The Incredible Shrinking Public Markets 

Many investors in the share market might not know it, but their investment world is rapidly changing before their very eyes. The number of listed companies, always only a tiny fraction of all companies, is contracting.  

Over the past 25 years, the number of publicly listed companies in the US alone has halved from 8,000 to 4,000 – and it’s a global trend. Looking through a different prism, in 2014 there were 42 late-stage venture companies worth more than $US1 billion in the US. Today, there are more than 1000, a massive increase. 

It’s not just an issue of fewer companies wanting to list. It’s also a fact that many companies are deciding to stay private for longer. They have decided the regulatory demands are too onerous and costly and that their high-growth strategies can alienate shareholders focused on earnings and dividends.  

It also reflects the reality that the opportunities for private companies to raise capital are more varied so the need to go public to fund early-stage development is not nearly as pressing or compelling. 

More and more capital is seeking Pre-IPO Opportunities 

On the flip side, there is no shortage of capital wanting to invest in these established private pre-IPO companies. As is often the case in investment trends, the US market is a bellwether of what is happening with an estimated US$1.5 trillion invested in these companies over the past decade. It has allowed these companies to grow, innovate and disrupt without being concerned about the structures that come with being publicly listed.   

There are other advantages too. For the founders of these private companies, it gives them more options. For example, having access to a share trading platform and other sources of capital relieves the pressure to have a premature IPO. At the same time, it can still allow shareholders to trade their shares, and, by having a wider spread of sophisticated shareholders, it increases the chances of having a successful IPO when the decision to go public is made.  

So, in a real sense, what we are seeing is a perfect storm: companies wanting to stay private longer are finding myriad avenues to facilitate both liquidity and raise capital outside the traditional IPO route at the very time investors are becoming more aware of and attracted to the investment opportunities these companies offer. 

Private companies represent the industries of tomorrow 

Increasing investor interest is the fact many of these companies are in those investment sweet spots – the industry sectors of tomorrow such as fintech, healthcare, AI, cybersecurity, cloud technology, genomics and biotechnology. 

As investing in private companies increasingly moves into the mainstream, one constant with investing is the need for due diligence. While pre-IPO buying opportunities are prized because they tend to be attractively priced, they also come with less liquidity and transparency than a publicly listed company. The phrase “high risk, high reward” is merited. So, with such investments, investors need to be prepared to do their research. This cannot be stressed enough. 

One approach is to use a combination of qualitative and quantitative analysis – a top-down and bottom-up approach – to distinguish companies worth pursuing and those to set aside. When engaging in fundamental analysis, examine: 

  • Quality of management 
  • Experience and strength of investors 
  • Quality of the business and operating model 
  • Market Opportunity 
  • Competitive landscape 
  • Capital structure 
  • Path to profitability if not yet profitable

This list is far from exhaustive. If physically possible go visit the company. How is it spending your money – or potential money? Is the car park populated with Ferraris or Toyotas, the latter being preferable? Doing your own homework, as well as seeking professional advice if deemed necessary, is critical.  

The importance of due diligence in private investing 

For those that decide to invest in private companies, one option is via the PrimaryMarkets trading Platform, which provides liquidity for several of the largest private companies in Australia. Soon, Stockbrokers and AFSL holders will be able to trade directly on the Platform for their clients as PrimaryMarkets integrates its Platform with parent Company Complii Fintech Solutions Ltd (ASX: CF1). 

Since its founding in 2016, PrimaryMarkets has nurtured a global investor network of more than 110,000 investors spread across 119 countries. In addition to offering investors attractive pre-IPO opportunities, this network injects liquidity into the Platform.   

Information about companies, as well as trading depth, pricing and volume is available on the Platform, enabling investors to get insights into how large and small offers may affect a company’s price. Only sophisticated investors who have the industry and market knowledge, as well as the capacity to do their own due diligence, should play in this space. The phrase, caveat emptor, has never been more apt. 

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