Public to Private migration
Mauboussin's paper and podcast highlights of Public to Private migration
Hi
Reading time: About 6 minutes
This is going to be my fourth post on Michael Mauboussin. All of the work I am doing is hopefully going to collate into something wonderful as a singular deep dive report so in a few months time I do hope to come up with something very interesting so stay tuned.
By the way there is a very interesting AI which has all of his writings and work over the years and answers questions citing the source as well!
You can find the link here.
Michael Mauboussin wrote a wonderful paper identifying a megatrend in the US where companies were increasingly hesitant to go public and were going to private markets.
There is a huge shift from the public market to buyout and venture capital funds in the United States:
"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."
Size of the markets:
"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."
Returns of buyout and venture funds:
The PME(Public market equivalent) return has been about 1.2 for buyout funds and 1.0 for venture capital. This is showing the opportunity cost of putting money in these funds. Any number above 1 indicates more return than the public market index.
Returns for top VC firms are persistent but not the same story for top buyout firms since 2000.
Concentration of businesses:
M&A has caused fewer companies to list and more industry concentration. Smaller firms feel they cannot scale their business enough and hence sell their businesses to big corporations.
" Likewise if a big public company buys a private company, that company obviously didn't go public, but in a sense they came into the public domain.They're going to count that as going from private to public. So there's a little bit of an accounting thing, but if you do that analysis, rather than us having half as many public companies in 2020 versus 1996, the assets are only down about 5%"
Average age and size of companies listing:
The average size of the IPO's have increased as there is a lot of capital available easily in the early stages of a company. The average age of a company listing has also increased.
"the age of a company at IPO has also increased very significantly. It was just a little under eight years, in that early period it's called the... again, mid-70s through the late 1990s, and today it's closer to just a shade under 11 years."
Exits for VC firms used to be getting companies to list. But now it has changed. It is to sell the business to secondary businesses/ other funds.
Returns hampered if there is higher valuation:
"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."
Shift from Tangible to Intangible assets:
Due to there being a shift in assets going from tangible to intangible the need for capital to scale a business has gone down. You don't need as much capital to finance your business as you did before.
"And she's (Carol Corrado) written a bunch of papers which she shows, and go back to 1970s, which lines right up with our public company thing. Tangible investment was double that of intangible investment, which made sense. And today intangible investments are 1.5x tangible investments. So there's been a complete flip."
Idea of rival goods and non rival goods:
"rival goods are goods that one person can use at a time. So your laptop you're on it, I can't use your laptop, if you're reading a book, I can't read that book. By contrast a non-rival good is one that we can all use at the same time. So it'd be a recipe, it would be software, it'd be anything digital. And then the second is, the degree to which you can control it essentially. So if you develop some incredible intellectual properties, some songs, some software, and you want to keep it proprietary, how easy is it for others to take it, or not to take it? So the concept is technically called excludability. What Romer talked about was these non-rival goods that are partially excludable, which allow companies to generate huge excess returns"
Financing of Buyouts:
Buyouts in the past used to be financed by junk bonds and then later on the shift happened to the leverage loan market.
Idea of preferential access:
"The idea is something like this: that a venture firm does well, and it could do well originally by luck it doesn't have to be skill, but it does well so it builds a good reputation. And then you come along and you know that you're a pretty good company, and you know that your prospects are pretty exciting and people can identify that pretty readily. You will attach yourself to the best firms, in the sense to get the imprimatur from them, and then of course they want attach with you, and so that creates a positive feedback, that all the best companies want to work with the same venture capitalists. And that allows them that positive feedback that allows them to do well."
What should young people pay attention to
"I think one of the answers to that is, if you're serious about making a long-term career, is to try to think about, "Can I do something that other people aren't doing?" So to be the nth person doing the same thing as everybody else, is very challenging. And so that might mean, are there parts of the markets that are less trafficked? Are there geographies, where you could be on the smarter side of the people in the room? That would be the advice, is to try to find something that's not what everybody else is doing"
One learning from Dennis Lynch head of Counterpoint Global:
"You have to play the cards that are there. You have to deal with the world as it is, not as you want it to be, or you wish it to be, or how you think it should be. That's also another thing to bear in mind for people is that, don't complain about the world, figure out a way to thrive in it."
If you want to read the paper and the podcast transcript which is highlighted I am attaching it below.
Please let me know if there is any feedback!!
Thank you for reading,
Samvit.