This piece explains why fewer US companies are going public. Mauboussin argues it's not a market decline but a shift: companies stay private longer, get acquired more, and invest heavily in intangibles (like R&D and software), which changes how investors should measure value. Key holdings: Facebook, Amazon, Apple, Microsoft, Google—their combined market cap growth exceeded the entire buyout industry; Benchmark, a top venture fund, remains small but elite; CalPERS, a pension fund, may have unrealistic return expectations.
Michael Mauboussin discussed the significant shift from public to private markets over the past few decades on the Invest Like the Best program. The core argument is that the number of listed companies has notably decreased, while the private market (including PE and VC) has continued to expand, par
Michael Mauboussin (Head of Comprehensive Research at Counterpoint Global) and Patrick O'Shaughnessy delve into the structural shift of U.S. capital markets over the past few decades from public markets to private markets. Their core judgment is: the sharp decline in the number of listed companies is not a market contraction, but rather the result of a fundamental transformation in asset forms (the rise of intangible assets), financing methods (equity incentives for employees as a form of disguised fundraising), and exit routes (more acquisitions than IPOs). Investors must rethink the accounting definition of "investment."
Michael Mauboussin points out that the scale of public markets far exceeds that of private markets, but the incremental growth is highly concentrated in a very small number of companies.
Mauboussin argues that the persistent decline in IPO numbers and the significantly longer time companies remain in the private phase are the core drivers of structural changes in public markets.
Implications and verification signals: If the number of IPOs rebounds in the future (e.g., due to regulatory easing or sustained activity of special purpose acquisition companies (SPACs)), or if the age of companies going public declines again, the trend may reverse. Mauboussin notes that if measured by "asset flows" rather than "number of companies," the assets covered by public markets have only decreased by about 5%, not the half suggested by the decline in count.
Mauboussin emphasizes that the average return of the private equity asset class masks extremely wide individual performance, and that return persistence is stronger in venture capital than in buyout funds.
Mauboussin argues that the rise of intangible assets is the most important structural change of the past two decades, fundamentally distorting traditional financial metrics and investment strategies.
Unique Framework – The "Non-Rival" Nature of Intangible Assets: Tangible assets are "rival" (if one person uses them, others cannot), while intangible assets (e.g., software, formulas) are "non-rival" and can be used by multiple people simultaneously. When such non-rival assets also possess "partial excludability" (i.e., the ability to protect intellectual property), companies can earn excess rents.
Mauboussin, drawing on Brian Arthur's theory of "increasing returns," explains why a small number of companies can continuously widen their lead, leading to divergence in the structure of public markets.
Policy risk reminder: These "natural monopoly" companies are currently not subject to strict regulation, but if the regulatory environment changes in the future (e.g., after the 2020 U.S. election), they could face antitrust risk. Mauboussin cautions that for a company's shareholders, a breakup is not necessarily a bad thing—historical cases show that shareholder returns after a breakup have sometimes been even better.
| Ticker | Analyst View | Key Data |
|---|---|---|
| Facebook / Amazon / Apple / Microsoft / Google | Not explicitly stated (used as a market concentration case) | Aggregate market cap of the 5 companies increased by approximately $1.8 trillion by end of July 2020, exceeding the total size of the entire U.S. buyout fund industry |
| Benchmark (venture capital fund) | Not explicitly stated (used as a scale case) | Latest fund size of $400–500 million, "barely moves the needle" for large institutional portfolios |
| CalPERS (California Public Employees' Retirement System) | Not explicitly stated (used as a pension fund case analysis) | Assumed plan return rate rises from 4% in 1960 to 7% in 2020, while 10-year Treasury yield falls from 4% to 0.7%, implying an implied equity risk premium from 0% to approximately 6.3% |
| AT&T | Not explicitly stated (used as a historical network effect case) | Network effect clearly articulated in its 1908 annual report; the breakup may not have been detrimental to shareholders |
| Walmart | Not explicitly stated (used as a historical benchmark case) | Listed in the 1970s, generated negative free cash flow for the first 15 years due to heavy capital spending on store construction |
| RJR Nabisco | Not explicitly stated (used as a historical M&A case) | Acquired by KKR in the 1980s, transaction size approximately $50 billion (in current dollars) |
1. "The public market has not disappeared, but the incremental gains have been monopolized by a handful of companies." (Mauboussin) — The market cap increase of just five tech companies surpassed that of the entire buyout fund industry, implying that the "effective investment universe" of the public market is shrinking, and index investing is increasingly concentrated in these superstar companies.
2. "Employee stock-based compensation is a disguised form of financing, and on a massive scale." (Mauboussin) — In S&P 500 technology companies, stock-based compensation (SBC) accounts for about 18% of operating cash flow. This proportion is even higher for younger companies, effectively meaning the company is "borrowing" capital from employees rather than raising funds from the public market. This is one of the key reasons companies delay IPOs.
3. "Investment in intangible assets is already twice as large as physical investment, yet it is treated as an expense in accounting." (Mauboussin) — In 2019, U.S. companies invested approximately $1.8 trillion in intangible assets, while capital expenditure was only about $700 billion. If intangibles were capitalized, the returns of value investing strategies would improve significantly.
4. "The average return of venture capital is misleading; the vast majority of returns come from a six-year window." (Mauboussin) — The late 1990s to early 2000s dot-com bubble period was the main driver behind the VC industry's overall PME of 1.4; for most of the rest of the time, PME was close to 1.0. The return gap between top-tier funds and mediocre funds is enormous.
5. "Network effects are not a new phenomenon, but their importance in the intangible economy has been amplified." (Mauboussin) — AT&T clearly articulated network effects in its 1908 annual report, but today's business models of software, platforms, etc., with high fixed costs, low marginal costs, and strong network effects, make "increasing returns" the norm rather than the exception.
6. "Pension funds' expectation of 14%+ returns from alternative assets may be a dangerous assumption." (Mauboussin) — 40% of institutional investors expect annualized returns of over 14% from alternative assets, but actual historical returns are far lower. This expectation may stem from agency problems (investment managers are not held accountable for short-term performance) rather than rational analysis.
7. "Purchase price is the most important factor determining buyout fund returns — an entry multiple above 10x EBITDA has historically been a danger signal." (Mauboussin) — In 2019, the average EV/EBITDA for buyout transactions reached a record high of 11.5x, and over 40% of deals used EBITDA adjustments (i.e., optimistic estimates of future cost savings). Historical data shows that these expectations are often proven wrong.
8. "Advice for young investors: do what others are not doing." (Mauboussin) — Don't become the 1000th large-cap growth fund manager; instead, look for overlooked, smaller asset classes or geographic regions and become an expert in them.