The stock market is the ultimate democratic institution.
It doesn’t care where you came from, where you went to college or even how you earned the money you are investing.
Traditionally, the stock market offered a way to build your wealth by buying into the United States’ fastest-growing companies.
To paraphrase what Barack Obama said to “Joe the Plumber” in 2008, the stock market “helps spread the wealth around.”
Alas, today the U.S. stock market is disappearing before your very eyes.
Mergers and acquisitions, buybacks and burdensome regulation have reduced the number of companies listed on U.S. stock exchanges by around a third since 1997.
According to the University of Chicago’s Center for Research in Security Prices, the number of U.S.-listed companies peaked at 9,113 that year.
Today, that number is just over 5,700.
That’s hardly more than in 1982 when the U.S. gross domestic product (GDP) stood at a nominal $3.35 trillion, compared to $18.56 trillion today.
That’s all because the hottest companies representing the best investment opportunities are shunning the stock market.
Sure, Facebook Inc. (FB) had a high-profile initial pubic offering (IPO) back in May 2012.
Facebook listed at $38 per share, and today trades at around $130, an annualized rate of return of more than 30%.
But think of new household names like Uber and Airbnb.
Investment returns on these companies likely far exceed those on Facebook.
The difference is you have to be an inside player to get access to these kinds of investments.
Why are the Big Names Shunning the Stock Market?
Back in 1999, the Ubers of the world would have listed their stocks on Nasdaq.
Today, they are shunning all public markets.
First, private companies in the United States today can raise money from investors as diverse as the Canada Pension Plan Investment Board and Singapore’s Government Investment Corporation.
With interest rates low, public markets weak and demand for private equity deals exploding, pension funds and sovereign wealth funds are throwing cash at private companies. This private money has all but taken over Silicon Valley.
The red-hot tech sector saw a mere 26 IPOs in 2016 that raised $4.3 billion.
In contrast, late-stage private funding for tech companies secured $19 billion — almost four times what the IPO market raised — in over 800 transactions.
Second, once upon a time, companies retained their top employees by locking them in with stock options. These stock options would make them rich once companies went public.
Today, employees can get rich without having to suffer through an IPO. Airbnb Inc. recently raised $850 million. Employees were able to sell $200 million of stock at a valuation of $30 billion. Airbnb did not need a Nasdaq-based IPO.
Here’s What CEOs Think
I recently had dinner with a senior U.K. executive at Oxford University’s Said Business School.
He described his experience with being a CEO of a public company versus a CEO of a private company.
He told me that when he was CEO of a public company, 30% of the Board of Directors’ meeting time dealt with addressing financial regulations. The remaining 70% of the time was dedicated to the careful wording of the press release.
In contrast, as the CEO of a private company, 100% of the Board of Directors’ meetings were dedicated to improving the business.
There is no need to deal with overzealous financial regulators and public investors clamoring for short-term stock price gains.
Put another way, listing a company on the stock market is both a pain — and just plain bad for business.
What’s the unintended consequence?
The very best management talent was heading for private companies. Public companies were left with the dross.
Personally, this CEO was also attracted by the prospect of getting rich in peace — and not having to justify his compensation to public shareholders or the press.
So where does this leave you, as an average investor?
Sure, the U.S. stock markets won’t disappear and the stocks will continue to rise over time as they always have.
But, as a rule, only well connected, high net worth private investors can invest in the most promising new players on the private market.
And that’s where the biggest money will be made.
In case you missed it, I encourage you to read my e-letter column from last week about how the public opinions against Trump could actually benefit the U.S. economy.
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