The number of public companies listed on U.S. exchanges peaked in 1996. Due to mergers on the one hand and de-listings on the other, factors far offsetting new initial public offerings, this number has fallen drastically since then, to less than half of its peak.

Part of the reason for this reduction is that those IPOs are drying up. There were 624 IPOs in 1996.That number fell into the 80’s in the early years of the millennium, after the bursting of the dotcom bubble and the spectacular fall of Enron (of which, more in a bit).The IPO number has had further ups and down since, but has never gotten back to the mid-90’s level. In 2016, there were only 111 IPOs.

So what? Well, work from first principles. If one assumes that the IPOs, and public equities markets as such, serve any valuable economic role then one has to conclude either (a) that the role is not as fully served as it used to be or (b) that some other institution(s) is/are serving it. Either inference is potentially of monumental importance.  Either some growing firms would benefit from an IPO but can’t get one, or the institution of the IPO is becoming archaic for some large class of entities.

The Whys and Wherefores

Why do companies at some point in the course of their growth decide that they want to go public? There are at least five reasons: they want to access lower cost capital than they can get in the debt markets; they want to use their own stock as currency for acquisitions; the stakeholders want to manage their own risks; the entity wants to be able to provide stock or stock options in a very liquid way as an incentive to investors and employees or a reward to founders; or the move is thought to create/build a brand identity.

A recent presentation before the U.S. Securities and Exchange Commission’s advisory committee on small and emerging companies, looked into the matter of why companies are staying private.   It listed four main reasons, though it also added a broad “other” category. The big reasons? Larger amounts of private capital are available now than formerly, so the first of the above reasons for going public is no longer so pressing; a managing group may fear the greater transparency of a public company, and the loss of competitive advantage that may entail; the supposed short-term horizon of public investors and activists is thought to limit flexibility; there are various regulatory burdens on public companies that carry risks with them.

Under the “other” category the presenters listed class action lawsuits, short sellers, the threat of proxy fights, and the lack of analyst coverage.

Consider those private sources of capital that may make public listing unnecessary for some. The presentation references a McKinsey study that showed that the capital invested in private technology concerns grew in the ten years leading to 2015, from $11 billion to $75 billion. It also tells us about Uber, the ride-share networking company, which raised more than $8 billion from private equity firms and sovereign wealth funds over seven years.

The Intermediaries

The presentation, further, asks us to look at the intermediary’s side of the going public process. Intermediaries no longer have any real incentive to assist with the not-so-large deals that could help medium-sized enterprises grow, though they still want a piece of the large pies.

Also, near the end of the presentation, one runs into a reference to the “light-asset models” for corporations. This takes one back in memory to the days of Enron headlines. For what the SEC staff has in mind here is what used to be known as the “asset lite” model, and it was intimately associated with Jeffrey Skilling. But of course Skilling ran a public corporation, and what the presentation suggests is that the model, the whole notion that companies engaged in the great “digital transformation” don’t require the type of balance sheet associated with “the old industrial economy,” may be helping to persuade some companies that they also don’t require the infusion of capital that, say, a growing manufacturing concern would require.

So there is both push and pull involved. There are factors that are pushing smaller concerns away from the public markets, but there are also factors that are making the once-powerful pull of those public markets less urgent over time.