Wall Street Journal Article: America’s Roster of Public Companies Is Shrinki...

[Osprey]

Below is an excerpt from the article

"The U.S. is becoming “de-equitized,” putting some of the best investing prospects out of the reach of ordinary Americans. The stock market once offered a way for average investors to buy into the fastest-growing companies, helping spread the nation’s wealth. Since the financial crisis, the equity market has become bifurcated, with a private option available to select investors and a public one that is more of a last resort for companies.

"The number of U.S.-listed companies has declined by more than 3,000 since peaking at 9,113 in 1997, according to the University of Chicago’s Center for Research in Security Prices. As of June, there were 5,734 such public companies, little more than in 1982, when the economy was less than half its current size. Meanwhile, the average public company’s valuation has ballooned.
....

"Retail investors haven’t had access to shares of some of the highest-value private companies, including Uber Technologies Inc., Airbnb and Snap Inc. Some of those shares have gone to clients of the wealth-management arms of large banks, typically wealthy individuals or families.

"If those private companies enter the public markets in coming years as expected, average investors may miss much of the kind of rapid growth achieved by nascent public companies a decade or two ago. Amazon.com Inc., which went public in 1994 valued at $440 million, is now worth about $358 billion."




I had wanted to invest in uber but saw that since it wasn't a public company one suggested way was to invest in Google which owns an interest in uber. Is anyone finding ways to participate in private companies or other investment vehicles besides the public markets?




There’s never enough time to do all the nothing you want.
Bill Watterson, Calvin and Hobbes

[Meadbh]

This is happening in Canada too. Basically, it's easier to raise private equity, avoid burdensome regulation, and keep control of your company.

From the Financial Post, May 30, 2016:

The amazing disappearance of the Canadian Public Company | Financial Post

This is one reason why I expect equity portfolio returns to be lower in the future.

[kcowan]

One of the main reasons for the success of the Canada Pension Plan is that the segregated funds are invested privately (e.g. building toll roads).

[Texas Proud]

I think one of the problems is that this investment class also values some of these companies at huge valuations...

I do not see Uber being worth the $66 billion it is deemed to be worth today... there is no profits and little barrier to entry....


I watch Shark Tank and Mark Cuban tells people all the time they are trying to get a Silicon valuation for their company...



I would say another thing that has happened over time is mergers... I saw a listing of some of the mergers that JPMorganChase has done over the years.... they have bought or merged some of the biggest banks that were separate back in the 80s and 90s.... this is just one company of many that has done the same thing.... and they were merging with others all during the last century....


19
Key Mergers That Shaped
JPMorgan Chase & Co.
Many JPMorgan Chase & Co. predeces-
sors took part in the merger movement
that began in the early 1990s. Key
transactions that led to the formation
of JPMorgan Chase include:
• In 1991, Chemical Banking Corp.
merged with Manufacturers Hanover
Corp., keeping the name Chemical
Banking Corp., then the second-
largest banking institution in the
United States.
• In 1995, First Chicago Corp. merged
with NBD Bancorp Inc., forming
First Chicago NBD Corp., the
largest banking company based in
the Midwest.
• In 1996, Chemical Banking Corp.
merged with The Chase Manhattan
Corp., keeping the name The Chase
Manhattan Corp. and creating what
then was the largest bank holding
company in the United States.
• In 1998, Banc One Corp. merged
with First Chicago NBD Corp., taking
the name Bank One Corp. Merging
subsequently with Louisiana’s First
Commerce Corp., Bank One became
the largest financial services firm in
the Midwest, the fourth-largest bank
in the United States and the world’s
largest Visa credit card issuer.
• In 2000, The Chase Manhattan Corp.
merged with J.P. Morgan & Co.
Incorporated, in effect combining
four of the largest and oldest money
center banking institutions in New
York City (Morgan, Chase, Chemical
and Manufacturers Hanover) into
one firm called JPMorgan Chase & Co.
• In 2004, Bank One Corp. merged
with JPMorgan Chase & Co., keeping
the name JPMorgan Chase & Co.
Fortune
magazine said that “the com-
bined bank will be big and strong in
a panoply of businesses,” adding
that “the deal has been widely laud-
ed” by investment analysts.
The New
York Times
said the merger “would
realign the competitive landscape for
banks” by uniting the investment
and commercial banking skills of
JPMorgan Chase with the consumer
banking strengths of Bank One.
• In 2008, JPMorgan Chase & Co.
acquired The Bear Stearns Companies
Inc., strengthening its capabilities
across a broad range of businesses,
including prime brokerage, cash
clearing and energy trading globally

[foxfirev5]

Ouch! Now how is this actionable for us stuck in the masses?

[pjigar]

Motivation for getting out of the masses! I have been trying real hard and I think my heirs will succeed for sure.

[Svensk Anga]

Quote:

Originally Posted by Meadbh This is one reason why I expect equity portfolio returns to be lower in the future.

