WSJ commentary about declining # of publicly traded companies

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WillRetire
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WSJ commentary about declining # of publicly traded companies

Post by WillRetire »

WSJ published a commentary piece titled "Where Have All the Public Companies Gone?" dated November 17, 2017. The author provides some concerning facts.

- There are 3,671 domestic listings today, down from 7,322 in 1996
- The number of public companies in the U.S. has been on a steady decline since peaking in the late 1990s.
- The dearth of IPOs has led to a 50% increase in the average age of public companies, from 12 years in 1996 to 18 years in 2016.
- Microcap, small-cap and midcap stocks have all but disappeared from U.S. exchanges. Over the past 20 years, the average size of a publicly listed company in the U.S. has risen nearly fourfold, after accounting for inflation

Full article here: https://www.wsj.com/articles/where-have ... 1510869125
A subscription may be required to read from that link. The author is Jason M. Thomas of the Carlyle Group.

This trend of declining # of publicly traded stocks concerns me as an investor because it suggests that an ever increasing amount of money is chasing fewer and fewer stocks, leading to artificially high valuations and eventual collapse.

What do others think? Has Jack Bogle commented on this?
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TheTimeLord
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Re: WSJ commentary about declining # of publicly traded companies

Post by TheTimeLord »

While index funds don't, some Mutual Funds carry shares of privately held companies. I was looking at a Fidelity funds that has outperformed the S&P for over a decade and noticed one of its top holdings was UBER.
Fidelity Contrafund (FCNTX) The Fidelity Contrafund (“FCNTX”) is one of the most aggressive mutual fund investors in pre-IPO companies, with more than $900 million invested as of April 2015. The Contrafund was among a large group of equity funds that owned Facebook as a pre-IPO investment.Jul 25, 2016
https://www.investopedia.com/articles/e ... b-twtr.asp

https://www.cnbc.com/2017/05/17/mutual- ... anies.html
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Re: WSJ commentary about declining # of publicly traded companies

Post by BolderBoy »

WillRetire wrote: Sat Nov 18, 2017 10:01 am- There are 3,671 domestic listings today, down from 7,322 in 1996
Weren't a goodly number of those 7322 companies in the late 1990s simply paper companies with zero revenues? When the dot.com bubble burst, thousands of these so-called "companies" vanished overnight.
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Re: WSJ commentary about declining # of publicly traded companies

Post by Spewin »

BolderBoy wrote: Sat Nov 18, 2017 10:19 am
WillRetire wrote: Sat Nov 18, 2017 10:01 am- There are 3,671 domestic listings today, down from 7,322 in 1996
Weren't a goodly number of those 7322 companies in the late 1990s simply paper companies with zero revenues? When the dot.com bubble burst, thousands of these so-called "companies" vanished overnight.
I remember when I first investigated Vanguard's Total Stock Market index in ~2011 there were some 6000 stocks in it. Now it's some 3000.
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Re: WSJ commentary about declining # of publicly traded companies

Post by Lonestarz »

I’d be curious if this is a result of people keeping companies private or if there is a big impact from mergers (mega companies)

I will say that in the 90s there were likely lots of paper (worthless) companies
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WillRetire
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Re: WSJ commentary about declining # of publicly traded companies

Post by WillRetire »

Lonestarz wrote: Sat Nov 18, 2017 10:37 am I’d be curious if this is a result of people keeping companies private or if there is a big impact from mergers (mega companies)

I will say that in the 90s there were likely lots of paper (worthless) companies
The author of the article cites reasons for companies not going public, or delaying going public:
"Easy access to venture, growth and private-equity capital means that companies no longer need to pursue an initial public offering to fund growth or access liquidity. Increases in regulations, shareholder lawsuits and activist demands have also diminished the appeal of a public listing. Over the past two decades, the number of annual IPOs has fallen sharply, to 128 in 2016 from 845 in 1996."
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Re: WSJ commentary about declining # of publicly traded companies

Post by selters »

Why does everbody use numbers from the late 90s to illustrate the fall in the number of publicly traded companies? Weren't the numbers back then artificially high for a few years?
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Re: WSJ commentary about declining # of publicly traded companies

Post by Pacman »

OP,

Thanks for the article reference; I found it interesting. I do think the article is a bit self-serving, however, since the conclusion (by the author who happens to run a private equity firm) is that investors should seek out private equity investments in order to benefit from the growth of these companies that are no longer going public. One data point I would be curious about is how the market capitalization distribution between public companies compares today with the 1990s? For example, if the top 500 companies today and in the 1990s consistently account for 50-75% of total market capitalization (I'm just making this up as an example), perhaps those smaller other companies would haven't made a large difference to our portfolios anyway?
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Re: WSJ commentary about declining # of publicly traded companies

Post by magneto »

WillRetire wrote: Sat Nov 18, 2017 10:01 am This trend of declining # of publicly traded stocks concerns me as an investor because it suggests that an ever increasing amount of money is chasing fewer and fewer stocks, leading to artificially high valuations and eventual collapse.
This is not a purely US issue, the phenomenom exists elsewhere across the globe.

