DOCSLIB.ORG

Public to Private Equity in the United States: a Long-Term Look

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Public to Private Equity in the United States: a Long-Term Look Counterpoint Global Insights Public to Private Equity in the United States: A Long-Term Look A Long-Term Look CONSILIENT OBSERVER | August 4, 2020 Introduction AUTHORS Over the past quarter century there has been a marked shift in U.S. Michael J. Mauboussin [email protected] equities from public markets to private markets controlled by buyout and venture capital firms. This change has had reverberations for asset Dan Callahan, CFA managers, investors, executives, and policy makers. [email protected] In this report we seek to answer the following questions: • What have been the major drivers behind the shift from public to private equities in the U.S.? • Why are there fewer public companies today than there were 25 years ago? • What are the long-term trends in buyouts? • What are the long-term trends in venture capital? • Where do we go from here? Markets have become more sophisticated over time as the result of the growth in institutional money management, financial innovation, and sharply lower technology costs. Large institutional investors, including pension funds and endowments, face the prospect of swelling future liabilities and diminished expected returns for most asset classes. As a result, they have reduced their portfolio allocation to public securities and have increased their allocation to private equity, where returns have historically been higher. From the end of World War II through the early 1970s, many companies went public to raise capital to fund their growth. Today, young companies often rely more on intangible assets and have a less voracious appetite for capital. They also have unprecedented access to capital through the private markets. Consequently, many young companies have elected to stay private longer than did the companies of prior generations. Table of Contents Executive Summary ........................................................................................................................................... 3 Introduction ........................................................................................................................................................ 4 Lay of the Land .................................................................................................................................................. 5 Investor Flows ............................................................................................................................................ 5 Risk and Reward ........................................................................................................................................ 7 Distribution of Investment Returns ............................................................................................................. 9 Persistence .............................................................................................................................................. 10 Drivers of Change ............................................................................................................................................ 12 Investors .................................................................................................................................................. 12 Technology .............................................................................................................................................. 16 Legislation ................................................................................................................................................ 22 Public Equities .................................................................................................................................................. 25 Buyouts ............................................................................................................................................................ 33 Origins ...................................................................................................................................................... 33 Industry Structure ..................................................................................................................................... 33 Exits ......................................................................................................................................................... 38 Outlook ..................................................................................................................................................... 40 Venture Capital ................................................................................................................................................ 42 Origins ...................................................................................................................................................... 42 Industry Structure ..................................................................................................................................... 44 Exits ......................................................................................................................................................... 45 Outlook ..................................................................................................................................................... 52 Where From Here? .......................................................................................................................................... 53 Endnotes .......................................................................................................................................................... 57 References ....................................................................................................................................................... 67 Books ....................................................................................................................................................... 67 Articles and Papers .................................................................................................................................. 