Consider the following statistics about the Wilshire 5000, the most comprehensive index of US stocks designed to track “all US equity securities with readily available price data”:
- It launched in the 1970s with the 5,000 names its moniker implies.
- The total number of companies in the index grew to an all time high of 7,562 in July 1998.
- The Wilshire currently has 3,559 constituents, 53% fewer than the 1998 peak.
- The last time the Wilshire 5000 had 5,000 or more names was on December 29, 2005. Over 13 years ago, in other words…
There are many explanations for this decline, but to our thinking the simple answer is “disruption”. Public equity markets have been the explicit targets of alternative forms of capital that use the same disruptive playbook that explains why there are no neighborhood bookstores any more. For example:
- Venture capital funds startups that public equity investors would typically find too small or speculative to fund. In the 1970s VC investing was limited to ad hoc “angel” meetings in San Francisco diners. Now, the largest pool of VC money (SoftBank’s Vision Fund) has $100 billion to put to work. That’s larger than Goldman Sachs’ market cap of $72 billion, just to frame the size.
- Private equity takes on the challenge of managing more mature businesses, doing the heavy lifting of keeping them disciplined and (where possible) growing. If you’ve ever worked with or for a PE shop (we have done both), you know the good ones do this very well and also have total transparency through to the underlying business. Far more than public shareholders, we would note… And as with venture capital, private equity has orders of magnitude more money to invest than in the 1970s.
So while public equity markets have become more “passive” in their approach to the stewardship of financial assets, we would argue that American capitalism remains just as “active” as it was in the 1970s. If you work for a company with PE or VC investors, they are never far from your shoulder. If your employer is publicly traded, you still have to make your goals but shareholders do not get to see your budgets or performance reviews.
All this brings us to 2019, which is setting up to be the year when a raft of VC-funded/controlled mega-firms make the transition to public company status. A partial list:
- Uber ($120 billion recent valuation)
- Palantir (IPO price chatter of $41 billion)
- Lyft ($15.1 billion initial price talk)
- Pinterest ($12.3 billion value at last round)
- Rackspace ($10.0 billion by press accounts)
- Slack ($7 billion)
- Robinhood ($5.6 billion)
- Cloudflare ($3.5 billion)
- To see more: https://www.thestreet.com/technology/biggest-tech-ipos-to-watch-for-in-2019-14802091
Just those 8 names total +$200 billion of total value shifting from private to public hands, and this raises several questions:
- Will this be enough to spark incremental interest in active US equity management? As good as the SPY or IVV ETFs may be, they can’t buy an IPO. The S&P 500 committee requires companies to be public at least 12 months before they are considered for inclusion in the index. Active managers who load up on the right IPOs will be able to outperform in 2019.
- Will all these well-known companies also encourage retail investors to reengage with single-stock trading? They have migrated to ETFs over the last decade, of course…
- If venture capital’s darlings successfully go public, will it encourage them to IPO other holdings more quickly? If so, that could begin to unwind the long trend of increasing private ownership of US companies.
The bottom line to all this: US equities have suffered from their lack of exposure to disruptive companies like the ones that are set to go public in 2019. Don’t forget that the trailing 20-year compounded annual growth rates for the S&P 500 is just 5.5%, a far cry from the 11% CAGR back to the 1920s. A large piece of that lag comes from missing out on funding the growth of Uber, Palantir and other VC-captured investments. All that should change this year.
Wilshire data: https://wilshire.com/indexes/wilshire-5000-family/wilshire-5000-total-market-index