Where Have All The Stocks Gone?

Episode Summary

Executive Summary: The episode argues that public equity markets have lost ground to private capital over the past two decades due to regulation, cheap debt, and rising private-market capacity. While private equity and unicorns can deliver strong apparent returns and lower volatility, the episode questions whether those advantages are real or just artifacts of illiquidity, delayed pricing, and governance trade-offs.

Main Topics: Decline of public listings and rise of private capital: The number of US-listed companies has nearly halved while private equity, venture capital, and private debt have expanded dramatically, shifting where companies raise growth capital. How the traditional IPO pathway has changed: Historically, firms went public to access permanent capital and broaden ownership, but many fast-growing companies now stay private much longer, using private rounds instead of exchange listings. Regulation, market structure, and the JOBS Act: The episode reviews explanations for fewer small-company IPOs, emphasizing Sarbanes-Oxley costs, increased legal liability, and government efforts like the JOBS Act that did little to revive IPOs. Private equity performance versus public markets: The show compares private equity returns and volatility against public equities, arguing that reported outperformance and low volatility may be overstated because of valuation methods and illiquidity. Governance and shareholder rights in late-stage tech IPOs: Many private and recently public tech firms preserve founder control through dual-class or non-voting shares, weakening public shareholder influence and changing the purpose of IPOs. Private assets in mutual funds and valuation risks: The transcript warns that mutual funds holding private assets can inflate reported returns and hide volatility because these positions are marked to model, not market. Implications for retail investors: The episode suggests retail investors can replicate much of the economic exposure of private equity via public small-cap, low-valuation, and levered stocks—while retaining liquidity and transparency.

Key Arguments: Public markets have shrunk in importance as companies increasingly remain private longer and raise more capital from private investors. Government rule changes since the mid-1990s, plus Sarbanes-Oxley-era costs, materially reduced the appeal of going public for smaller firms. The JOBS Act loosened some burdens but did not meaningfully revive IPO activity. Private equity’s strong historical returns may partly reflect favorable marking practices, illiquidity, and leverage rather than superior manager skill alone. Private equity’s low volatility is likely artificial because portfolio companies are valued infrequently and with model-based appraisals. The traditional diversification story for private equity is weak; many funds are long-only, U.S.-focused leveraged portfolios with high fees. Retail investors can approximate private-equity-style exposures with public equities and do not need access to expensive private funds to obtain similar risk premia. Dual-class and non-voting share structures transfer control to founders while public shareholders bear economic risk, weakening corporate governance. Late-stage IPOs now function more as liquidity events for founders and VC investors than as capital-raising events for growing businesses.

Data Points: Decline in US-listed companies: Almost halved over 20 years - Indicates shrinking public equity markets in the United States. Private capital industry size: $7.4 trillion - Reported current size of private capital industry. Private capital growth since 2000: 15x - Industry size compared with its level in 2000. Projected private capital size: $13 trillion - Expected size within the next four years. Uncommitted private capital: Almost $2.5 trillion - Capital committed to private funds but not yet deployed, showing intense deal competition. Palantir private period: 16 years - Time Palantir remained private before its 2020 IPO. Palantir IPO valuation: $16.5 billion - Valuation at the time of going public. Airbnb private period: 12 years - Time Airbnb stayed private before its December 2020 IPO. Mutual fund exposure before IPO: 40% - Share of venture-capital-backed IPOs in 2016 that had raised money from mutual funds beforehand. Long-run private vs public outperformance: Around 5% per year - Bain and Company estimate of private investments outperforming the S&P 500 over 30 years. Private investment horizon trend: Returns converged over the last 10 years - Recent private returns are similar to or slightly below public market returns. Private equity fee structure: 2% of AUM and 20% of upside above a hurdle rate - Typical compensation model described for private equity funds. Facebook voting rights: 10x voting rights for founder shares - Example of dual-class structure in a public IPO. Index response to poor governance: Excluded companies with virtually no voting rights - FTSE Russell and S&P Dow Jones reaction after Snap’s IPO. S&P 500 drawdown in 2008: Down 38% - Compared with reported positive returns for private equity funds during the crisis. Cambridge Associates claim for private equity in 2008: Up 11% - Illustrates the valuation lag and potential understatement of losses in private assets.

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: Commentary on risky illiquid private investments, referencing a cold-fusion-related example. "An IPO is no longer a means of raising capital for a new startup. It's instead an exit for venture capital investors and a liquidity event for company founders." — Patrick Boyle: Summarizes how the role of IPOs has changed in the modern market. "The upside of that, though, is that you will be able to sell your holdings whenever you want to." — Patrick Boyle: Contrasts public-market liquidity with the illiquidity of private investments.

Implications: Listeners should be cautious about treating private-market returns and low volatility at face value. Much of private equity’s appeal may stem from illiquidity and accounting, while public markets still offer transparency, liquidity, and governance rights.