69 © 2021 Morgan Stanley 3654905 Exp. 07/31/2022 2 Executive Summary • Over the past quarter century there has been a marked shift in U.S. equities away from public markets to private markets controlled by buyout and venture capital firms. This change has had reverberations for asset managers, investors, executives, and policy makers. • U.S. domestic equity mutual funds manage about $8.4 trillion, with active funds controlling $5.6 trillion and index funds $2.8 trillion at year-end 2019. Buyout funds in the U.S. have $1.4 trillion in assets under management (AUM), including $560 billion in “dry powder.” Venture capital funds have AUM of approximately $455 billion, which includes dry powder of $120 billion. The equity capitalization of the U.S stock market is roughly 27 times the size of AUM for buyout funds and more than 80 times the size of venture capital funds. • The median public market equivalent (PME) return has been about 1.2 for buyout funds and 1.0 for venture capital over the last 30 years. These headline figures belie a lot of complexity. For example, competing data sources produce different results, and the returns for managers are highly dispersed. • Returns for top venture capital funds are persistent, whereas there is limited evidence for persistence in buyout funds since 2000. • Drivers of the shift from public to private equity include investors seeking higher returns, changes in institutions and technology, and legislation. • There are about 3,600 public companies in the U.S. today, about one-half as many as there were in 1996 and three-quarters as many as there were in 1976. The drop reflects active M&A activity and a low level of initial public offerings (IPOs). More than 90 percent of the stocks that have disappeared since 1996 were those of small- and micro-capitalization companies. • The drop in listings means that public companies today are much larger and older on average than the past population of companies. M&A has led to more concentration in most industries, and listed companies also have a high proclivity to pay out capital. • Buyout activity has been up in the last few years, albeit still below the peak of 2007. On average, deals are now larger and more expensive than those of the past. • Exits for buyouts are dominated by strategic sales to other companies. In recent years, there has been rapid growth in sales to other private equity firms. • There is a strong negative correlation between the average price paid for businesses and subsequent PMEs in the buyout business. Multiples in 2019 were at a record. This concern is partially mitigated by low interest rates. • Venture capital is more cyclical than either public markets or buyouts, and recent annual investment levels have been high. • Exits in venture capital (VC) used to be primarily via IPOs, but today sales to other companies dominate. The average age of a company at IPO is higher than before, and VC firms wait longer to do IPOs. © 2021 Morgan Stanley 3654905 Exp. 07/31/2022 3 Introduction We can point to a few drivers of the move from public to private equity. There has been a meaningful evolution in the form in which companies invest. Tangible investment was double that of intangible investment in the mid- 1970s, and intangible investment is one-and-a-half times tangible investment more recently.1 As a consequence, companies need less capital to fund their
Load more

Recommended publications
  • Combining Banking with Private Equity Investing*
    Unstable Equity? * Combining Banking with Private Equity Investing First draft: April 14, 2010 This draft: July 30, 2010 Lily Fang INSEAD Victoria Ivashina Harvard University and NBER Josh Lerner Harvard University and NBER Theoretical work suggests that banks can be driven by market mispricing to undertake activity in a highly cyclical manner, accelerating activity during periods when securities can be readily sold to other parties. While financial economists have largely focused on bank lending, banks are active in a variety of arenas, with proprietary trading and investing being particularly controversial. We focus on the role of banks in the private equity market. We show that bank- affiliated private equity groups accounted for a significant share of the private equity activity and the bank’s own capital. We find that banks’ share of activity increases sharply during peaks of the private equity cycles. Deals done by bank-affiliated groups are financed at significantly better terms than other deals when the parent bank is part of the lending syndicate, especially during market peaks. While bank-affiliated investments generally involve targets with better ex-ante characteristics, bank-affiliated investments have slightly worse outcomes than non-affiliated investments. Also consistent with theory, the cyclicality of banks’ engagement in private equity and favorable financing terms are negatively correlated with the amount of capital that banks commit to funding of any particular transaction. * An earlier version of this manuscript was circulated under the title “An Unfair Advantage? Combining Banking with Private Equity Investing.” We thank Anna Kovner, Anthony Saunders, Antoinette Schoar, Morten Sorensen, Per Strömberg, Greg Udell and seminar audiences at Boston University, INSEAD, Maastricht University, Tilburg University, University of Mannheim and Wharton for helpful comments.
    [Show full text]
  • Private Equity;
    MICHAEL MORTELL Senior Managing Director Digital Media; Mergers & Acquisitions; Private Equity; Restructuring; Strategy 485 Lexington Avenue, 10th Michael Mortell is a Senior Managing Director at Ankura Capital Advisors, Floor New York, NY 10017 based in New York. Mike has extensive experience advising entrepreneurs +1.212.818.1555 Main and companies on mergers, acquisitions, strategic and business planning, +1.646.291.8597 Direct restructuring, and capital raising alternatives. Over a career in investment banking and consulting, he has cultivated expertise in the digital media and [email protected] private equity industries and developed strong relationships within them. Mike has a proven record of identifying young, high-potential companies, and providing the strategical and tactical counsel that supports growth EDUCATION objectives and positions them for future success. He also has advised MBA, University or Chicago owners/shareholders of established companies on strategic growth and Booth School of Business liquidity options. In addition to his work in digital media, he has significant BS, Finance Fairfield University experience in the e-commerce, software, retail, specialty manufacturing, and business services sectors. Prior to joining Ankura, Mike was a senior advisor at GP Bullhound, a CERTIFICATIONS boutique investment bank that acquired AdMedia Partners, the M&A FINRA Series 24, 7, 79 and 63 advisory firm where he served as a managing director. He previously ran the Private Equity Financing Group of Prudential Securities and worked for Zolfo, Cooper and Company where he was a consultant to troubled companies and their creditors. Mike also co-founded and managed Grandwood Capital LLC, an investment bank and advisory firm focused on middle-market companies.
