Where Have All The Stocks Gone?

Episode Summary

Executive Summary: This podcast analyzes the decline of US public equity markets, where listings have halved in 20 years, and the rise of private capital to $7.4 trillion. It explores regulatory, market structure, and economic reasons for this shift, including the Sarbanes-Oxley Act and the JOBS Act, and examines the implications for investors, such as the illusion of low volatility in private equity and the erosion of shareholder rights in late-stage tech IPOs.

Main Topics: Decline of Public Markets (Priority: 5/5): The number of US-listed companies has nearly halved over 20 years, with share buybacks and low interest rates reducing shares outstanding. The traditional IPO path for growth is disrupted as companies stay private longer. Rise of Private Capital (Priority: 5/5): Private capital industry has grown to $7.4 trillion (15x since 2000), expected to reach $13 trillion in four years. Institutional investors favor private equity, venture capital, and private debt. Regulatory and Market Structure Changes (Priority: 4/5): Government actions since the mid-1990s eased private fundraising. Sarbanes-Oxley Act (2002) increased IPO costs, while the JOBS Act (2012) aimed to reduce burdens but had no effect on IPO numbers. Private Equity Performance and Illusions (Priority: 4/5): Private equity historically outperformed S&P 500 by ~5% annually but returns have converged. Low volatility is an illusion due to infrequent valuations; a public portfolio of similar stocks outperformed private equity over 30 years. Corporate Governance Issues in Tech IPOs (Priority: 3/5): Late-stage tech IPOs often feature multi-class share structures that limit shareholder voting rights (e.g., Facebook, Snap). Index providers like FTSE Russell now exclude such companies. Implications for Retail Investors (Priority: 3/5): Retail investors can replicate private equity returns via small-cap, low-valuation, levered public stocks with daily liquidity. Private equity's lack of daily pricing hides true volatility.

Key Arguments: The decline in IPOs is primarily due to increased regulation (Sarbanes-Oxley) and market structure shifts that make staying private more attractive. Private equity's apparent low volatility is misleading because valuations are quarterly and based on internal models, not daily market prices. A portfolio of public small-cap, low-valuation, levered stocks outperformed the US private equity index over 30 years, offering better liquidity and lower fees. The JOBS Act failed to revive IPOs, but allowed companies to stay private longer by expanding shareholder limits before mandatory public reporting. Late-stage tech IPOs often impose unfair governance structures on public shareholders, such as non-voting shares, reducing shareholder control.

Data Points: Decline in US listed companies: Almost halved over 20 years - Number of companies listed on US stock market Size of private capital industry: $7.4 trillion - Current size, 15x larger than in 2000 Projected private capital size: $13 trillion - Expected in next four years Private equity outperformance vs S&P 500: ~5% per year - Over last 30 years, but returns have converged in last 10 Private equity dry powder: $2.5 trillion - Committed but undeployed capital Private equity claimed return in 2008: Up 11% - While S&P 500 was down 38% Venture capital-backed IPOs with mutual fund pre-IPO investment: 40% - In 2016

Pivotal Quotes: "If there's one piece of investment advice that I can give, it's that investments in businesses that violate the fundamental laws of physics mostly don't work out." — Patrick Boyle: Referring to a Woodford fund investment in a cold fusion company "The average private equity fund, according to Cambridge Associates, claimed to be up 11% back in 2008, when many of their portfolio companies were at the brink of collapse and the stock market was down 38%." — Patrick Boyle: Highlighting the illusion of low volatility in private equity "This, of course, is great news for retail investors, as it means that you don't have to be an accredited investor to access this type of return stream." — Patrick Boyle: Referring to replicating private equity returns with public stocks

Implications: Retail investors can replicate private equity returns via public small-cap value stocks with daily liquidity. The shift to private markets reduces transparency and shareholder rights, but public markets still offer accessible, liquid alternatives. Investors should be wary of private equity's smoothed returns and high fees.