Today's public markets, which were first designed to fill the capital-raising needs of the 19th century, are out of step with capital formation in the 21st century.
It's essential to move the markets forward to provide adequate access to investment opportunity for all, and not just a few, investors. Right now, the average investor has little or no access to where the real action is.
Why is this happening? Because the public capital markets continue to shrink in the Western world.
In the last 20 years, the U.S. stock market has undergone an alarming change. Between 1996 and 2016, the number of listed companies fell by half, to 3,600, down from 7,300, according to a Credit Suisse research study.
Additionally, the number of listed companies and initial public offerings in the U.S., the U.K. and the Eurozone has been on a steady decline since the heady days of the dotcom boom. To that point, activity peaked in the U.S. in 1996, with nearly 700 IPOs. By 2017, that number was barely 100, according to CFA Institute research.
With the number of IPOs declining, small investors are getting shut out of the most lucrative deals.
Private companies have not suffered, however. The private capital markets now provide more than enough capital to fund business models, particularly those in this capital-light era where companies do not require massive amounts of financing to grow and mature.
Investment bankers, lawyers and exchanges, such as the New York Stock Exchange and the London Stock Exchange, bemoan this trend, of course. A once-rich source of revenue has dissipated. Business models evolve, though, and these businesses can pivot to find other lucrative revenue streams.
For average investors, this decline brings profound long-term consequences. Main Street investors generally are not able to invest in private markets; they lack access to companies when they might be expanding at their fastest pace.
Average savers are disadvantaged because only sophisticated funds can invest in venture capital, private equity or infrastructure funds. Therefore, non-public market funding of new businesses basically excludes retail investors from participating in the early-stage growth and the related returns.
Today, in the U.S. and across Europe, the big game-changing ideas are often funded privately. Many new ventures aspire to an IPO not as a start, but as the end point of their fortunes. And some never make it to the public markets, choosing to be acquired.