The Consequences of Shrinking Public Markets

Ordinary investors are missing out on significant gains as private equity pushes out IPOs, Syracuse University research finds.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

Micro-cap companies are increasingly relying on private markets for capital, hastening their demise as publicly traded stocks to the detriment of ordinary investors, according to Syracuse University research.

The U.S. pool of micro-cap stocks, or those with market values under $250 million, shrank by 58 percent from 1998 to 2018, a recent paper by Robert Blecher of SU shows. That’s a much faster decline than for larger stocks.

The number of companies in the U.S. stock market has tumbled over the past two decades, as firms increasingly turned to private equity to fund growth. As a result, micro-cap companies — which represented roughly half or more of listed equities each year from 1985 to 1998 — are no longer driving up volume for initial public offerings, according to the paper.

“The absence of small companies threatens public access to equities with the potential to grow exponentially and become highly profitable,” Blecher wrote, meaning ordinary investors are missing out on potentially significant returns. The companies that have stopped listing tend to be “small and nimble,” he said, operating in the services, transportation, communications, and finance sectors — “all spaces that are now chock-full of unicorns.”

Unicorns, or private companies valued at least $1 billion, have been seeking late-stage funding in private markets instead of raising capital from investors on public stock exchanges, according to Blecher, citing Elon Musk’s SpaceX, Airbnb, and payments company Stripe as examples.


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“As young companies gravitate to the private markets, the return profile of public equity investors has been altered for the worse with the loss of a significant source of growth,” Blecher wrote. “This growth is increasingly limited to investors in the private markets,” he said, “as companies avoid the public markets or list after reaching maturity, creating a divide between different classes of investors.”

Small IPOs of less than $100 million are down in number and total amount raised over the past two decades, sliding from their peak in 1996. “The disappearance of small-company IPOs has held with time,” said Blecher, who probed investors, founders, and experts in private market due diligence for his research.

One person he interviewed saw “no good reason to pay bankers and disclose financials when the money is waiting [in the private markets] at the same valuation,” according to his paper.

But Blecher also found that delisting activity, including via mergers and acquisitions, has become less prevalent over the past two decades. “While micro-caps accounted for upwards of 80 percent of activity through the 1990s, they stayed around 60 percent through the 2000s, with the exception of heavy dropping activity surrounding the 2008 financial crisis,” he said.

Although he sees promise in fewer companies leaving the pool of publicly traded stocks through delisting, Blecher wrote that “the inadequacy of entry through the IPO process is upsetting the balance of power between the public and private markets.”