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Companies lost reasons to go public
Why companies listed
Historically, going public was how a business raised an amount of capital that private markets couldn't provide. It was also a clear milestone and a mark of prestige. The trade-off was giving up control and the ability to make decisions for longer horizons, because public markets punish a company, shareholders react, and boards react.
What changed
Private markets have more or less solved those problems. Companies can now raise gigantic amounts of capital, so the capital need has been solved. The prestige has diluted, since these companies have grown so large that everyone knows what they are. The cost of being public is quite high, from the literal cost of compliance to the pressure to operate quarter to quarter or year to year when a business really needs a three-to-five-year window that public markets rarely give.
Regulatory burden might revert, and that is at least fixable. The availability of capital to private companies is what is likely to stay, so the balance between public and private will persist.
Holding public markets
Public markets are also substantially harder to hold. Few people think about the value of their house every day, even though it changes hourly. Someone who owns a public REIT will probably look at it daily and have feelings about it. Equity exposure is still equity exposure, which makes the first step to look at the equity risk and then decide on the best way to get it.
How did private markets grow so large?
A 2017 study by Craig Doidge, Andrew Karolyi, and René Stulz found that the number of US listed companies fell by roughly half between 1996 and 2016. Over the same period, private equity, venture capital, and private credit funds raised far more money than before. Large pools of capital from pension funds, endowments, and sovereign wealth funds now look for places outside public markets. Companies can stay private through many more funding rounds than a generation ago.
Why did listing become more costly?
After the collapses of Enron and WorldCom, Congress passed the Sarbanes-Oxley Act in 2002. Section 404 of the law requires management to assess its internal controls over financial reporting and an outside auditor to attest to them. Public companies also pay for exchange listing fees, investor relations, and legal disclosure. Those obligations apply every year, whatever the size of the company.
Why do owners watch REIT prices every day?
Shares in a real estate investment trust trade on exchanges, and their prices update every second the market is open. A house has no continuous price; its value is estimated from occasional sales and appraisals. Appraisal-based indexes tend to move more smoothly than market prices, which makes real estate look less volatile than it would if it traded daily. Researchers who study this call the effect appraisal smoothing.
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