There are almost 30% fewer publicly listed companies today than at the start of the millennium due to rising private-equity buyouts and strategic acquisitions. 2009 saw $118 billion of global buyout deal value, while 2021 saw over $1.1 trillion in deal value.
In addition, many firms are choosing to avoid the public markets altogether. As McKinsey writes, “recent surge aside, the number of IPOs did decline between 2001 and 2010,” which is particularly true among small deals. At the same time, companies that go public are delaying doing so for longer. The economic downturn is catalyzing this shift.
Companies avoid IPOs in downturns
Even well-run companies can see their stock prices plummet in a volatile stock market. This is especially true in a recession when firms cut costs and reduce investments.
Therefore, going public in a recession “may be a kiss of death,” as described in a Wharton Magazine article. Why? Because correctly pricing an IPO is difficult enough in good times and near-impossible in bad times.
It’s no wonder that US IPOs worldwide fell a precipitous 82.5% year-over-year in the second quarter of 2022. Rather than risk it, many companies are sticking to private markets—where they can raise money without the same level of public scrutiny.
The shift to private markets has already been long underway, but the current economic conditions are accelerating. This is bad news for public markets and good news for private investors.
Private markets often fare better in recessions
Naturally, VC activity, too, has dropped in recent months. But private market investors don’t just sit on the sidelines during economic downturns—they actively seek opportunities. In contrast to public markets, which are driven by short-term thinking, private markets take a longer-term view.
This was borne out in the dot-com bubble and the Great Recession, with private equity funds experiencing less significant drawdowns and faster recoveries than public markets. In the decade following the dot-com crash, the public market equivalent index’s annual return fell to 0.08%, while private equity maintained a 7.5% average.
Recent data suggest that this recession will be no different. CBInsights’ latest State of Venture report analyzed Q2 2022 startup data, finding that “median post-money valuation is on the rise across most stages.”
All median valuations from seed to Series D are up compared to 2020. This is due, in part, to an influx of “dry powder”—undeployed capital that investors are waiting to invest. Another reason is that, as IPOs have dried up, late-stage VCs are filling the gap by investing in private companies.
Only Series E+ companies have seen a dip in median valuation due to their closer proximity to public markets. That dip, too, has been modest, falling from $2.1 billion to $2 billion in 2022 YTD.
Investors are leaving public markets
Investors today are leaving public markets in droves. JPMorgan reports that retail investors have capitulated. For institutional investors, however, the public market exodus is nothing new.
Institutions have been pouring money into private markets for years, only accelerating their pace. In a recent survey by Preqin, 81% of investors said they planned to increase their allocation to alternatives by 2025. Just 3% said they planned to decrease it.
The writing is on the wall: investors are losing faith in public markets and turning to private ones. For them, it’s simply a better way to preserve and grow their wealth. You must be in the private markets to take advantage of these trends. And Gridline is here to help with high-quality, professionally managed funds at minimums that let investors and their advisors build diversified portfolios of private market assets.