If the concerns are really so troubling, the answer lies as pointed out up-thread; including exposure to Private Equity, etc.
Why ignore that part of the investable wealth creators universe, the unquoted companies?

Maybe it all depends on comfort zone?
Some like International Stocks or Bonds, some don't.
Some like a wide choice of Asset Classes, some don't.
A personal choice then :!:
'There is a tide in the affairs of men ...', Brutus (Market Timer)
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JoMoney
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Re: WSJ commentary about declining # of publicly traded companies

Post by JoMoney »

Archive of article (no paywall) http://archive.is/eFYx9
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Re: WSJ commentary about declining # of publicly traded companies

Post by JoMoney »

Pacman wrote: Sat Nov 18, 2017 11:21 am OP,

Thanks for the article reference; I found it interesting. I do think the article is a bit self-serving, however, since the conclusion (by the author who happens to run a private equity firm) is that investors should seek out private equity investments in order to benefit from the growth of these companies that are no longer going public. One data point I would be curious about is how the market capitalization distribution between public companies compares today with the 1990s? For example, if the top 500 companies today and in the 1990s consistently account for 50-75% of total market capitalization (I'm just making this up as an example), perhaps those smaller other companies would haven't made a large difference to our portfolios anyway?
It would seem the largest companies have actually been a shrinking share of the broad market over past several decades
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( 12/31/1999 https://www.sec.gov/Archives/edgar/data ... 000244.txt )
Top ten 25.2%

Code: Select all

Microsoft Corp.                                    4.9%
General Electric Co.                               4.1%
Cisco Systems, Inc.                                2.8%
Wal-Mart Stores, Inc.                              2.5%
Exxon Mobil Corp.                                  2.3%
Intel Corp.                                        2.2%
Lucent Technologies, Inc.                          1.9%
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Re: WSJ commentary about declining # of publicly traded companies

Post by Tanelorn »

Note the author of the WSJ works for a private equity shop, so they'd love to convince you that expensive private equity funds are a good way to recapture and index this growing and "missing" part of the stock market. Rick Ferri covered this years ago - this effect has been going on for a long time.

viewtopic.php?t=87921

Regulatory compliance costs are a big factor, which makes it very expensive and arguably non-economic for small companies to be public. Between that and the tons of private equity money for funding promising companies from startups up through when they're worth $1B and do their IPO, that doesn't leave much in the way of new small cap stocks.
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Re: WSJ commentary about declining # of publicly traded companies

Post by SimpleGift »

WillRetire wrote: Sat Nov 18, 2017 10:01 am What do others think? Has Jack Bogle commented on this?
Two unbiased, comprehensive papers on this subject, both published fairly recently: Though the universe of U.S. companies has certainly changed in character in recent decades, I don't see anything worrisome or actionable for a widely-diversified, buy-and-hold equity investor.
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Re: WSJ commentary about declining # of publicly traded companies

Post by nisiprius »

"The stock market today isn’t the stock market of 20 years ago." And when, exactly, in the past, has it ever been different? The stock market of 1977 wasn't the stock market of 1997, either.

Furthermore, since his next words are "Investors, take heed," it is clear from that and the rest of the article that he thinks the stock market of 20 years ago was better than today. Was it? Twenty years ago is the time when the market was exhibiting "irrational exuberance," the dot-com fad was in full swing, everybody was going public, Henry Blodgett was knowingly lying about stocks... and the market was just about to crash.

The name "Wilshire 5,000" and the article's own words tell us that the 7,322 issues in 1996 was just a peak. Of course it has been declining since the peak, that's what made it a peak. There are fewer now, but there were also fewer before 1996. There's nothing specially alarming or unusual about the "Wilshire 5,000" having some number of stocks in it other than 5,000.

Would we be happier and wealthier with a stock market packed full of the likes of boo.com, eToys.com, flooz.com, garden.com, go.com (backed by Disney!), kosmo.com, pets.com, theglobe.com, and webvan.com?
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Re: WSJ commentary about declining # of publicly traded companies

Post by Bacchus01 »

I have workdon’t d for public Fortune 500, private equity, IPO, and private companies.