    [Show full text]
  • August Investor Presentation
    APOLLO GLOBAL MANAGEMENT, LLC (NYSE: APO) Apollo Global Management Investor Presentation August 2018 Forward Looking Statements & Other Important Disclosures This presentation may contain forward-looking statements that are within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include, but are not limited to, discussions related to Apollo Global Management, LLC’s (together with its subsidiaries, “Apollo”,”we”,”us”,”our” and the “Company”) expectations regarding the performance of its business, liquidity and capital resources and the other non-historical statements. These forward looking statements are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. When used in this presentation, the words “believe,” “anticipate,” “estimate,” “expect,” “intend” or future or conditional verbs, such as “will,” “should,” “could,” or “may,” and variations of such words or similar expressions are intended to identify forward-looking statements. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to be correct. These statements are subject to certain risks, uncertainties and assumptions, including risks relating to our dependence on certain key personnel, our ability to raise new private equity, credit or real asset funds, market conditions generally, our ability to manage our growth, fund performance, changes in our regulatory environment and tax status, the variability of our revenues, net income and cash flow, our use of leverage to finance our businesses and investments by funds we manage (“Apollo Funds”) and litigation risks, among others.
    [Show full text]
  • Amazon's Antitrust Paradox
    LINA M. KHAN Amazon’s Antitrust Paradox abstract. Amazon is the titan of twenty-first century commerce. In addition to being a re- tailer, it is now a marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer, and a leading host of cloud server space. Although Amazon has clocked staggering growth, it generates meager profits, choosing to price below-cost and ex- pand widely instead. Through this strategy, the company has positioned itself at the center of e- commerce and now serves as essential infrastructure for a host of other businesses that depend upon it. Elements of the firm’s structure and conduct pose anticompetitive concerns—yet it has escaped antitrust scrutiny. This Note argues that the current framework in antitrust—specifically its pegging competi- tion to “consumer welfare,” defined as short-term price effects—is unequipped to capture the ar- chitecture of market power in the modern economy. We cannot cognize the potential harms to competition posed by Amazon’s dominance if we measure competition primarily through price and output. Specifically, current doctrine underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anticompetitive. These concerns are height- ened in the context of online platforms for two reasons. First, the economics of platform markets create incentives for a company to pursue growth over profits, a strategy that investors have re- warded. Under these conditions, predatory pricing becomes highly rational—even as existing doctrine treats it as irrational and therefore implausible.
    [Show full text]
  • Move Over Ipos: Unicorn Direct Listings May Be the New Mythical Beasts in Town
    Fordham Journal of Corporate & Financial Law Volume 26 Issue 1 Article 5 2021 Move Over IPOs: Unicorn Direct Listings May Be the New Mythical Beasts in Town Tatum Sornborger Fordham University School of Law Follow this and additional works at: https://ir.lawnet.fordham.edu/jcfl Part of the Securities Law Commons Recommended Citation Tatum Sornborger, Move Over IPOs: Unicorn Direct Listings May Be the New Mythical Beasts in Town, 26 Fordham J. Corp. & Fin. L. 215 (2021). This Note is brought to you for free and open access by FLASH: The Fordham Law Archive of Scholarship and History. It has been accepted for inclusion in Fordham Journal of Corporate & Financial Law by an authorized editor of FLASH: The Fordham Law Archive of Scholarship and History. For more information, please contact [email protected]. MOVE OVER IPOS: UNICORN DIRECT LISTINGS MAY BE THE NEW MYTHICAL BEASTS IN TOWN Tatum Sornborger* ABSTRACT Most people think of “going public” as an Initial Public Offering (IPO), but as IPOs have boomed and busted over the past decade, the direct listing has emerged as an unconventional but viable way to raise capital. The direct listing approach was uncovered by one rebellious “unicorn,” a term used to describe privately held companies with valuations exceeding one billion dollars. By circumventing the traditional IPO process, Spotify prompted both the SEC and major stock exchanges to examine direct listings and promulgate rules for future offerings. Though these rules are still developing, companies now have a clear path to follow in Spotify’s footsteps and forgo the traditional IPO.
