Over the last twenty-five years, the U.S. has undergone a dramatic transformation in the role of public equity. The number of public firms has fallen by roughly half since 1997. In contrast, the number of companies backed by private equity (PE) funds has doubled from 2006 to 2017 according to McKinsey. Why is it that public markets appear to be struggling while private markets are expanding rapidly and attracting considerable capital? Does this contrasting evolution mean that the public form of corporate organization is less suited to the business models of firms in the 21st century than it was to the business models of firms last century? Or is it that regulatory changes have decreased the advantage of the public form of organization? Another way to put this is: Are public markets doing less well because firms have changed or because public and/or private markets have changed? I address these issues in my paper titled Public versus Private Equity.
I present a framework that makes it possible to evaluate the relative benefits and costs of public versus private ownership and why these relative benefits and costs have changed over time. I then show that two important changes have taken place that help understand the relative evolution of private and public firms: First, the net benefit of private ownership falls as information asymmetry between insiders of a corporation and potential investors increases and the increase in the role of intangible assets in corporations has increased this information asymmetry; second, funds available for private equity investments have increased sharply partly because of deregulation and partly because of the institutionalization of investment.