THE number one reason that companies are choosing to stay private or go private? Sarbannes-Oxley.
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Re: WSJ commentary about declining # of publicly traded companies

Post by WillRetire »

TheTimeLord wrote: Sat Nov 18, 2017 10:06 am While index funds don't, some Mutual Funds carry shares of privately held companies. I was looking at a Fidelity funds that has outperformed the S&P for over a decade and noticed one of its top holdings was UBER.
Fidelity Contrafund (FCNTX) The Fidelity Contrafund (“FCNTX”) is one of the most aggressive mutual fund investors in pre-IPO companies, with more than $900 million invested as of April 2015. The Contrafund was among a large group of equity funds that owned Facebook as a pre-IPO investment.Jul 25, 2016
https://www.investopedia.com/articles/e ... b-twtr.asp

https://www.cnbc.com/2017/05/17/mutual- ... anies.html
Thank you for this information.
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WillRetire
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Re: WSJ commentary about declining # of publicly traded companies

Post by WillRetire »

Bacchus01 wrote: Sat Nov 18, 2017 5:31 pm I have workdon’t d for public Fortune 500, private equity, IPO, and private companies.

THE number one reason that companies are choosing to stay private or go private? Sarbannes-Oxley.
Yes, the article mentions "Increases in regulations, shareholder lawsuits and activist demands have also diminished the appeal of a public listing."
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Re: WSJ commentary about declining # of publicly traded companies

Post by tooluser »

Bacchus01 wrote: Sat Nov 18, 2017 5:31 pm Sarbannes-Oxley.
I note for the record that no one ever provides specifics after mentioning that phrase.
Thus it appears to be nonsense to the casual observer, though you may in fact be correct. I don't know.

The top hit on bogleheads.org is a very short thread:
viewtopic.php?t=37691

If this were important, wouldn't there be a lot of discussion on it here on this website? :confused
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Re: WSJ commentary about declining # of publicly traded companies

Post by stlutz »

One could argue that this is an indication that the market is currently too cheap. If stocks were expensive relative to other forms of capital, then many companies would be looking to go public to cash in on those high valuations. The fact that they aren't may be an indication that the public stock market is still undervalued relative to other assets.
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Re: WSJ commentary about declining # of publicly traded companies

Post by Pacman »

tooluser wrote: Sat Nov 18, 2017 8:53 pm
Bacchus01 wrote: Sat Nov 18, 2017 5:31 pm Sarbannes-Oxley.
I note for the record that no one ever provides specifics after mentioning that phrase.
Thus it appears to be nonsense to the casual observer, though you may in fact be correct. I don't know.

The top hit on bogleheads.org is a very short thread:
viewtopic.php?t=37691

If this were important, wouldn't there be a lot of discussion on it here on this website? :confused
He probably meant the costs to comply with Sarbanes Oxley, which some sources estimate at $1 million or more annually for publicly traded companies. That number doesn't seem surprising when the public companies I have worked at have accounting staff/project managers solely dedicated to sox compliance, the annual updating to the documentation involved, the fees paid to the accounting firms, and perhaps the time spent by higher level executives even thinking about this stuff. Tooluser - you should be grateful that not many people around here are discussing sox.
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Re: WSJ commentary about declining # of publicly traded companies

Post by tooluser »

Pacman wrote: Sat Nov 18, 2017 9:11 pm
tooluser wrote: Sat Nov 18, 2017 8:53 pm
Bacchus01 wrote: Sat Nov 18, 2017 5:31 pm Sarbannes-Oxley.
I note for the record that no one ever provides specifics after mentioning that phrase.
Thus it appears to be nonsense to the casual observer, though you may in fact be correct. I don't know.

The top hit on bogleheads.org is a very short thread:
viewtopic.php?t=37691

If this were important, wouldn't there be a lot of discussion on it here on this website? :confused
He probably meant the costs to comply with Sarbanes Oxley, which some sources estimate at $1 million or more annually for publicly traded companies. That number doesn't seem surprising when the public companies I have worked at have accounting staff/project managers solely dedicated to sox compliance, the annual updating to the documentation involved, the fees paid to the accounting firms, and perhaps the time spent by higher level executives even thinking about this stuff. Tooluser - you should be grateful that not many people around here are discussing sox.
Grateful for enforced ignorance? You've got to be kidding. This is a financial board. The top two Google links on "top 10 costs of sarbannes oxley" reveal a link behind a paywall, and a very short article that again does not get into details. http://ww2.cfo.com/auditing/2015/05/sox ... ing-costly

$1M for multi-billion-dollar revenue companies? -0.1%? A CEO who has to think about running their business? Sounds like whining to me, and a lot of other people too.