    [Show full text]
  • 1 Globalization: a Cautionary Tale 1
    Notes 1 Globalization: A Cautionary Tale 1 . Trade data from the World Trade Organization, “Statistics: Trade and Tariff Data,” https://www.wto.org/english/res_e/statis_e/statis_e.htm (accessed May 11, 2015). Investment data from United Nations Conference on Trade and Development “FDI Flows and Stocks,” http://unctad.org/en/Pages/DIAE/FDI%20Statistics/FDI-Statistics. aspx (accessed May 11, 2015). 2 . The World Bank http://www.worldbank.org/en/topic/poverty (accessed May 11, 2015). 3 . See the case study, W. J. Henisz and B. A. Zelner, “AES-Telasi: Power Trip or Power Play?” (The Wharton School, 2006); or Paul Devlin’s film Power Trip (2003), for more in-depth coverage of AES and its failed entry to Georgia. 4. I explain some of the specific issues that IKEA faced in Russia, along with more gen- eral issues that similar companies face in emerging markets, in a blog post. See R. Salomon, “So You Want to Do Business In a Developing Country?” September 15, 2009, http://www.robertsalomon.com/so-you-want-to-do-business-in-a-developing-country / (accessed May 11, 2015). 5 . See “Tesco Plans Foray into US Market,” BBC News , February 9, 2006, http://news.bbc. co.uk/2/hi/business/4695890.stm (accessed June 24, 2015). 6 . In June 2007 I wrote a blog post forecasting that, given its strategy, Tesco would have trouble entering the US market. See R. Salomon, “Tesco’s American Foray,” June 27, 2007, http://www.robertsalomon.com/2007/06/ (accessed May 11, 2015). In March 2008, it was clear that many of those predictions had come true; Tesco failed to make a profit in the US market and exited a short time later.
    [Show full text]
  • 'Barbarians at the Gate'
    Tuesday 27 July 2010 ‘Barbarians at the gate’ DH News Service Proposed changes in the takeover code may make Indian companies open to hostile acquisitions, but modifications were much needed writes, Dilip Maitra In 1990, when the giant private equity fund KKR (Kohlberg Kravis Roberts & Co) raided and acquired the American biscuit company RJR Nabisco Corp in a $25 billion leveraged buyout (LBO), the tussle between RJR and KKR was documented in an aptly titled book ‘Barbarians At The Gate’ written by financial journalist Bryan Burrough. Now in India we may soon come across situations where many corporate chiefs will complain about ‘Barbarians’ at their gates because India’s merger and acquisition (M&A) rules are all set for a complete makeover from April 2011. The rules will become simpler, more transparent and free from many roadblocks that now come in the way of M&A. The M&A activities in our country are regulated by the Takeover Code laid out by the capital market regulator Securities and Exchange Board of India (Sebi ). To overhaul the 15-year old takeover rules, last week a Sebi- appointed committee, Takeover Regulations Advisory Committee, headed by C Achuthan, proposed sweeping changes in many important issues like open offer trigger, offer size, pricing norms, non-compete fees, etc. Changes proposed by the Achuthan committee are now open for public debate and, if accepted, will become the new Takeover Code from the next financial year. The real threat In a major change, the Achuthan committee suggested that the trigger point for a mandatory open offer should be raised to 25 per cent of the equity capital.
