The public to private equity pivot continues

By Scott Reeds, Head of Sponsor Coverage, Capital Markets & Advisory | December 2024

As the private capital ecosystem has expanded over the last 25 years, the private equity (PE)-backed company count has climbed, while the number of public companies has fallen sharply. Here’s what these trends mean for mid-sized companies.

The private equity (PE) ecosystem has proliferated in the last 25 years, with the count of PE-owned companies surging past public companies in the U.S. market. Has PE replaced public stock markets? Is private equity a benefit or a challenge to companies? Here, we expand on previous analysis on the megatrend shift to PE, and consider implications for mid-sized companies.

Putting the PE trend in context

Since 2000, the private equity-backed company count climbed from about 2,000 U.S. companies to more than 11,500, a 400%+ increase. At the same time, the count of publicly-listed U.S. businesses on the NYSE or NASDAQ exchanges declined from roughly 7,000 to 4,500, shrinking the count by 35%.¹ Observers may wonder if private equity is taking over what was once owned publicly.

There is important context to these trends. First, note that the market capitalization for public U.S. companies listed on the NASDAQ and NYSE exchanges was about $54 trillion as of March 2024 – compared to $3.5 trillion held in domestic private equity funds at the end of 2023.^2,3 The scope of these two markets remains different, with far more market value in publicly held companies.

This reflects, in part, the differences in the enterprise size of public and PE-backed companies. Today’s public companies include the largest ever established. There are multiple public U.S. companies that have individual market capitalization of more than $3 billion — about 1,000 of which would constitute the entire U.S. private equity market. This size gap illustrates one important observation: while private equity holds far more companies, those businesses are smaller on average than publicly-listed ones.

In some cases, formerly public companies have been taken private by PE firms – but that’s not the only explanation for the declining public company count. Consolidation is also driving this reduction, as a significant number of public firms merge or acquire each other. Company bankruptcies have also played a role, as have management buyouts and or other transactions not involving private equity.

The declining count of public companies is certainly related to the growth of the PE market but also to a mix of other factors, including increased regulatory costs for public company compliance and disclosures. As a result, the number of new company listings has diminished as companies find that private ownership offers benefits and private capital sources become more accessible.

Benefiting from the PE effect

The expansion of PE has affected the marketplace in many ways – including the operational environment. PE ownership tends to raise the standard of operations within an industry or sector, as private equity owners upgrade governance, systems, and skills across their portfolio companies.

The growth of the PE ecosystem has also led to the proliferation of private credit funds, where non-bank lenders originate loans, particularly to mid-size companies and/or to the private equity sponsors that are purchasing them. Private credit funds are often affiliated with private equity groups and attract the same pool of institutional investor funds. For mid-sized companies, business leaders should be aware of the private credit option which could be a viable option compared to other funding avenues.

After turbulence, PE market seeking balance

Though PE has experienced long-term growth, the market has encountered challenges in recent years. When inflation and interest rates experienced significant increases in 2022 and 2023, private equity funds paused typical deal activity – largely because falling market valuations made it less appealing to exit or sell-off holdings. As a result, the pace of distributions to PE investors dropped, as did fundraising for new sponsor funds.

Since then, valuations have recovered somewhat and M&A activity. has revived, though not to previous levels With interest rates down from recent highs and the possibility of more rate cuts to come, the private equity market could be positioned for further momentum in exits and new acquisitions.

These market trends have also benefited publicly-held companies, who have likewise seen valuations bounce back. An IPO rebound could be on the horizon after a string of slower quarters.

Does the PE trend matter for mid-sized companies?

Looking at long-term trends, capital markets are quite different today than they were at the start of the new millennium – and these changes could prove positive for mid-sized companies. With broader options for ownership and financing, company owners have alternatives for exits or funding growth. This market evolution creates greater resources for mid-sized U.S. companies compared to international peers, who have more limited access to capital and greater dependence on public markets. With a broader set of options, U.S. company owners and decision-makers can strategically access capital in a variety of ways to best suit their needs.