In recent years, there has been a noticeable trend of large companies opting to stay – or go private. According to research from the University of Florida, the number of publicly listed companies in the US decreased significantly from 7,810 at the start of the year 2000 to just 4,814 by the end of 2020 and a downward trend is observed in the UK and in the euro zone as well. This shift is driven by several factors, including the desire to avoid the regulatory burdens of being public, the ability to make long-term strategic decisions without the pressure of quarterly earnings, and the availability of substantial private capital.
As part of our research for this article, we spoke with Jelle Postma, CEO at Capler to gather his views on the democratisation of private markets. Capler is a European investment platform that democratises access to high-yielding private equity investments for retail investors.
While this trend has significant implications for Private Markets, it also presents challenges for individual investors.
Drivers Behind the Trend
- Regulatory Burden: Public companies are subject to extensive regulatory requirements, including regular financial disclosures and compliance with various laws. By going private, companies can reduce these burdens and focus more on their core business activities.
- Long-Term Strategic Decisions: Public companies often face pressure from shareholders to deliver short-term results, which can hinder long-term strategic planning. Private companies, on the other hand, can make decisions that prioritise long-term growth without the constant scrutiny of public markets.
- Portfolio diversification: From an (institutional) investor’s perspective, allocating capital to private markets is appealing due to the lower correlation with public indexes, which supports diversification strategies. Additionally, various studies have shown that private market investments historically outperform public market indexes, such as the S&P 500, attracting significant capital to private markets
- Availability of Private Capital: The expansion of private equity (PE) and venture capital has created a cycle where companies can secure substantial funding without the need to go public. As more private capital becomes available, companies are more inclined to stay private, benefiting from the flexibility and strategic advantages it offers. This, in turn, attracts even more private capital, as investors seek opportunities in these privately held companies. Statista data shows that global PE dry powder increased from USD 0.5 trillion in 2003 to USD 3.9 trillion in 2023, illustrating this growing trend. This cycle of increasing private funding and companies choosing to remain private reinforces itself, driving further growth in the private markets.
The growth of private markets
The trend of companies staying or going private has been a boom for PE firms. The sector has capitalised on this trend by acquiring companies and taking them private, allowing them to implement strategic changes and drive growth. This has led to significant growth in the PE sector, with global PE deal volume increasing substantially. As a testament to the incredible growth in the sector, in 2023, CVC Capital Partners managed to raise a EUR 26 billion fund within a time frame of only six months.
Despite recent years being marked by increasing interest rates and inflation headwinds, the sector is back on track for growth in 2025 and beyond. PE firms benefit from the ability to restructure companies, improve operational efficiencies, and ultimately sell them at a profit. The flexibility and control that comes with private ownership allow PE firms to execute their strategies more effectively.
Individual Investors
While the trend of companies going private has been advantageous for PE firms, it can limit investment opportunities for individual investors. With fewer companies listed on public exchanges, individual investors have fewer options to diversify their portfolios, leading to increased concentration risk and potentially lower returns. Additionally, private companies lack the transparency of public companies, making it harder for individual investors to assess performance and make informed decisions.
Furthermore, retail investors have limited ways to access investment opportunities that resemble private markets. There are listed holdings that invest in private companies, such as Exor, and there are private equity firms that are themselves publicly listed.
On the former option, Jelle commented, “Investors need to consider that the listed holding variant loses some of the advantages of private markets, as the focus on quarterly earnings is ever-present when listed, which influences short-term versus long-term value creation dynamics. Perhaps more importantly, returns are driven by supply and demand for the stock of the holding, not by bottom-up valuations based on cash flows and profit margins.”
Regarding listed private equity companies, Jelle added, “Retail investors should be aware that when buying stock in a listed private equity firm, you are investing in the investment management business of that firm. Owning stock in such a firm does not give direct exposure to the underlying portfolio of private companies in which the private equity firm has invested.”
Effective from January 10, 2024, European Long-Term Investment Funds (ELTIF) 2.0 address these challenges by offering a more transparent and structured approach to private market investments. By removing the EUR 10,000 minimum investment threshold and providing more flexible investment and redemption policies, ELTIF 2.0 makes it easier for retail investors to participate. This enhanced accessibility, combined with the long-term investment focus and the regulatory framework of ELTIFs, provides a more secure and understandable option for those looking to diversify their portfolios with private market assets.
While this all sounds promising, Jelle stressed that “there are very few ELTIFs available in the market, and online brokers often exclude them due to the long-term nature of ELTIFs and the transaction-focused business models of brokers. Only recently have private banks started to show interest in ELTIF products, yet this means you have to be a private wealth client, which completely undermines the removal of the EUR 10,000 minimum threshold for ELTIF products.”
In the Netherlands alone, per the end of the year 2024 there was a total balance of EUR 600.5 billion Euros in the savings accounts of the Dutch population according to data publish by the Dutch central bank which raises the question, where can these funds be invested in a well-diversified manner?
Rise of Fund of Funds
To address the challenges faced by individual investors, the rise of fund of funds (FoFs) has emerged as a potential solution. A fund of funds is an investment vehicle that pools capital from multiple investors to invest in a diversified portfolio of other funds, including PE funds.
This structure provides several benefits:
- Diversification: By investing in a variety of funds, FoFs offer broad diversification, reducing the risk associated with investing in a single fund or company
- Access to Expertise: FoFs leverage the expertise of multiple fund managers, providing investors with access to specialised knowledge and investment strategies
- Lower Capital Requirements: FoFs allow individual investors to gain exposure to PE investments without the large capital commitments typically required for direct investments
The rise of FoFs has made PE more accessible to individual investors, enabling them to participate in the growth and returns generated by PE investments. This democratisation of PE has the potential to mitigate some of the downsides associated with the trend of companies going private.
Commenting on these trends, Jelle noted: “While FoFs have been around for a long time, only recently has there been an increase in semi-liquid funds. Semi-liquid products have existed in real estate for decades, but in private equity, they have only been on the rise in recent years, both inside and outside of the ELTIF framework. This development addresses key pain points for retail investors. First, less stringent lock-up arrangements are often preferred over a 10-year+ investment horizon without guarantees. Secondly, committing capital today, which will be called at some point in the future, rarely aligns with a retail investment focus where individuals typically want to decide on the investment and actually make that investment at that time.”
Conclusion
The trend of large companies going private is reshaping the investment landscape. While it presents significant opportunities for PE firms, it also limits investment options for individual investors. However, the rise of FoFs offers a promising solution, providing individual investors with access to diversified PE investments and the expertise of seasoned fund managers. As this trend continues, it will be crucial for individual investors to explore innovative investment vehicles like FoFs to navigate the evolving market dynamics.
Capler is a European investment platform that democratises access to high-yielding private equity investments for retail investors. Visit Capler.nl for more information.
At Taru, we offer fund administration services built on forward-focused technology and exceptional client service. Visit Taru.com for more information.