    [Show full text]
  • Representations of Scotland in Edwin Morgan's Poetry
    California State University, San Bernardino CSUSB ScholarWorks Theses Digitization Project John M. Pfau Library 2002 Representations of Scotland in Edwin Morgan's poetry Theresa Fernandez Mendoza-Kovich Follow this and additional works at: https://scholarworks.lib.csusb.edu/etd-project Part of the Literature in English, British Isles Commons Recommended Citation Mendoza-Kovich, Theresa Fernandez, "Representations of Scotland in Edwin Morgan's poetry" (2002). Theses Digitization Project. 2157. https://scholarworks.lib.csusb.edu/etd-project/2157 This Thesis is brought to you for free and open access by the John M. Pfau Library at CSUSB ScholarWorks. It has been accepted for inclusion in Theses Digitization Project by an authorized administrator of CSUSB ScholarWorks. For more information, please contact [email protected]. REPRESENTATIONS OF SCOTLAND IN EDWIN MORGAN'S POETRY A Thesis Presented to the Faculty of California State University, San Bernardino In Partial Fulfillment of the Requirements for the Degree Master of Arts in English Composition by Theresa Fernandez Mendoza-Kovich September 2002 REPRESENTATIONS OF SCOTLAND IN EDWIN MORGAN'S POETRY A Thesis Presented to the Faculty of California State University, San Bernardino by Theresa Fernandez Mendoza-Kovich September 2002 Approved by: Renee PrqSon, Chair, English Date Margarep Doane Cyrrchia Cotter ABSTRACT This thesis is an examination of the poetry of Edwin Morgan. It is a cultural analysis of Morgan's poetry as representation of the Scottish people. ' Morgan's poetry represents the Scottish people as determined and persistent in dealing with life's adversities while maintaining hope in a better future This hope, according to Morgan, is largely associated with the advent of technology and the more modern landscape of his native Glasgow.
    [Show full text]
  • Activist Distressed Debtholders: the New Barbarians at the Gate?
    Washington University Law Review Volume 89 Issue 1 2011 Activist Distressed Debtholders: The New Barbarians at the Gate? Michelle M. Harner University of Maryland Follow this and additional works at: https://openscholarship.wustl.edu/law_lawreview Part of the Law Commons Recommended Citation Michelle M. Harner, Activist Distressed Debtholders: The New Barbarians at the Gate?, 89 WASH. U. L. REV. 155 (2011). Available at: https://openscholarship.wustl.edu/law_lawreview/vol89/iss1/4 This Article is brought to you for free and open access by the Law School at Washington University Open Scholarship. It has been accepted for inclusion in Washington University Law Review by an authorized administrator of Washington University Open Scholarship. For more information, please contact [email protected]. ACTIVIST DISTRESSED DEBTHOLDERS: THE NEW BARBARIANS AT THE GATE? MICHELLE M. HARNER ABSTRACT The term “corporate raiders” previously struck fear in the hearts of corporate boards and management teams. It generally refers to investors who target undervalued, cash-flush or mismanaged companies and initiate a hostile takeover of the company. Corporate raiders earned their name in part because of their focus on value extraction, which could entail dismantling a company and selling off its crown jewels. Today, the term often conjures up images of Michael Milken, Henry Kravis, or the movie character Gordon Gekko, but the alleged threat posed to companies by corporate raiders is less prevalent—at least with respect to the traditional use of equity to facilitate a hostile takeover. The growing use of debt rather than equity to cause a change of control at target companies raises new concerns for corporate boards and management teams and new policy considerations for commentators and legislators.
