Public Markets Are Key to the U.S. Economy

A key role of public equity markets is to help connect all investors with companies in order to provide capital necessary for those companies to grow, hire new workers, and fund research and development (R&D).

In return, as these companies grow, they provide returns that build wealth for U.S. households.

Intuitively, all these factors feed back into the economy and strengthen it. Making U.S. equity markets a cornerstone of the U.S. financial system, a contributor to our economic success as well as a source of financial security to U.S. households.

Today, we highlight some of the key data supporting Nasdaq’s proposals to reinvigorate U.S. public equity markets.

Private markets growing at the expense of public markets

The balance between public and private markets has shifted significantly since 2000. Notably:

The number of publicly listed companies in the U.S. has fallen by about 36%.
Private equity-backed companies (green line) have grown more than 475%.

This shows that there is no lack of entrepreneurs or ideas in the U.S. — just that fewer new companies are choosing to go public.

Chart 1: There are now 2.5x as many PE-backed companies as public companies

Private companies are waiting longer and getting bigger

Importantly, these aren’t just companies that are too small to go public.

There are over 1,400 unicorn companies (with valuations at or above $1 billion) worth a combined $5.1 trillion (chart below) – up from $330 billion a decade ago. Despite the growth of companies with a valuation of over $1 billion, research shows that only 26% are publicly listed. This includes companies that are worth tens of billions of dollars and even hundreds of billions of dollars.

Chart 2: More and more unicorn companies are privately held

Public markets support household wealth, innovation and economic growth

To be sure, private and public markets work together.

Private markets often provide greater flexibility that early-stage and high-growth companies need to scale, while public markets deliver a well-defined regulatory and liquidity framework that lowers the cost of capital and drives accountability beneficial to broader society.

Still, there are challenges created by this trend of more companies staying private, as we highlight in Nasdaq’s new white paper:

Household financial security: Retail investors miss out on the opportunity to invest in these companies as public companies. That makes it harder to secure the retirements of American investors, adding to the reliance on social security.
Employment growth: Research shows that companies that hold an initial public offering (IPO) see average annual employment growth of 23% in their first three years post-IPO, compared to a 7% annual gain for companies that withdraw their IPO filing.
Innovation: Funds from IPOs support innovation via increased R&D spending, with research showing that public companies invest about 50% more in R&D than comparable private firms.
Economic Growth: Other research shows that growing public markets also boosts economic growth.

Chart 3: Private unicorns outperform broader public markets indexes

Economics is causing the shift

The reason for this shift away from public markets is economics. Over time, new public company regulations have made being public more expensive and less attractive.

That’s led to companies waiting longer to go public, with the average age at time of IPO rising from 6.9 years a decade ago to 10.7 years now.

Chart 4: Average age of a company at IPO

Meanwhile, other rule changes have made it easier and cheaper to access private markets. There’s also been a trend of more companies choosing to remain private or return to private ownership.

Data shows that global private market AUM is up over 200% since 2013 to $14.5 trillion. The increasing availability of private money has made it possible for these companies to stay private.

Making public markets more attractive again

With public markets playing a key role in economic growth, employment, R&D and household wealth, it’s important to address the issues contributing to the decline of public markets.

Nasdaq’s recent white paper highlighted several commonsense reforms that will help reinvigorate public markets and, ultimately, the U.S. economy.

These include:

Reducing the regulatory burden of going public by scaling disclosure requirements to the size of the company and simplifying quarterly reporting – or even offering semiannual reporting, as was adopted in the U.K.
Modernizing the proxy voting process by streamlining communication with shareholders and raising ownership thresholds for submitting proposals and the required level of shareholder support to resubmit proposals, among other changes.
Leveling the playing field with smart regulation, like keeping audits relevant and affordable, and preventing unproductive litigation.