Is accounting and legal compliance so boring that one must accept simple assertions as proof? I think not. Let's see the details. The lack of evidence seems to imply that major corporations cannot be profitable if they are transparent and compliant to the law. Shameful.

There may be some other truth in all this, but wow is it hard to find! All I am saying is that I have yet to find anyone who can make the case that operating a business in a transparent and legal manner is a patently bad idea, despite assertions to the contrary. That's how it comes across. I am looking for the argument to be laid out with facts, logic, and reason, and would appreciate a link. I will read it.
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Re: WSJ commentary about declining # of publicly traded companies

Post by Bacchus01 »

Pacman wrote: Sat Nov 18, 2017 9:11 pm
tooluser wrote: Sat Nov 18, 2017 8:53 pm
Bacchus01 wrote: Sat Nov 18, 2017 5:31 pm Sarbannes-Oxley.
I note for the record that no one ever provides specifics after mentioning that phrase.
Thus it appears to be nonsense to the casual observer, though you may in fact be correct. I don't know.

The top hit on bogleheads.org is a very short thread:
viewtopic.php?t=37691

If this were important, wouldn't there be a lot of discussion on it here on this website? :confused
He probably meant the costs to comply with Sarbanes Oxley, which some sources estimate at $1 million or more annually for publicly traded companies. That number doesn't seem surprising when the public companies I have worked at have accounting staff/project managers solely dedicated to sox compliance, the annual updating to the documentation involved, the fees paid to the accounting firms, and perhaps the time spent by higher level executives even thinking about this stuff. Tooluser - you should be grateful that not many people around here are discussing sox.

Costs, yes. They are significant and they take away from working on value creating activities.

But even bigger is the amount of information turned over that can often be proprietary in a way that reduces competitive advantages. It’s a huge competitive advantage to be private for that reason.

You don’t have to like those answers, but they are the ones I most often here and personally experience.
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Re: WSJ commentary about declining # of publicly traded companies

Post by tooluser »

Bacchus01 wrote: Sat Nov 18, 2017 10:12 pm But even bigger is the amount of information turned over that can often be proprietary in a way that reduces competitive advantages. It’s a huge competitive advantage to be private for that reason.
Now we're getting somewhere, and yet... It's the law that companies can protect their proprietary information. So if there is a conflict between laws, saying that one must be able to protect and yet one cannot protect this information, I would think that all the corporations and their lawyers could have come up with an argument that this cannot stand. Googling "Supreme Court Sarbanes Oxley" seems to indicate that no damages have actually been experienced by corporations under the law, so no one has standing to challenge it on that basis.

At this point the argument is more political than finance, so I will let this drop from my end. It's sad that no details are available.

I'd love to see a graph of the number of U.S. publicly traded companies over time. When did that definition start and how is it defined?
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Re: WSJ commentary about declining # of publicly traded companies

Post by Barry Barnitz »

Hi:

News article: Why Vanguard Isn’t Freaking Out About Fewer Public Companies, Julie Segal , Institutional Investor, November 17, 2017.
New research from the fund firm pours cold water on the idea that the declining number of public companies is having a meaningful effect on investors.

Amid cries that the number of public companies is shrinking, research from fund giant Vanguard Group that will be released in the coming weeks shows that the decline is coming exclusively from micro-cap stocks.
James Rowley, head of active/passive portfolio research in Vanguard’s investment strategy group. “If you see the falling number of public companies, it’s almost all limited to the smallest of the smallest of the small. There are few, if any, implications for investors.”

Rowley says the proportion of large-cap, mid-cap, and small-cap companies that make up overall market capitalization is very consistent going back to 1979. He says many analysts have made 1996, which had a record number of public companies, a de facto anchor point. However, the late 1990s markets were at a high point, with many companies eager to go public and cash in on rich valuations.

In 1979, there were 2,044 public micro-cap companies. In 1997, there were 4,193, and in 2014 there 1,549. But they are a small part of the publicly traded universe. In 1979 and 1997, micro caps represented 3 percent of the market. In 2014, micro-caps represented 2 percent of the market. Micro-caps fell to 1 percent by 2016.

Rowley says Vanguard also analyzed changes in market structure and regulations that may make it attractive, from a company’s perspective, to stay private for longer. For one, the cost of complying with additional dislosure requirements and regulations has burdened smaller companies in particular.

