How Private Markets Are Killing Public Equity

The stock market is becoming a “holding pen for massive, sleepy corporations” with low growth prospects, a Duke law professor says.


The future of the public equity market is bleak and private capital investors may be to blame, according to new research from Duke University.

In a paper released this week, Duke associate law professor Elisabeth de Fontenay says that booming private markets will result in an increasingly stagnant stock market consisting of companies lacking meaningful growth.

“No longer the promised land for companies poised to grow, the public stock market is quickly becoming a holding pen for massive, sleepy corporations,” Fontenay wrote in the paper.

Deregulation of private capital and its increased accessibility have diminished the value of going public, resulting in a sharp decline in initial public offerings and a shrinking proportion of U.S. firms listed on stock exchanges, according to the paper. Because private company “unicorns” like Uber and Airbnb are raising “astonishing” amounts of money through private markets channels like venture capital, Fontenay says there’s little motivation to join the public sphere, where they’d have to disclose information in exchange for investors.

Already, Fontenay found that the average number of IPOs per year has dropped by two-thirds since the turn of the century. The two decades ending in 2000 witnessed an average of 310 IPOs a year, with 53 percent of small firms and 48 percent of large firms going public. Between 2001 and 2012, there were 99 IPOs a year on average, and the composition of firms going public shifted: Just 28 percent of small firms raised capital through IPOs, compared to 72 percent of large.


In another sign of the declining appeal of going public, the ratio of total U.S. firms listed on public stock exchanges to all U.S. firms plummeted roughly 40 percent between 1977 and 2012.

Meanwhile, 103 private startups achieved valuations exceeding $1 billion each by November 2015, Fontenay said in the paper, adding “these firms are in no hurry to go public.” Instead, private firms are “thriving in part by freeriding on public company information and stock prices,” she wrote.

“Such firms’ astonishing ability to attract cheap capital may last only so long as the public companies continue to yield vast, high-quality information covering a broad range of companies,” Fontenay wrote, saying the trend isn’t likely to endure.

In other words, the decline of public markets doesn’t bode well for private markets, either.