If the trend continues, it could support equity returns. All those dollars looking for equity to buy will find a smaller supply of publicly traded companies/shares available, bidding up prices. This could be part of the reason PE's are elevated now.

[ERD50]

I remember reading a few years ago, that the regulations are so tough/expensive for a small company to adhere to, that companies were staying private much longer (or maybe never going public?). A big company can absorb the cost of lawyers and accountants to meet the newer regs, but that doesn't scale to a small company, it's close to a fixed cost.

That really could mean lower growth in 'the market' that we can easily invest in.

Or maybe that's a bunch of hooey.

-ERD50

[Osprey]

Very interesting that the same thing is happening in Canada. I wonder if this is true for other developed countries. I do have concerns as to whether this shrinking base of companies to invest in at the same time that the masses are being urged to invest in equities for retirement is causing PE levels to become too high and whether eventually the values will drop. Is this the same situation in other countries? Are there other developed countries whose stocks are not at such high PE levels and should I consider increasing my foreign stock holdings? Have not looked into whether there are index funds for particular countries.


Osprey

There’s never enough time to do all the nothing you want.
Bill Watterson, Calvin and Hobbes

[Osprey]

Found an interesting site looking at valuation levels in different countries:

http://www.starcapital.de/research/stockmarketvaluation

Osprey



There’s never enough time to do all the nothing you want.
Bill Watterson, Calvin and Hobbes

[ziggy29]

For sure, some formerly public companies have been absorbed by private capital, but I'd be interested to see how that compares to the number of public companies lost due to mergers and acquisitions. Many large companies barely even do their own R&D any more; instead, they use their hoard of cash to simply buy new products and product lines.

[DrRoy]

Private equity investment for regular folk would likely not be a good idea. Plenty of those investments go bust. You only hear about the big ones that work. For average people I think it would be worse than a casino.

[pjigar]

Quote:

Originally Posted by DrRoy Private equity investment for regular folk would likely not be a good idea. Plenty of those investments go bust. You only hear about the big ones that work. For average people I think it would be worse than a casino.

+1

There is no alternative to outright owning a real business if the PE madness of public companies continue in the future.

[kcowan]

Quote:

Originally Posted by Texas Proud I watch Shark Tank and Mark Cuban tells people all the time they are trying to get a Silicon valuation for their company...

The number one deal-maker:
Cuban makes the most deals during and after The Tank

[Brat]

How does Silicon Valley value companies: equity in these companies is bought/sold privately and many experience private capital funding rounds. Value is based on % of company traded and cash paid.

My DD once said that the real value of Uber is in their software, it could be used by the trucking industry - for example - for efficient dispatch by shippers.

[Texas Proud]

As an example.... here is a chart showing the number of banks.... not all are public, but as you can see the number is about 1/3rd of what it was...


https://fred.stlouisfed.org/series/USNUM


We all know that the number of major airlines has dropped... maybe even more than banks...


Also, think about dept stores... you might see a familiar name, but it might not be independent anymore... lots of consolidation and just going out of business...


Now, I would agree that there seems to be a trend of larger cap values when going public, but I also wonder if that is due to inflation or that companies are waiting longer to go public...

The size of the big companies now are just mind boggling.... anybody remember when Texaco had to pay out $3 bill for interfering with a deal... they were talking about how big that was and the company might not be able to pay.... fast forward to today and look at how much the banks paid out for the financial crisis (even though we were worried about their survival in 2008)....


$128 Billion In Bank Fines, In 1 Chart | The Huffington Post



Soooo, is it becoming de-equitized or just that the equity is concentrated in fewer companies, but still more invested than ever.... I think the latter...

[GrayHare]

Stock issuance is a way to raise capital. When loan interest rates are low, as they have been during recent years, it's cheaper to borrow than sell shares. As rates rise selling shares will become more attractive again.

[Totoro]

Silly question: is the total number of public companies shrinking as well?

As far as I can see it's a confluence of factors: continued consolidation in all sectors, concentration of wealth in a few wealthy families and endowments so companies can stay (or become) private longer, and very low yields on senior debt.

The last one merits an example: one of the largest car lease companies in the world was recently sold in a private transaction to pension funds. Not because they wanted the equity, but because of the solid stable returns on total assets (~4%).

Much better than the poor yields you can get from other sources these days.

[Totoro]

Quote:

Originally Posted by Osprey Found an interesting site looking at valuation levels in different countries: Global Stock Market Valuation Ratios (Shiller PE, CAPE, PB...)

I like that site as well. Do be careful with regards to countries with a shallow stock market though.

The Norway stock market is basically dominated by a few companies for example.

Statoil by itself is 500 billion NOK, with I believe is about a quarter or so of the total Oslo stock exchange. You had the same thing back when Nokia was still going strong in Finland.

[CaptTom]

If you feel like you're being left out of a good thing...

I saw a headline the other day about a 5-year-old kid who's making millions opening toys on YouTube videos.

Sort of puts the our whole system in perspective, doesn't it?