“But that shouldn’t be construed as a negative to investors,” he says. “There are few if any implications to an investors’ ability to build diversified portfolios.”
regards,
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Re: WSJ commentary about declining # of publicly traded companies

Post by Tanelorn »

tooluser wrote: Sat Nov 18, 2017 9:56 pm Grateful for enforced ignorance? You've got to be kidding. This is a financial board. The top two Google links on "top 10 costs of sarbannes oxley" reveal a link behind a paywall, and a very short article that again does not get into details. http://ww2.cfo.com/auditing/2015/05/sox ... ing-costly
Try this one, and download their 40 page report on the costs and trends. You'll find more using "SOX" in your search terms.

https://www.protiviti.com/US-en/insight ... nce-survey
$1M for multi-billion-dollar revenue companies? -0.1%? A CEO who has to think about running their business? Sounds like whining to me, and a lot of other people too.
It's not whining when it costs the same $1M/year when you're a small public company and that can be a large fraction of your firm's net profit, or the difference between making money or not. Like many expensive regulations, SOX serves as a barrier to entry by disadvantaging smaller public companies who have fewer resources to waste on largely fixed costs, as compared to much larger ones.
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Re: WSJ commentary about declining # of publicly traded companies

Post by Stilwell »

One of the dynamics that isn't given full credit is simply where we are in the current cycle. This is the longest bull market in history. Bull markets drive consolidation as companies run out of sufficiently compelling organic opportunities, fatigue on buybacks and are wary of increasing their dividend further ahead of the next downturn. As the machine continues to mint cash, the last item in their alternatives toolkit becomes M&A. It's one of the reasons why M&A activity has actually slowed over the last 2-years since hitting an all-time high. All of the 'obvious' deals have happened and the industry consolidators have consolidated. What is left is less natural or challenged deals.

What this is meant to say is that you are probably at a low-point of public companies today. When the cycle tips and comes out of a trough that will create new disruptors, the number will tick up again.
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Re: WSJ commentary about declining # of publicly traded companies

Post by FedGuy »

nisiprius wrote: Sat Nov 18, 2017 3:37 pmThere's nothing specially alarming or unusual about the "Wilshire 5,000" having some number of stocks in it other than 5,000.
Well, it's arguably false advertising. I'm being pedantic here and admit that I've always been especially peeved about stuff like this, but to me the number "5,000" in the name is a statement that the index has 5,000 stocks. If it doesn't have 5,000 stocks, that number shouldn't appear in the name.

Again, I know I'm making a mountain out of a molehill and I'm not suggesting that there's anything illegal about the name. It just bugs me if the implied promise in the name doesn't match the reality.
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Re: WSJ commentary about declining # of publicly traded companies

Post by McGowan »

How do you feel about the Big 10 having 14 teams and the Big 12 having 10?

Anyway. This article is not being written either as a research article or for retail investors.

I'm in the PE business and I believe that he is writing it to the investors in and Board members of various institutional funds. If the PE world can carve out another couple of % of the overall asset allocations, it would be a huge win for the PE operators. Fund operators and Board members have a nice gig. They face criticism if their returns fall too far from benchmarks or if they take 'unreasonable' risks. Point of this article is to give these operators ammunition to approach their investors to in effect take more risk (but by agreement not 'unreasonable' risks) by allocating more to PE funds.

I know this is cynical but I believe it to be true.
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Re: WSJ commentary about declining # of publicly traded companies

Post by FedGuy »

McGowan wrote: Sun Nov 19, 2017 9:43 amHow do you feel about the Big 10 having 14 teams and the Big 12 having 10?
Honestly? That ticks me off too.
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Re: WSJ commentary about declining # of publicly traded companies

Post by WillRetire »

Barry Barnitz wrote: Sun Nov 19, 2017 12:32 am Hi:

News article: Why Vanguard Isn’t Freaking Out About Fewer Public Companies, Julie Segal , Institutional Investor, November 17, 2017.
New research from the fund firm pours cold water on the idea that the declining number of public companies is having a meaningful effect on investors.

Amid cries that the number of public companies is shrinking, research from fund giant Vanguard Group that will be released in the coming weeks shows that the decline is coming exclusively from micro-cap stocks.
James Rowley, head of active/passive portfolio research in Vanguard’s investment strategy group. “If you see the falling number of public companies, it’s almost all limited to the smallest of the smallest of the small. There are few, if any, implications for investors.”

Rowley says the proportion of large-cap, mid-cap, and small-cap companies that make up overall market capitalization is very consistent going back to 1979. He says many analysts have made 1996, which had a record number of public companies, a de facto anchor point. However, the late 1990s markets were at a high point, with many companies eager to go public and cash in on rich valuations.

