Where Are All The Public Companies?
There are just under 3,700 exchange-listed U.S. companies. This is down from over 7,300 in 1996. What has caused this decline, and what are the potential ramifications for investors?
The reduced number of public companies has coincided with a dearth of Initial Public Offerings (IPOs). Today, young companies have no shortage of easy access to debt, venture capital, and private equity funding, meaning a public offering is no longer needed to fuel growth. There were only 160 IPOs in 2017 compared with 845 in 1996. To the extent institutional funding remains plentiful, expect the trend of fewer IPOs to continue.
In response to the Global Financial Crisis of 2007-2008, regulators increased the accounting and compliance standards that public companies must meet. This has made it costlier to be a public company. Therefore, private companies must wait until they are big enough to shoulder that increased burden, if they choose to go public at all.
In 1996, there were over 4,100 exchange-listed microcap companies (market capitalization below $300 million) in the United States. The number has since declined to under 1,500. The reason is a combination of the previous two points: increased regulations have made it cost prohibitive for microcaps to stay listed, and cheap debt has allowed larger companies to acquire them. The reduction in the number of public companies can largely be attributed to the decline in microcaps.
Opportunity for Large Cap Investors
Publicly-traded microcaps in the United States have never represented more than 4% of the total investable universe on a market capitalization basis. Additionally, the higher risk and lower liquidity of microcaps make them an unsuitable investment for typical investors. This means that, for most investors, the reduction in the number of public companies should have negligible impact on their investment plans. Importantly, the number of large capitalization stocks has remained stable for many years, giving First Fiduciary a well-stocked pond in which to fish for new investment ideas. “Because we invest in well-capitalized companies that generate a lot of cash flow, the increased regulations have not impacted their businesses materially. In fact, our portfolio companies have been able to use the higher public company maintenance costs to their advantage by opportunistically acquiring weaker peers and increasing their competitive advantages,” said Bill Henry, First Fiduciary’s Chief Operating Officer.