A lot of people are worried about the shrinking number of public companies in the US, but quality is an even bigger problem than quantity.
JPMorgan Chase & Co Chief Executive Officer Jamie Dimon lamented in his most recent annual letter to shareholders that there are only 4,300 US stocks, down from 7,300 in 1996. Meanwhile, Dimon noted, the number of private companies backed by private equity has ballooned to 11,200 from 1,900 during the past two decades.
It’s unquestionably harder to be a public company than it used to be. Dimon hit on many of the reasons including increasingly burdensome regulation, intensifying public scrutiny and a growing obsession with short-term financial results. It’s also no longer necessary for many companies. Private equity is awash with cash, making it easier for businesses to raise capital from private sources. So, why go public?
It’s time to consider the real possibility that the stock market has become a dumping ground for businesses too weak to attract capital in private markets. That’s not a good development for investors or the market.
Systemically, this trend is worrisome because private companies, a number of which are as valuable as public ones, bypass many of the disclosure and governance rules the US adopted for public companies after the Great Depression. These are meant to make markets more efficient and transparent — and to help avert a repeat of the devastating stock market crash that sparked the Depression.
The challenge for ordinary investors is more immediate: Most of them are confined to the stock market because financial regulation bars them from investing in private markets. Unfortunately, the quality of small public companies those similar in market value to the businesses that predominate private markets has deteriorated significantly.