I’m tired of all the bad news, so here’s some more:
he publicly traded company is disappearing. In 1996, about 8,000 firms were listed in the U.S. stock market. Since then, the national economy has grown by nearly $20 trillion. The population has increased by 70 million people. And yet, today, the number of American public companies stands at [fewer than 4,000]. How can that be?
One answer is that the private-equity industry is devouring them. When a private-equity fund buys a publicly traded company, it takes the company private—hence the name. (If the company has not yet gone public, the acquisition keeps that from happening.) This gives the fund total control, which in theory allows it to find ways to boost profits so that it can sell the company for a big payday a few years later. In practice, going private can have more troubling consequences. The thing about public companies is that they’re, well, public. By law, they have to disclose information about their finances, operations, business risks, and legal liabilities. Taking a company private exempts it from those requirements.
As one person quoted in the article notes: If this trend continues we could end up with a completely opaque economy. Oligarchs arise! Your time is coming! Yes, we’ve gone from 4% private equity just a few years ago to 20% now, and it’s accelerating. Good luck out there in, you know, little-people land.
Why is this a concern? They still must comply with the law.
People say reporting earnings each quarter gives us a short term focus. Long term strategies are difficult if shareholders vote them down after one weak quarter. We can do better.
China for one thinks long term. It has its advantages.
I have a close relative that has worked in corporate finance for a few decades. They say that decades ago, “everyone” wanted to go public and remain public, it was a kind of status symbol, and lended credibility to your business. But he says that today, the regulations involved with being public are excessive, and the demands put upon you by being public are high (try having a really bad quarter or two because you changed something big in the business!) and raising capital itself is often viewed with suspicion (for example, you want to expand the business into a new line, and will show a year or two of lower earnings until the new business kicks in in earnest.)
What they’ve seen over the decades is more and more companies simply opting to remain private, raising their equity privately, and reporting their results privately. And, more recently, they even have this thing called private debt, where instead of issuing bonds (very few companies do this anymore), and instead of going to a bank for a loan, you go to a private group that has substantial amounts of cash, and borrow from them instead. It’s kind of like a private bond. It has huge advantages, as they tend to hold on to that debt instead of trading it where it can potentially cause undesired effects (like forcing a company into bankruptcy during hand times to gain full control).
Now there is a private equity industry that purposely raids companies to extract cash and destroy them, but that is still only a small part of privately held companies. There was also the whole SPAC thing, where instead of going public via IPO, a company would find an existing public shell and use that instead. I think that’s going out of favor as most of the difficulties still remain after doing so, with the additional issue of the “sponsor” taking a piece of the action for little or no contribution to the business.
Basically, like everything else in life, if you make being a public company more cumbersome, over time, you will see more companies opting to be private.
Seems this is only a vector of the long established trend of “financialization”. The tax code gives preferential treatment to income from financial manipulation, vs productive endeavor. The inevitable outcome will be more financial manipulation, and less productive endeavor.
The companies that have not done an LBO, or gone private by other means, have become increasingly opaque. The first step was making the CEO also the Chairman, and packing the Boards with other company officers and cronies of the CEO. I have posted before how a Tandy Corp Board member was questioning the competence of the CEO. I would think the Board’s job is to take care that the company be well managed, but in Tandy’s case, the dissenting member was purged from the Board instead. Public companies are increasingly going to the SEC for permission to not even allow their shareholders to vote on shareholder proposals. I posted recently about public company managements telling shareholders that management’s pol bribing activities are none of the shareholder’s business.
One concern I can think of is what do people like us do if this trend continues or accelerates? In other words where do you invest money if the number of public companies spirals downwards? Investing for retirement was very different for my dad than for me. It could very well be different for my daughter.
With thousands of investments to choose from, I doubt its a major concern. Any of us can engage in private investing if we choose to do so.
Many private companies decide to ipo to become public. That establishes a market value for the stock and makes it possible to issues stock options to employees etc.
Sure you can participate in venture capital investment or a local enterprise if you like. But that is not usually for amateurs.
Then we proles could be locked out of investing, with all the stock in the hands of the very few. We could only put our money in the bank, at a sub-inflation rate APR. Instead of 2023, we would be living in 1923.
During the 1920s, there was a pronounced shift in wealth and income toward the very rich. Between 1919 and 1929, the share of income received by the wealthiest one percent of Americans rose from 12 percent to 19 percent, while the share received by the richest five percent jumped from 24 percent to 34 percent. Over the same period, the poorest 93 percent of the non-farm population actually saw its disposable income fall. Because the rich tend to spend a high proportion of their income on luxuries, such as large cars, entertainment, and tourism, and save a disproportionately large share of their income, there was insufficient demand to keep employment and investment at a high level.
Meanwhile, in 2021:
“The top 1% earned 14.6% of all wages in 2021—twice as high as their 7.3% share in 1979. The bottom 90% received just 58.6% of all wages in 2021, the lowest share on record, and far lower than their 69.8% share in 1979.”
A “pro-growth” “thought leader” would observe that the top 1% still haven’t caught up to where they were in 1929, and conclude the system must be tilted to help the 1% realize the promise of “supply side economics”.
That is now outdated by four years.
I disagree. Their position in rare earths, lithium, batteries, solar panels, wind turbine, purchase of iron ore companies, investments in Asia, Africa, US pork industry, farm land, port facilities, etc all indicate a long term patient approach to profits. Far more like a Go board than trying to beat earnings estimates end of quarter.
All positions gained more than four years ago. At least for the most part.