The number of publicly listed stocks has fallen by half in 20 years, a dramatic shift in capital markets that has deprived mainstream investors of high-growth private companies such as Lyft and Pinterest.
Sophisticated investors have long been able to clear the added hurdles of private-market investing, such as higher minimum mandates in private equity, venture capital, hedge funds, real estate, and other alternatives. Retail investors, however, primarily invest through their defined contribution plans, which rarely include unlisted asset classes, and charge steeply when they do.
Some experts see the paucity of alternatives in DC plans as a fairness issue. “Slow-growth companies are dominating the public markets,” says Kevin Albert, a partner at Pantheon who leads business development and client service. “Returns from private equity and other investments are flowing to rich people. There’s a progressive argument here.”
The portfolios of households with $20 million to $100 million grew almost twice as fast as those between $250,000 and $1 million, according to BCG’s 2017 wealth management report. Managing Director Brent Beardsley attributed the alpha of the ultra-rich to the “illiquidity premium” — better returns via allowing money to be locked up for extended periods of time — which lesser portfolios and 401(k) plan members often cannot access.
Asset managers, however, are chomping at the bit to offer versions of private equity and other alternatives in retail mutual funds or other formats compatible with 401(k) plans.
Beardsley says so-called liquid alternatives do hold promise. “But will you get the same level of performance as investors have long term? It’s still unclear.” But he emphasizes that individuals belonging to defined benefit pension plans have always benefitted from alternatives. DC participants should get the same opportunity, he argues.
A number of factors have contributed to public companies’ thinning numbers, including rising regulatory costs and the threat of activist investors who often demand big strategy changes. At one time, private companies went public because they wanted access to capital for growth. Now, they can stay private and raise money all the same.
Private equity firms, which typically invest in private companies or take public firms off the market and restructure them, possessed $1.5 trillion in assets in 2016. That’s up 400 percent since 2000, according to Pantheon. For the young unicorn companies seeking investment capital, that’s plenty to go around.
