The Shift Toward Private Companies: A Growing Divide in Investment Opportunities

• The number of public companies has sharply decreased, as many tech firms choose to stay private to avoid regulatory scrutiny and secure larger investments.
• Highly valued private companies like SpaceX and OpenAI attract significant investments, but retail investors are typically excluded from participating.
• Going public offers companies opportunities for funding, increased credibility, and liquidity for stakeholders, yet more firms are opting to stay private for extended periods.

In recent years, private companies, especially in the tech sector, have raised billions to delay or avoid going public. This strategy has generated substantial wealth for early investors and employees while excluding most everyday investors. For many, the chance to benefit financially from these companies is limited, with options like 401(k) retirement accounts offered by select US firms. The effect of this shift has become even more apparent as the number of initial public offerings (IPOs) has dropped since the pandemic.

A Declining Number of Public Companies

Over the past two decades, the number of publicly traded companies worldwide has seen a sharp decline. Data from the Centre for Research in Security Prices shows that in the United States alone, the number of public companies has nearly halved, dropping from about 7,500 in 1997 to fewer than 4,000 today. This trend is part of a broader global shift, signalling a move away from public markets.

Why Are Companies Staying Private?

The growing interest from institutional investors in private companies has been a key factor driving this shift. While private companies come with higher risks, they also present greater potential rewards and attract a larger share of available capital. Companies like SpaceX and OpenAI are prime examples of this trend, with their valuations soaring in recent years.

For instance, SpaceX, led by Elon Musk, reached a $350 billion valuation, placing it among the top 25 firms in the S&P 500. OpenAI, under Sam Altman’s leadership, raised $6.6 billion, pushing its value to $157 billion. Similarly, Stripe Inc. repurchased shares at a $70 billion valuation, while Databricks raised $10 billion, boosting its value to $62 billion.

These companies benefit from the more relaxed regulatory environment of private markets, allowing them to avoid the scrutiny of public markets and sidestep pressure from activist investors while keeping crucial trade secrets and operations confidential.

A Growing Pool of Capital in Private Companies

Private equity and venture capital firms are increasingly invested in the trend of private companies, with trillions of dollars flowing into this space. As of October, Bain & Co. reported that private equity firms alone manage nearly $3 trillion. Meanwhile, PitchBook highlights a thriving venture capital environment, with over 1,400 unicorns (companies valued at more than $1 billion) collectively valued at around $5 trillion.

In the U.S., there are about 57,000 privately held companies, many of which are late-stage or venture-backed startups. These companies are typically on track for public listings but remain private due to the abundant funds from private investors. Kyle Stanford, a PitchBook analyst, notes that firms like Databricks and Stripe have successfully raised significant capital while staying private, but he also points out that most businesses lack access to such vast resources, making it difficult for them to follow the same path.

How Are Private Companies Valued?

Private companies are valued based on what investors are willing to pay for a stake in them, much like public companies. The key difference is that private company valuations are not updated in real-time, as they are for publicly traded companies. Instead, these valuations tend to remain confidential, with updates only released through press announcements following investment rounds.

Lack of Public Scrutiny in Private Companies

One key benefit of staying private is the absence of public scrutiny. Unlike public companies, private firms aren’t obligated to disclose detailed operational information. Nevertheless, top private companies like SpaceX and OpenAI often choose to share select business insights voluntarily.

Investing in Private Companies: A Limited Opportunity

For regular investors, gaining access to private companies can be challenging. Typically, only accredited investors—those who meet specific income or professional requirements—are permitted to invest directly in these firms. This restriction aims to protect less experienced investors from high-risk opportunities.

Accredited investors can acquire shares in private companies through platforms like Forge Global Holdings and Rainmaker Securities. However, these markets are often opaque and come with high fees. Additionally, funds like Destiny Tech100 Inc. (ticker DXYZ), which invests in private unicorns like SpaceX and OpenAI, offer another route. But shares of such funds can trade at a significant premium, making them an expensive option for investors.

The Appeal of Going Public

Although many businesses choose to stay private, going public remains an attractive option for others. Public companies have the ability to raise capital from a wide range of investors, including retail investors, through channels like 401(k) plans. An initial public offering (IPO) allows businesses to secure funds for operations or debt reduction while also offering a public currency for future acquisitions.

Additionally, being listed on a public exchange enhances a company’s legitimacy, providing validation to employees, customers, and suppliers. Public companies are required to disclose financial information regularly, increasing transparency and building trust with stakeholders.

A Growing Divide in Investment Access

As private companies continue to thrive and secure substantial capital, the divide between those who can access these lucrative investments and the average investor widens. The wealth accumulated by early investors and employees remains largely out of reach for most, highlighting an increasing imbalance in financial opportunities. While going public offers notable advantages, the trend of remaining private shows no sign of slowing. This raises the question: will the typical investor ever truly have a chance to invest in these high-growth companies?