Why private markets are underpenetrated, yet compelling
• 2 minute read
Stock markets are shrinking. Private markets are expanding.
Since 1996, the number of U.S. publicly traded companies has decreased from 7,300 to approximately 4,300 today.
With their preponderance of data, earnings reports, daily price moves, and corporate announcements, public companies dominate the financial news. Yet in reality, most of the innovation in developed markets today takes place in private markets, away from the daily glare of stock markets.
In the U.S., 87% of firms with revenues greater than $100 million are private held (1) Widening the lens further, private equity’s dominance can be underscored by the fact that there are more than 95,000 private companies in existence globally with annual revenues over $100 million (2). In public markets, there are an estimated 10,000 such companies.
The European Opportunity Set
Europe is home to some of the largest software companies, many of which remain private. Some of these companies include the likes of Visma, who last year generated EUR2.3 billion in revenues; up 16% on the previous year (3). In addition, the company's EBITDA for 2023 climbed 20%, year-on-year, to EUR705 million.
As the chart below illustrates, Europe’s fragmented market structure means that investors have access to a more diverse range of private software companies in comparison to the U.S. market. This allows for a more favourable competitive market structure that is not set up for a “winner take all” environment.
Europe’s market structure provides more diverse opportunities for private equity investors
Private vs. Public Ownership Approach
As long-term investments – typically five to seven years – private equity managers are able to use time to their advantage. Rather than worry about the daily volatility of public markets, PE firms can take a forensic approach to build value with management teams. This involves implementing value creation plans, which might include overseeing digital transformation within the organisation, guidance on sales and marketing strategies, tactics for expanding into new markets or geographies, product innovation etc.
It is this ability to build synergies with companies and uphold a strong alignment of interest that enable PE funds to generate attractive returns. Furthermore, such has been the success of the asset class that it also helps to explain why companies are choosing to remain private for longer; thus reinforcing the value proposition to private investors.
Other factors that contribute to private equity’s ability to oversee value creation include:
Active ownership: Buyout funds take controlling stakes in companies, allowing them to actively manage and improve operations, business strategy and governance. This hands-on approach contrasts with public equity investors who typically have limited influence over company decisions.
Operational improvements: Focus on enhancing efficiency, cutting costs, and driving growth through strategic initiatives like mergers and acquisitions.
Providing expertise and resources: Leveraging industry knowledge, professional networks and resources to help portfolio companies navigate market challenges, recruit talent, and pursue growth opportunities.
Private equity is a multi-disciplined investment model that ultimately relies on the collective experience and sector expertise of its general partners. For private investors, the asset class offers many diversification benefits but, crucially, it gives them a direct route to invest in some of the most exciting, innovative companies.
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