    [Show full text]
  • Applied Corporate Finance Real Companies, Real Data, Real Time Aswath Damodaran
    Applied Corporate Finance Real Companies, Real Data, Real Time Aswath Damodaran Thursday – Friday, 13 – 14 August 2015 9 am – 5.30 pm (Registration starts at 8 am) Early bird saves Grand Ballroom Hotel Indonesia Kempinski IDR 3,000,000! Jalan M.H. Thamrin No.1 (Enter via West Mall Grand Indonesia) (*) Participant Fee: IDR 23,000,000 (exclusive VAT) Get a Certificate signed by Aswath Damodaran Secure your seats now before they are sold out! Email your registration form before 3 August 2015 to [email protected] or fax it to +6221 29928200/29928300 (*)Early Bird offer expires on 29 June 2015 Content This 2-day applied corporate finance seminar will cover the following sessions: • discuss different interests that make up the modern corporation and their different objectives, potential conflict and problems, how to convert a risk measure into a hurdle rate, and examine the cost of debt and resulting cost of capital • cover investment analysis – consider what a project is and how to estimate project cash flows, and examine different decision rules for determining a good or acceptable investment • evaluate financing choices made by a firm – how much to borrow, types of financing, approaches to coming up with optimal debt ratio • examine how much firms pay in dividends and whether they should pay more or less • explore determinants of intrinsic value in a company and what managers can do to enhance value Objective The objective of this seminar is provide participants with tools and techniques that have been developed in theory to answer corporate finance questions, and how best to apply them in practice.
    [Show full text]
  • THE ORCHESTRA in BILBAO by Victor Barba Gomez
    THE ORCHESTRA IN BILBAO by Victor Barba Gomez Last August 27th, the band played in Bilbao City situated in the North of Spain. It was the Festivities of the city, called ASTE NAGUSIA, and every day of the week were concerts in the city, in different stages and THE ORCHESTRA played in the main stage, in front of almost 8.000 people. This show was the main of the week, closing the Festivities. After the Fireworks, people were arriving to enjoy the wonderful sound of the guys that began at 12.00 in the night in a big stage with two screens. In charge of the sound was Dennis with the local crew. It was the first time that the band was playing in Bilbao, but not for Mik, who played in 1975 with ELO in his first tour in Spain. Before the sound check, the three vocalists Eric, Hux and Glen, were rehearsing together. While the band was in the rehearsals, some fans and public were approaching the stage to see the band, as a prelude of the massive attendance that later came to the show. There were press, TV cameras photographs, waiting the magic moment Opening the show with the intro and Twilight, soon the audience was handed over to the band’s songs. Glen, in Basque language, said hello to the attendance. The audience thanked this gesture. After Twilight, came All Over the World, R&R is King, Evil Woman, Sweet Talking Woman, Hold on Tight, Mama Belle, Showdown and Rockaria. Then was moment for the Intros, and Hux presented the members of the band.
    [Show full text]
  • Valuation and Start-Up Strategies Class News
    290T: The Business of Software: Valuation and Start-up Strategies Professor Kurt Keutzer Fall 2003 EECS [email protected] 1 Class News • Sorry, can’t make my office hour this week 3-4PM Tuesday, I’ll move it to Wed 2-3PM 2 landay 1 Valuation • The key common element between these: Start-up/ Entry Valuation Exit 3 Valuable Business Skills 1. The ability to predict the future 2. The ability to judge people 3. The ability to identify the value (and its direction arrow) of a technology, product, company, market or industry 4. The ability to develop a valuable technology, product, company, market or industry 4 landay 2 So, let’s get started! How do we value these? • A pen? • The cost to replace it • A diamond? • Table look up on size, cut, index of refraction, color (the 4C’s) • An oil well? • The value of seven years production • A year of your work life • Comparable salaries • Opportunity cost!!! 5 So, let’s get started! How do we value these? • A house? • Market comparison (comparables) • Cost of land and construction • Income: • Estimated_rental_income – mortgage - taxes – maintenance * 12 * 30 • Includes: risk, maintenance • What other factors could affect the sale? • Unique features of the property (house provides access to other valuable property) • Disposition of buyers • Disposition of sellers 6 landay 3 Buyers and Sellers • How many sellers have a comparable product? • Disposition of seller • Doesn’t want to sell • Willing to sell, but in no hurry • In the mood to sell • Anxious to sell • How many buyers are there? • Disposition of the buyer • Disinterested • Interested, but passively so • Actively interested • MUST HAVE! 7 Why do we need to value start-ups? • To raise capital • Invested capital buys some portion of company • Need to value start-up to determine how much money will buy • For example: myNewStartup, Inc.
    [Show full text]