It's ironic that at the very moment the private markets are in turmoil because of their opacity, the SEC may do away with quarterly earnings reports for public companies.
I sympathize with the desire to get more companies to go public again. Since the 1990s, the number of public companies has fallen by more than 40%, and the ones who do go public are taking twice as long to do so--roughly twelve years now--amid the rise of venture capital and private equity, which has cut off public access to their best early growth years.
This is a huge challenge, especially because our collective retirements and 401(k) accounts are largely geared to how well the publicly traded S&P 500 does. But there are two reasons that this draining of public markets has happened.
One, yes, the downsides of going public. It can cost $1 million or more a year to comply with the 2002 Sarbanes-Oxley reforms that were put in place to prevent future blow-ups like Enron and WorldCom. Plus, a lot of managers hate the 90-day race to "hit their numbers." David Cote of Honeywell tells a story of finding out one of his factory managers sold all the trees on his lot for timber one quarter in order to hit his targets, before Cote took over. This is why the SEC may now do away with the quarterly requirement.
That said, the second big change has been the massive amounts of money flowing into venture capital and private equity firms, allowing companies to stay private for longer. The rise of these asset classes, however, has been predicated on their strong returns, especially in the 2010s. That was also the era of ultra-low interest rates, which boosted start-up valuations and made leveraged buyouts more attractive.
As these asset classes mature, losses are starting to materialize--although getting clear, authoritative data on their performance is more challenging than in public markets. Cambridge Associates' venture capital index, for instance, is up only 3% in total over the past three years, because of losses when rates spiked post-Covid. For private equity, the number is 8%. (Numbers as of September 30.)
And now, with their large exposure to software companies, the financial performance could be even worse. The problem is, it's hard to know, precisely because we don't have a good look at the financials of the underlying businesses.
So while the SEC may allow fewer disclosures by public firms, investors like Leyla Kunimoto want more disclosure about private market companies, especially as regulators move towards allowing more private or "alternative" assets in 401(k) plans. Meanwhile, social pressure is building towards more regulation of private equity's impact on "sensitive sectors" like "healthcare, energy, education, childcare, and corrections," with reforms suggested in this recent University of Chicago Business Law Review piece.
The question for the SEC is, are there better ways to fight back against the rise of these private markets, instead of choosing a path of quasi-surrender?
See you at 1 p.m!
Kelly