Some of the largest companies in the world are choosing to remain private. This choice is having a negative impact on investors. The ownership of the best performing private equity companies is controlled by a small group of investors, often through investments with the top venture capital firms. Investors fortunate enough to own these VC partnerships have enjoyed great returns, but are also paying hefty private fund fees, have limited transparency, low liquidity, and delayed return of capital.
The late-July Figma initial public offering (IPO) shows that Wall Street’s investment banking system may be partially to blame for large companies remaining private. Figma’s IPO was 40-times oversubscribed at $33 dollar per share, the price where the underwriters’ preferred customers bought shares and Figma, its existing shareholders, and private equity owners sold a portion of their equity. Figma opened at $85 in public trading, 257% higher than where the investment bankers priced the IPO. The steep underpricing of Figma’s $20 billion IPO calls into question Wall Street’s ability to efficiently bring much larger private companies to the public markets
The hesitation of these private companies to go public has negative consequences for both public and private investors. For private investors it delays potential liquidity and extends high management fee payments. For public investors, the hesitation to go public limits broader investor participation in the
growth stories of these potentially
transformative companies.
There is an ongoing conversation about making private equity available to retail investors, as institutional investors have begun to pull-back. Smaller investors are unlikely to gain access to the top-performing venture capital investment funds. Having smaller investors pay higher fees, assume illiquidity, and lose transparency by investing in second and third-tier private equity funds is not the solution. Instead, Wall Street needs to demonstrate that it can do a better job facilitating the movement of these companies into liquid, transparent, and more accessible public markets.