More Institutional Assets Pour Into Fewer Securities

A new analysis published by Pantheon warns that the total number of publically listed securities has dramatically declined in recent decades—challenging assumptions about maximizing diversification.

By John Manganaro | July 07, 2017
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Pantheon has published an informative research paper that examines the “phenomenon and causes of shrinking public markets.”

The research, “The Shrinking Public Market and Why it Matters,” is penned by Cullen Wilson, associate, and Brian Buenneke, partner. It warns in no uncertain terms that the number of publicly listed companies in the U.S. has roughly halved since 1996. Crucially, this trend has “spanned multiple economic cycles and has impacted countries across the globe,” the researchers explain, and as such they believe the phenomenon is likely to persist and have a significant impact on institutional investors.

Reasons underlying the trend of shrinking markets are numerous and various, but two of the clearest drivers include the “increased net cost of listing,” which has resulted in fewer initial public offerings bringing new companies into the market, as well as the fact that merger activity continues to remove companies from public exchanges far faster than they are added.

As Wilson and Buenneke lay out, “unprecedented access to private capital and a reasonable outlook for a healthy merger/acquisition activity” should allow this trend to persist. The result is that, for large-scale and long-term institutional investors especially, the public market “no longer offers the full breadth of opportunities historically available, and consequently investors may consider a broader basket of alternatives to access younger and more rapidly growing companies.”

The researchers then highlight the fact that the last four decades have brought tremendous amounts of new capital into the equities markets even as the total number of securities has sharply declined. Specifically, in 1976, Pantheon’s data shows mutual and index funds represented about $41 billion, growing to a whopping $10.7 trillion by 2016. It requires only a simple turn of logic to see the negative implications for institutional investor diversification contained in these numbers.

“The net effect of continued robust capital inflows and growth in market capitalization since the listing peak is that more investment dollars are concentrated in fewer, older businesses,” the researchers suggest. “The large increases in average age and market cap, the latter of which has grown by four-times in size, have coincided with a declining trend in year-over-year revenue growth in the S&P 500.”

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