Why Companies Are Staying Private for Longer

Vyacheslav Dvornikov

Jan 10, 2025

The number of public companies in the US has decreased from 7,500 in 1997 to less than 4,000 currently. This trend is also observed globally and is related to companies staying private longer, notes Bloomberg. The average age of companies going public has increased from 6.9 years in 2014 to 10.7 years in 2024.

The main reason why companies are increasingly hesitant to conduct IPOs is that they now have far more options than before, writes The Economist. More and more funds are willing to invest in companies regardless of whether they are public. According to McKinsey, by mid-2023, private equity funds managed $8.2 trillion. This is more than double compared to 2018.

As a result of the growth of private capital markets, companies like ByteDance, OpenAI, Stripe, and SpaceX, which are valued at tens and even hundreds of billions of dollars, remain private. Elon Musk's SpaceX valuation reached $350 billion in December 2024, which would place it among the 25 largest companies in the S&P 500. Also last year, Sam Altman's OpenAI raised $6.6 billion, bringing its valuation to $157 billion. Fintech giant Stripe bought back shares based on a valuation of approximately $70 billion. Software developer Databricks raised $10 billion, bringing its valuation to $62 billion.

A similar situation exists with venture capital markets, which are a subgroup of private capital. According to PitchBook, there are currently over 1,400 venture 'unicorns' — companies with a capitalization exceeding $1 billion — with a total value of about $5 trillion.

Companies have several reasons to choose private capital markets. One of them is the growth of intangible assets, which include copyrights, software, and other intellectual property, as well as brand recognition. Disclosure requirements for public companies favor companies with tangible assets, such as machinery and real estate, notes Rene Stulz from Ohio State University. When a company announces that it owns a building, competitors are unlikely to steal that asset. When it comes to ideas, research, and other intangible assets, the situation is different: the less competing companies know, the better.

Private companies are also protected from activist investors, notes Bloomberg. Jamie Dimon, head of JPMorgan, explains companies' reluctance to conduct IPOs by the need to follow the ESG agenda and the pressure associated with the requirement to report quarterly.

Why it matters

Private investors have fewer opportunities to directly invest in companies that might otherwise be traded on the stock exchange. Indirectly, they invest in them through pension and mutual funds. The share of private equity in institutional investors' portfolios increased to 10% of assets in 2023 compared to 6% five years earlier, while investments in listed stocks decreased by a similar amount.

Another way is the closed fund Destiny Tech100, which holds shares in SpaceX, OpenAI, and other 'unicorns'. At the same time, investors are willing to pay a significant premium. Recently, the fund reported that the net asset value per share is $5.32, while its shares are trading above $60.

Yes, the reduction in the number of public companies is a negative trend in financial markets. But it should be noted that many of the best companies have always been private. Let's recall what Warren Buffett said about investment-attractive companies. The most attractive are those that can deploy a lot of capital at high returns. Second are those that can provide high returns but do not need much capital. Then there are those that bring low returns but use little capital. Finally, the least attractive for investments are companies that require a lot of capital, and the business profitability is low.

Buffett further says that companies of the first type are extremely rare. It is realistic to invest in companies of the second type. Now let's continue his logic. Attractive companies do not need much capital. Therefore, there is no need to go public, as equity capital is the most expensive money.

When I buy a Ritter Sport chocolate bar or Ferrero Rocher candies, I always think that this is an extremely attractive business, inaccessible to retail investors because the companies are private. Moreover, the owner of the Ferrero group has the largest fortune in Italy, so it is far from a small business. Even cooler is the private company Swarovski, as it is a monopolist in the market of high-quality crystals that mimic (in appearance, but not in hardness) diamonds. However, among such companies, there are also public ones, like Lindt. In addition, there are many public companies in promising sectors (semiconductors, biotechnology, etc.) that allow investors to earn returns incomparable with the returns of many of the best private companies. And quality is more important than quantity.