Why This Hedge Fund Manager Thinks Companies Delay Going Public
News Summary
Clifford Asness, founder and CIO of AQR Capital Management, suggests that companies may be staying private longer due to a reduced, or even reversed, illiquidity risk premium in private markets. Historically, private companies traded at a discount because investors demanded compensation for the lack of liquidity, transparency, and broad market scrutiny. However, Asness posits that private markets, now flush with capital from venture firms, sovereign wealth funds, and private equity, may be granting valuations as high as, or even higher than, what companies would achieve in public markets. This inflow of money gives later-stage firms significant leverage, allowing them to demand management-favorable terms and delay IPOs. Concurrently, public markets have lost appeal due to new regulations, activist pressures, and disclosure burdens. If private market valuations continue to climb without the discipline of open market pricing, the eventual transition to public markets could be painful, marking a complex crossroads for capital markets.
Background
Historically, private companies have been valued at a discount compared to their public counterparts due to the illiquidity of their shares, lack of public disclosure, and absence of broad market scrutiny—a phenomenon often referred to as the 'illiquidity risk premium.' Investors demanded higher expected returns to compensate for these drawbacks. However, over the past decade, there has been a significant surge in capital allocated to private equity, venture capital, and sovereign wealth funds globally. These institutional investors, seeking high-growth opportunities, have become increasingly comfortable deploying substantial capital into private assets. This trend has allowed late-stage startups to raise billions through multiple rounds of private funding, postponing or even bypassing the need for a public offering. Special purpose acquisition companies (SPACs), for instance, briefly emerged as an alternative to traditional IPOs but did not sustainably reverse the trend towards private longevity.
In-Depth AI Insights
What are the deeper structural drivers behind companies delaying IPOs, beyond merely capital availability? - This reflects a structural shift in capital market efficiency. Private investors, such as sovereign wealth funds and large private equity funds, possess deeper pools of long-term capital, can tolerate longer investment horizons, and are unburdened by quarterly reporting and public market volatility. - Regulatory arbitrage is also a key factor. Regulations like Sarbanes-Oxley have increased compliance costs and administrative burdens for public companies, incentivizing firms to seek avenues to avoid these costs. - Investor behavior has evolved. The growing institutional appetite for private assets makes private markets more adept at meeting the funding needs of high-growth companies, reducing their reliance on public capital. What are the long-term implications for public market investors if this trend continues, particularly concerning access to growth and valuation integrity? - Markets could bifurcate, with the most promising and fastest-growing companies remaining private for extended periods, thereby depriving public market investors of opportunities to participate in their early to mid-stage growth. - In the long run, public markets may face a risk of 'adverse selection' or 'toxic IPOs.' When companies eventually go public, much of their growth potential may have already been realized, or their valuations inflated in private markets, leaving public investors with higher risk and lower potential returns. - This could lead to sustained pressure on public index performance as they miss out on key growth engines of the new economy, prompting investors to seek more active private market exposure, further accelerating the trend. How might the Trump administration's deregulatory stance, if it continues, influence the balance between private and public market appeal? - A continued deregulatory push by the Trump administration could potentially reduce the compliance and operational burdens for public companies, thereby slightly increasing their attractiveness and lessening some incentives to remain private. - However, this impact may be limited. The allure of private markets is largely driven by flexible capital structures, bespoke deal terms, and the ability to avoid short-term market pressures, factors not directly contingent on public market regulatory changes. - Furthermore, the ample supply of capital in private markets and the growing institutional investor appetite are independent forces. Even with an improved public market environment, private markets may continue to serve as an attractive funding source for high-growth companies, especially if they can still offer superior terms, valuation-wise, compared to a deregulated public market.