The FAST Take

Image
Decorative background

Changes in public equity

03/15/2024

Q: How can I justify a larger allocation to private equity than public equity?

(Referencing: Out with the Old and In with the New: A 50% Private Markets Portfolio)

— PacNW CIO

A: For any investors who “grew up” investing in the 1990s or early 2000s, today’s investment landscape has changed significantly – particularly in U.S. Equity Markets.

1. Public equity performance can be highly dependent on a few companies

As of the beginning of this year, the seven largest companies (sometimes called the “Magnificent 7”) took up a full 28% of the S&P 500 market cap. The 25 largest companies constituted nearly half of the index, while the remaining 475 companies accounted for the other half.

S&P 500 Constituents by Market Cap1,2
SanP 500 Constituents by Market Cap
2. Companies are finding it easier and more efficient to raise capital in the private markets

The Sarbanes-Oxley Act of 2002 and other regulatory changes made it progressively more difficult and more expensive to operate as a publicly traded company.3

At the same time, rule changes allowed more private investors to get into private investments—for example, the 2012 JOBS Act and the 2018 Economic Growth, Regulatory Relief and Consumer Protection Act—which allowed private investments to raise more money.

Combined, these forces aided the private equity market in passing the public equity markets for new capital fundraising more than a decade ago.

Capital Raised in the U.S. Public Markets vs. Private Markets4
FAST Take – Capital Raised in the U.S. Public Markets vs. Private Markets

As a result, private markets are often the first stop for companies looking to raise capital today. 

3. Companies continue to delay (or avoid) going public

A result of companies finding it easier and more efficient to raise capital in the private markets is not only that fewer companies are entering the public markets than in the past, but those that do enter are typically waiting longer to do so. The median age of a company IPOing today is ten years vs. under seven years two decades prior.

Median Age of IPOs5
FAST Take – Median Age of IPOs

As a result, many companies are already further along in their growth curve before becoming available for public investment.

Additionally, the U.S. public equity markets today hold fewer than 4,000 traded companies—approximately half the number of publicly traded stocks that existed just a couple decades ago.

Meanwhile, there are approximately 10x the number of privately held companies of the same size in the U.S.6

Conclusion: Beyond even the risk-and-return considerations of private equity, we think there are many justifications for private equity allocations as large or larger than public equity allocations.

Icon of bulb with stopwatch inside

Never Miss a Take

Sign up for notifications from The FAST Take

The Financial Advisor Solutions Team

Ares Wealth Management Solutions

Carlin Calcaterra

Managing Director, Financial Advisor Solutions Team

Brendan McCurdy

Managing Director, Financial Advisor Solutions Team

Ready to learn more?

AccessAres is your resource for education and information about the private markets. Talk to us to learn more about these important asset classes.

Professional woman smiling at her desk
×

Contact Us

Connect with our Wealth Management Solutions team that works with Financial Advisors and Private Wealth Managers to provide alternative solutions. For investors based in EMEA and APAC, please visit our Non-U.S. Investors Contact section.

 

Individual Investors

Reach out to your Financial Advisor.

 

Financial Advisor Inquiries

       (866) 324-7348

 

Financial Advisors Information Request

You are now entering the AccessAres website

AccessAres is the thought-leadership and educational division of Ares Wealth Management Solutions. The materials distributed by AccessAres are for informational purposes only and do not constitute investment advice or a recommendation to buy, sell or hold any security, investment strategy or market sector. Ares Wealth Management Solutions is a global brand of Ares Management Corporation.

You are now leaving the AccessAres website

AccessAres is the thought-leadership and educational division of Ares Wealth Management Solutions. The materials distributed by AccessAres are for informational purposes only and do not constitute investment advice or a recommendation to buy, sell or hold any security, investment strategy or market sector. Ares Wealth Management Solutions is a global brand of Ares Management Corporation.