The Private Equity Takeover

Without any particular fanfare, the investment landscape has shifted dramatically, from public companies to firms controlled by private equity. Increasingly, the opportunities to buy corporate growth are being diminished for the average investor, while a small number of wealthy investors are cherry-picking off the top.

In 1996, the U.S. markets included roughly 7,300 publicly-traded companies. Today that is down to 4,300 stocks. At the same time, the number of companies owned by private equity firms—pools of capital owned by wealthy investors—has ballooned from 1,900 to 11,200. Today’s private company market is larger and more diverse than the public markets—a total reversal of the market dynamic in just a couple of decades.

Is this a problem? Yes. The private equity pools of capital are picking out choice corporate opportunities and taking them off the market, essentially pulling their earnings and growth out of the reach of ordinary investors, leaving behind ‘opportunities’ that they consider to be unfavorable. Some observers are calling the current stock market a ‘dumping ground’ for businesses too weak to attract capital from the private markets.

This is surely an exaggeration (Apple, Microsoft, Nvidia and others are still public, after all), but the trend is not the friend of the U.S. economy as a whole. Private companies are not subject to the disclosure and governance rules imposed by the regulators (chiefly the Securities and Exchange Commission), which were meant to make the markets efficient and transparent. The last time private investor pools of capital (the infamous trusts) owned this much of Corporate America was the period right before the crash of 1929.

There’s no reason to panic over all this, but most of us know of situations where a profitable enterprise or two were gobbled up, and their service level dropped in the aftermath. It’s helpful to remember that these private equity pools exist for only one purpose: to take in as high a return as possible—which could upset the delicate balance between serving customers, generating profits and growing the enterprise. It might happen that the companies left behind in the PE buying spree might be the most viable, long-term, after all.