September 13, 2019

Staying Private Longer: Why Go Public?

Despite the fact that an IPO has historically been viewed as the crowning achievement for a private company, companies are staying private longer than they have in the past.  This trend can be attributed to a number of factors, including the growing supply of private capital, the introduction of more rigid securities regulations, the high cost of public markets, as well as the inherent market risks.

With the increase of funding provided by private markets, many companies are staying private simply because they can. McKinsey & Company reports in its Global Private Markets Review 2018 that global private market fundraising increased by $28.2 billion from 2017, for a total of $748 billion in 2018. Thus, given the abundance of private capital available, companies no longer require public markets for sufficient funding.

The US Jumpstart our Business Startups (JOBS) Act increased the maximum number of shareholders a company can have before it must disclose financial statements from 500 to 2000 shareholders. The increased flexibility due to the higher threshold allows companies to gain better control of choosing when to complete their IPO. For instance, prior to the JOBS Act, Google Inc. chose to go public in part because they had reached the 500-shareholder limit, and would need to comply with public reporting requirements to the SEC.

The heavy costs of going public may also deter private companies from pursuing public markets. The average cost of completing an IPO has been estimated to be approximately $4 million, on top of an average one-time fee of $1 million to prepare the organization to become a public company and the recurring average $1.5 million annually to comply with ongoing regulations.

Other significant benefits to staying private include the ability to maintain control of the company, the ability to execute a long-term strategy rather than focus on short-term quarterly earnings, the minimization of disclosure requirements, and the protection of the company from activist investors and hostile takeovers. Additionally, private companies are better sheltered from events that influence public markets, such as investor volatility, shareholder law suits and systemic risks.

Certain new trends in the private sector have levelled the playing field for private companies such as private liquidity programs and the ability to offer employee stock options. Private liquidity programs enable existing shareholders to sell all or a portion of their shares to a pre-determined group of new investors, resulting in a non-dilutive transaction to existing investors and the ability for private companies to facilitate pre-IPO liquidity to employees and early investors.

Other popular practices result in heightened risk when the private company becomes public. For instance, dual-class structures allow certain minority shareholders (typically founders) to retain control, even as economic ownership is diluted. But these structures often come under attack after the company goes public.  The directors and officers of public companies also face additional scrutiny in public company financing and M&A transactions.

The presentation will discuss why, in certain circumstances, it has become more feasible for private companies to stay private. Private companies are now equipped with many of the same capabilities and resources as public companies. That said, every company’s situation must be evaluated independently during its go-public or stay-private decision.