In 1979, there were 2,044 public micro-cap companies. In 1997, there were 4,193, and in 2014 there 1,549. But they are a small part of the publicly traded universe. In 1979 and 1997, micro caps represented 3 percent of the market. In 2014, micro-caps represented 2 percent of the market. Micro-caps fell to 1 percent by 2016.

Rowley says Vanguard also analyzed changes in market structure and regulations that may make it attractive, from a company’s perspective, to stay private for longer. For one, the cost of complying with additional dislosure requirements and regulations has burdened smaller companies in particular.

“But that shouldn’t be construed as a negative to investors,” he says. “There are few if any implications to an investors’ ability to build diversified portfolios.”
regards,
Thank you for providing Vanguard's take on this. Theirs is a positive spin, and it focuses on the ratio of small vs. large, which is somewhat of a distraction. The problem is the shrinking # of public companies to invest in, of any size.

It is not in Vanguard's best interest to publicly admit concern with the shrinking number of public U.S. companies, because they are known for promoting low cost index funds. Anything that endangers that investing philosophy endangers Vanguard.
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Re: WSJ commentary about declining # of publicly traded companies

Post by WillRetire »

Stilwell wrote: Sun Nov 19, 2017 7:50 am One of the dynamics that isn't given full credit is simply where we are in the current cycle. This is the longest bull market in history. Bull markets drive consolidation as companies run out of sufficiently compelling organic opportunities, fatigue on buybacks and are wary of increasing their dividend further ahead of the next downturn. As the machine continues to mint cash, the last item in their alternatives toolkit becomes M&A. It's one of the reasons why M&A activity has actually slowed over the last 2-years since hitting an all-time high. All of the 'obvious' deals have happened and the industry consolidators have consolidated. What is left is less natural or challenged deals.

What this is meant to say is that you are probably at a low-point of public companies today. When the cycle tips and comes out of a trough that will create new disruptors, the number will tick up again.
Interesting point. Thanks. Many things move in cycles, and 2 data points 20 years apart is insufficient to draw conclusions. So, I looked further at the links that Tanelorn provided.
Previous discussion: viewtopic.php?t=87921
Rick Ferri's article referenced in that discussion: https://portfoliosolutions.com/latest-l ... ing-market

Rick Ferri's article has a graph of the # of stocks in the Willshire 5000 index over time. It doesn't look cyclical.
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WillRetire
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Re: WSJ commentary about declining # of publicly traded companies

Post by WillRetire »

FedGuy wrote: Sun Nov 19, 2017 8:42 am
nisiprius wrote: Sat Nov 18, 2017 3:37 pmThere's nothing specially alarming or unusual about the "Wilshire 5,000" having some number of stocks in it other than 5,000.
Well, it's arguably false advertising. I'm being pedantic here and admit that I've always been especially peeved about stuff like this, but to me the number "5,000" in the name is a statement that the index has 5,000 stocks. If it doesn't have 5,000 stocks, that number shouldn't appear in the name.

Again, I know I'm making a mountain out of a molehill and I'm not suggesting that there's anything illegal about the name. It just bugs me if the implied promise in the name doesn't match the reality.
I agree with you. It is misleading. They need to lose the number. So does the so-called Big 10. Surely they both can come up with descriptive adjective.
grog
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Re: WSJ commentary about declining # of publicly traded companies

Post by grog »

The concern seems to be that the public stock market is becoming an inadequate stand-in for the overall equity universe. But I suspect "number of public companies" is probably not the best metric to address that question.

-M&A activity will affect the number of companies but doesn't necessarily indicate a significant move toward private equity.

-GAAP and SEC compliance are no doubt a factor, but the small companies that are at the boundary line for which that would be the deciding factor would make an imperceptible difference in a market cap weighted portfolio. More regulation might move that boundary line and hence decrease the number of public companies, but, mathematically, it doesn't seem like this could drive a big move to private equity, at least in terms of actual dollars.

- Here is a list of largest privately held companies: http://learn.stashinvest.com/10-largest ... -companies

Some of these are pretty large, but when compared to the many gargantuan public companies, it doesn't seem to be enough to be truly distortionary.

-The point about firms benefiting from the opaqueness and freedom of being private suggests there might be an interesting selection effect and would be a possible reason for larger companies to stay private. But in most cases the (fairly few) companies that stay private even after reaching scale seem to be family-owned companies where the family chooses to retain control for whatever reason. At a glance, this would seem to be more about the preferences and psychology of the family than pure business strategy.

