A strange trend that has surfaced in the American financial landscape is that the number of publicly held companies is shrinking, a media report said.
The count of publicly listed companies traded on US exchanges has fallen substantially from its peak in 1996, CNN reported.
Back then, the number exceeded 8,000 companies. Today, that count has dropped by more than 50 per cent to just 3,700, according to data from the Center for Research in Security Prices.
It’s not that America has half as many companies as 30 years ago it’s that companies are increasingly staying private, largely outside the scrutiny of the public eye, CNN reported.
Publicly listed companies are subject to regulatory oversight and disclosure requirements, which help ensure transparency and maintain investor confidence. With fewer companies listed, there may be a decrease in overall transparency and investor trust in the market, said Matthew Kennedy, head of data and content at Renaissance Capital, CNN reported.
It also consolidates power and leads to a lack of competition: Just two stocks, Apple and Microsoft, account for about 15 per cent of the entire S&P 500.
The pandemic-induced recession in 2020 and the subsequent cycle of sky-high inflation rates have exacerbated the downward trend, say economists.
Fears of a softening economy and market volatility have caused initial public offerings (IPOs) to dry up almost entirely.
In 2022, the US IPO market fell 94.8 per cent to $8 billion, a 32-year low. That downturn has continued; the total capitalisation of new stock in the first quarter of 2023 declined by 60 per cent as compared to last year, as per CRSP, CNN reported.
Bankruptcies, meanwhile, have reached their highest level since 2010, erasing names like Bed Bath and Beyond and Party City from exchanges.
Prevailing economic conditions mean that companies just aren’t interested in going public right now. That’s not good for the economy, say economists.
“With inflation remaining elevated, the costs of capital will also remain elevated, which will continue to put downward pressure on tech, growth, and venture capital,” said Torsten Slok, Chief Economist and Partner at Apollo Global Management, CNN reported.
There are now about five times as many private equity-backed firms in the US as there are publicly held companies, said economists at Wells Fargo, CNN reported.
The trend has been growing for some time. In 1999, the average US technology firm transitioned to the public markets after four years, according to Wells Fargo. By 2019, that figure increased to 11 years.
“Companies that remain private can avoid the burden and cost of regulatory requirements and focus on long-term strategic plans,” they wrote, CNN reported.
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