One hedge funder’s view that firms might stay private longer than they once did points to major changes in both private and public markets. Let's dig in:
Clifford Asness is the founder, managing principal and chief investment officer of AQR Capital Management and is known as a pioneer in quant investing and factor investing.
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Asness posted his idea on X that firms might be staying private for longer due to a reduced downside risk.
"Here's a thought. Perhaps the ‘wild’ stat that companies are staying private longer is related to the fact that the discounted price (illiquidity risk premium) to being private isn't what it once was (or is perhaps backwards). If so it bodes poorly not well for private vs. public," Asness wrote.
The Theory
Private companies have historically traded at a discount because investors demanded compensation for the lack of liquidity, transparency and broad market scrutiny that comes with being public.
But Asness is suggesting that the opposite may now be true: private markets, awash with capital from venture firms, sovereign wealth funds and private equity, may be granting valuations that are as high — or even higher — than what companies would achieve in public markets.
Why Private Markets Look Attractive
In today's funding environment, major startups can raise billions without tapping into public capital. Large institutional investors have grown comfortable allocating to private assets, drawn by promises of higher potential return and protection from the volatility of public markets.
This inflow of money has given later-stage firms incredible leverage, allowing them to demand terms that favor management and delay an IPO.
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Public Markets Under Pressure
Traditional public listings have also lost some of their appeal. New regulations, activist pressures and the burdens of constant disclosure have made CEOs wary of going public.
Alternatives like special purpose acquisition companies (SPACs) rose and fell, leaving firms with mixed options.
If private market valuations continue to climb without the discipline of open market pricing, the eventual transition to public markets could be painful.
A Market at a Crossroads
For now, the debate shows how capital markets are evolving. The once-clear distinction between the private discount and the public premium may no longer hold, leaving investors with a more complicated, and possibly riskier, landscape.
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