A robust pipeline of high-profile initial public offerings will offset the steady decline in the number of public companies, yet some institutional investors remain concerned. These fears may be overblown.
There is no disputing that the number of publicly held companies has declined in recent years. Whether this is cause for concern, however, may depend on the perspective.
Detractors, for instance, are quick to note that the decrease reflects the challenges of the public markets, ranging from "short-termism," emphasizing quarterly performance above all else, to imposing regulatory demands and the high costs of compliance. It's the same message that has been articulated for years by leveraged buyout firms, which would argue today that the private capital landscape now has the breadth and scale to support growing companies without ever requiring an IPO.
At face value, these developments might spook public market investors concerned that these trends represent a fundamental change in either the composition of the public market or the concentration of stocks within it. At the very least, investors are asking: At what point does the decline become material enough to warrant revisiting their investment policies or how they allocate to public equities and alternatives altogether?
The short answer is that the public markets have not fundamentally changed for institutional investors. Yes, there are fewer listed companies, but the catalysts behind the decrease are less sinister than the conventional wisdom might assume. The longer answer, though, offers institutional investors a deeper understanding around what is actually triggering the decline and how it will affect performance in the years ahead.