-Even if there is a significant trend toward private equity, there should still be an equilibrium between the two. There will always be a trade-off of the public companies offering more transparency and investor protection and lower costs of capital while the private companies have less red tape and possible strategic advantages. But the fear of all the smart money getting the good returns in private equity while the suckers plow their money into over-the-counter investments seems unrealistic to me (and like a sales pitch for private equity).
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tooluser
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Re: WSJ commentary about declining # of publicly traded companies

Post by tooluser »

WillRetire wrote: Mon Nov 20, 2017 9:23 am Rick Ferri's article referenced in that discussion: https://portfoliosolutions.com/latest-l ... ing-market

Rick Ferri's article has a graph of the # of stocks in the Willshire 5000 index over time. It doesn't look cyclical.
Thank you for the graph! I wish it went more to the left, but there is some perspective there.
Like good comrades to the utmost of their strength, we shall go on to the end. -- Winston Churchill
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Re: WSJ commentary about declining # of publicly traded companies

Post by Valuethinker »

Stilwell wrote: Sun Nov 19, 2017 7:50 am One of the dynamics that isn't given full credit is simply where we are in the current cycle. This is the longest bull market in history. Bull markets drive consolidation as companies run out of sufficiently compelling organic opportunities, fatigue on buybacks and are wary of increasing their dividend further ahead of the next downturn. As the machine continues to mint cash, the last item in their alternatives toolkit becomes M&A. It's one of the reasons why M&A activity has actually slowed over the last 2-years since hitting an all-time high. All of the 'obvious' deals have happened and the industry consolidators have consolidated. What is left is less natural or challenged deals.

What this is meant to say is that you are probably at a low-point of public companies today. When the cycle tips and comes out of a trough that will create new disruptors, the number will tick up again.
Although it's normally argued that at the peak of the bull market you see a lot of IPOs.

Private companies shareholders realize better valuations are obtained on public markets, and so they IPO -- that's a normal part of the Venture Capital cycle, and a not-so-uncommon one of the Private Equity/ LBO cycle.
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Re: WSJ commentary about declining # of publicly traded companies

Post by Valuethinker »

grog wrote: Mon Nov 20, 2017 11:37 am The concern seems to be that the public stock market is becoming an inadequate stand-in for the overall equity universe. But I suspect "number of public companies" is probably not the best metric to address that question.

-M&A activity will affect the number of companies but doesn't necessarily indicate a significant move toward private equity.
Agreed - M&A has reduced number of public companies.

We know, though, that PE value invested & activity is many times what it was even in the early 1990s. Logically, some companies that would have been in public markets, are now in private hands via PE funds.

The rise and rise of the secondary buyout (one PE firm sells a portfolio co to another) has reduced the role of IPO as an eventual exit route for a PE investment.

-GAAP and SEC compliance are no doubt a factor, but the small companies that are at the boundary line for which that would be the deciding factor would make an imperceptible difference in a market cap weighted portfolio. More regulation might move that boundary line and hence decrease the number of public companies, but, mathematically, it doesn't seem like this could drive a big move to private equity, at least in terms of actual dollars.

- Here is a list of largest privately held companies: http://learn.stashinvest.com/10-largest ... -companies

Some of these are pretty large, but when compared to the many gargantuan public companies, it doesn't seem to be enough to be truly distortionary.
Thank you for that list.

Surprised not to see Texas Utilities (which has since been broken up? After the failure of the TPG/ KKR LBO?

Chrysler was also the subject of a buyout by Cerebrus.

Equity Office Properties (Blackstone deal) would have been another-- but it was quickly broken up and the parts sold off (easy to do for a blue chip REIT, but timing was adroit given this was 2007/08).
-The point about firms benefiting from the opaqueness and freedom of being private suggests there might be an interesting selection effect and would be a possible reason for larger companies to stay private. But in most cases the (fairly few) companies that stay private even after reaching scale seem to be family-owned companies where the family chooses to retain control for whatever reason. At a glance, this would seem to be more about the preferences and psychology of the family than pure business strategy.
If you think IKEA for example. The retention of control is, I think, a key factor.
-Even if there is a significant trend toward private equity, there should still be an equilibrium between the two. There will always be a trade-off of the public companies offering more transparency and investor protection and lower costs of capital while the private companies have less red tape and possible strategic advantages. But the fear of all the smart money getting the good returns in private equity while the suckers plow their money into over-the-counter investments seems unrealistic to me (and like a sales pitch for private equity).
Leverage is a key factor. PE backed companies generally have much higher debt leverage.

