Author: Abby Copeland, Graphics: Carol Lu
The BRB Bottomline
Have you ever discovered an amazing company to invest in, just to learn it is private? From Trader Joe’s to Cargill, many of America’s most popular and lucrative companies are not available for retail investors to purchase. In this short article, Senior Investing Columnist Abby Copeland will explain why many top businesses are privately held and the advantages and disadvantages that non-public companies hold.
There are thousands of companies publicly traded on the stock market; however, it is often a struggle to find quality, publicly traded companies to invest in. According to a report by McKinsey & Company, the number of publicly listed companies is shrinking. In the mid-1990s, the amount of publicly listed companies peaked at around 6,000 during the Dot-com bubble, but that number has dropped to 4,000 as of 2020. From Bloomberg to Petsmart, the stocks of many notable companies are not available for retail investors to purchase. But why are these companies privately held, and what do privately held companies have in common that often makes them more attractive to retail investors?
What Is A Privately Held Company?
In simple terms, a privately held company is a company that is not publicly traded on the stock market; they do not give most retail investors the opportunity to purchase shares on a stock exchange. While publicly traded companies allow investors to purchase shares of the company beginning with an initial public offering (IPO), privately held companies are often solely owned by their founders or a group of private investors.
The Advantages of Being A Privately Held Company
There are numerous advantages to being a privately held company. Firstly, private companies are not listed on the stock market and thus face limited Securities and Exchange Commission (SEC) regulation such as registration requirements and providing shareholders company financial information. In addition, in 2002, after the unexpected bankruptcy of Enron, an energy trading conglomerate, the Sarbanes-Oxley Act (SOX) was passed. The act states that in order to increase transparency, publicly traded companies have to release quarterly earnings, whereas privately held companies can choose which information they would like to disclose to the public. As a result, privately held companies face less pressure from their shareholders to deliver value. In addition, the process of enforcing SEC compliance often necessitates publicly traded companies having to release sensitive legal and financial documents. However, privately held companies are not required to release this information, thereby enjoying more creative and strategic freedom. In 2013, Michael Dell, CEO of Dell Technologies, took his company private after being publicly traded since 1988. In 2014, he quoted in the Wall Street Journal about taking his company private, “As a private company, Dell now has the freedom to take a long-term view. No more pulling R&D and growth investments to make in-quarter numbers…No more trade-offs between what’s best for a short-term return and what’s best for the long-term success of our customers.”
The Disadvantages of Being A Privately Held Company
However, there are also many key challenges that privately held companies face. To begin, the corporate structure of private companies often ensures that all liability falls on the owners and private investors, whereas the shareholders of publicly traded companies are not liable for the debts of corporations. In addition, privately held companies do not have access to the same capital that an IPO brings in. Oftentimes that amount of capital that privately held companies have access to is far less than the amount of capital that is put up by public investors through an IPO.
The Small Business Private Company Fallacy
It is a common misconception that privately held companies do not play a significant role in the economy or markets or are small businesses. According to Forbes, less than one percent of the 27 million companies in the United States are publicly traded. Furthermore, among U.S. firms with 500 or more employees, 86.4 percent are privately held companies. Therefore many companies that are privately held cannot be classified as small businesses. In addition, in recent years, there has been a trend of publicly traded companies going private. A report from the SEC calls this phenomenon “going dark,” the idea that instead of going public, many companies or markets are choosing to privatize. This report describes private markets, which includes private companies as having the “power to make positive contributions to innovation” and to “shift paradigms.”
The Private Company “It” Factor: Values and Morals
Perhaps why so many investors favor private companies is their personable feel in comparison to large public, “soulless” corporations. For better or for worse, many private companies champion profound political and moral values. On one end of the spectrum, privately held companies such as In-N-Out and Chick-fil-A are noted for their conservative and Christian-centric values. However, other privately held companies such as Ikea and Ben & Jerry’s, are famous for their more liberal values. Wherever these companies land on the political spectrum, each privately held company represents a specific set of morals and values. These morals and values often feel more personable to customers and give the company an advantage in the long run, which makes them more attractive to investors.
How to Invest in Privately Held Companies
Despite the fact that privately held companies are not publicly traded, there are still ways to invest in them. However, these methods of investment are often somewhat inaccessible to retail investors. The first method to invest in a privately held company is through early-stage venture or angel investing. This provides investors with a high-risk, high-reward method for owning shares of a privately held company. The next option is for retail investors to buy shares of a mutual fund, which sometimes includes private companies in their portfolios. Finally, investors also have the option to invest in private equity. Many notable private equity firms such as Blackstone and KKR are publicly traded on the stock market but hold private companies in their portfolio.
The nature of privately held and publicly traded companies on U.S. exchanges serves as a microcosm for the state of the stock market, as well as the greater economy. It is evident that there are increasingly limited opportunities for retail investors to purchase stocks. This may reflect the chasm between the visible stock market and reality. While the amount of publicly traded companies is smaller and receives more attention, privately held companies arguably serve as the backbone of the American economy.
- A privately held company is a company that is not publicly traded on the stock market and usually is not available for retail investors to purchase.
- There are numerous advantages to being a privately held company, such as facing limited SEC and SOX compliance and having more creative and strategic freedom.
- It is a common misconception that privately held companies do not play a significant role in the economy or markets. In fact, the vast majority of businesses in America are privately held.
- Many private companies emphasize strong values and family, which feels more personable to customers and gives the company an advantage.
- In conclusion, the nature of privately held and publicly traded companies on U.S. exchanges serves as a microcosm for the state of the stock market and economy. While the amount of publicly traded companies is smaller and receives more attention, privately held companies arguably serve as the backbone of the American economy.