Michael Milliken's invention of the junk bond provided a source of capital to companies which hitherto would have either used bank lending (more costly, and with covenants that have similarity to equity ownership) or become public companies. It also made possible buyouts of public companies which hitherto would have been difficult or impossible.
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Re: WSJ commentary about declining # of publicly traded companies

Post by Valuethinker »

SimpleGift wrote: Sat Nov 18, 2017 3:05 pm
WillRetire wrote: Sat Nov 18, 2017 10:01 am What do others think? Has Jack Bogle commented on this?
Two unbiased, comprehensive papers on this subject, both published fairly recently: Though the universe of U.S. companies has certainly changed in character in recent decades, I don't see anything worrisome or actionable for a widely-diversified, buy-and-hold equity investor.
These are both extremely helpful.

I think the tendency, noted in the second paper, of US public companies to:

- hold more cash
- pay out more to investors
- invest less

is really the more concerning part of this trend.

I don't think anyone has a really good handle on why productivity growth is so bad, and why companies appear to be underinvesting, but it's got to be a worry
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Re: WSJ commentary about declining # of publicly traded companies

Post by SmileyFace »

As someone else mentioned the cost of Sarbanes Oxley keeps a lot of smaller companies from going public - they simply can't afford the large expenses associated with compliance. That said - I don't think it is necessarily a bad thing for index investors - it assures that nonprofitable companies without enough investor interest don't end up in your index fund.
PE investors have certainly been on the rise in then last decade as well - when you see big names like Dell be taken private you know a movement is about - 20 years ago very few big names where taken in by PEs.
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Re: WSJ commentary about declining # of publicly traded companies

Post by SmileyFace »

tooluser wrote: Sat Nov 18, 2017 8:53 pm
Bacchus01 wrote: Sat Nov 18, 2017 5:31 pm Sarbannes-Oxley.
I note for the record that no one ever provides specifics after mentioning that phrase.
Thus it appears to be nonsense to the casual observer, though you may in fact be correct. I don't know.
Read the two research articles posted above - the credit Suisse one (haven't read the other) talks about this being a factor.
If you are interested in actual costs of Sarbanes - just Google "Cost of Sarbanes" or "Cost of SOX" and you will find data that convince you this isn't nonsense.
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Re: WSJ commentary about declining # of publicly traded companies

Post by Tanelorn »

DaftInvestor wrote: Tue Nov 21, 2017 6:16 am As someone else mentioned the cost of Sarbanes Oxley keeps a lot of smaller companies from going public - they simply can't afford the large expenses associated with compliance. That said - I don't think it is necessarily a bad thing for index investors - it assures that nonprofitable companies without enough investor interest don't end up in your index fund.
For a total market indexer, your probably right. The smaller companies basically don't matter in terms of market cap, so who cares if there are a few less or they go public later. From the perspective of some of the popular factor investors, who overweight both small and/or value companies via index funds, this should be of more concern. The SCV outperformance has always been noisy, but it's doing quite poorly in recent years and it's not implausible to think that is because all the best companies in that sector (remembering that a handful of superstar winners make up nearly all the return) are being cherry picked by PE to stay private longer than they would have otherwise and eventually IPOing as midcaps.
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Re: WSJ commentary about declining # of publicly traded companies

Post by overthought »

Tanelorn wrote: Tue Nov 21, 2017 7:10 am
DaftInvestor wrote: Tue Nov 21, 2017 6:16 am As someone else mentioned the cost of Sarbanes Oxley keeps a lot of smaller companies from going public - they simply can't afford the large expenses associated with compliance. That said - I don't think it is necessarily a bad thing for index investors - it assures that nonprofitable companies without enough investor interest don't end up in your index fund.
For a total market indexer, your probably right. The smaller companies basically don't matter in terms of market cap, so who cares if there are a few less or they go public later. From the perspective of some of the popular factor investors, who overweight both small and/or value companies via index funds, this should be of more concern. The SCV outperformance has always been noisy, but it's doing quite poorly in recent years and it's not implausible to think that is because all the best companies in that sector (remembering that a handful of superstar winners make up nearly all the return) are being cherry picked by PE to stay private longer than they would have otherwise and eventually IPOing as midcaps.
I could easily imagine that being the case, but not sure how to tell if that's happening.

Looking at this report, the page labeled "4" has a chart showing that median pre-IPO funding levels have increased from $10-20M in the late 90's to $80M+ nowadays, while the medium size of the IPO has remained fairly similar, around $100M (still squarely in the small-cap regime). But I guess we wouldn't expect to find the superstars lurking around the median anyway; I don't know what the high end looks like. The report does also mention that IPOs backed by private equity have declined significantly in recent years, perhaps supporting the claim that they choose to keep their winners "in house" rather than going public and giving away the upside?
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