Market Overview

The Number Of Companies Publicly Traded In The US Is Shrinking—Or Is It?

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The Number Of Companies Publicly Traded In The US Is Shrinking—Or Is It?

Where have all the public companies gone? 

It’s a question market observers have been asking for several years, including by the Wall Street Journal in 2017, Bloomberg in 2018, and the Financial Times last year.  

And it’s a fair question. Since peaking at around 8,000 sometime in the mid-to-late 1990s, depending on your data source, the number of companies publicly listed on U.S. exchanges has steadily declined. In 2016, according to Credit Suisse, that number got down to around 3,600. Today, closer to 6,000 companies trade on the NYSE and Nasdaq. 

That trend is especially alarming when you consider the performance of the U.S. market compared with the rest of the world. U.S. large-cap stocks have consistently outperformed their international counterparts for the last decade—and the COVID-19 pandemic has only widened that gap. 

But there’s more to the equation. While the number of exchange-listed companies has gone down, this is omitting a key portion of the U.S. capital markets—non-exchange traded companies. Here, the trend is actually going in the other direction. 

The number of securities that trade on OTC Markets, the alternative trading system for securities that don’t trade on an exchange, reached roughly 11,500 in 2020, more than double the total from 10 years ago.

“What you are seeing is that while the news is telling you that the number of companies going public is decreasing, that really only looks at exchange-listed public companies,” said Jason Paltrowitz, EVP, Corporate Services at OTC Markets.

Reasons For The Opposing Trends

When it comes to the decline in exchange-listed stocks, the reason most commonly attributed is the rise of private equity and venture capital. 

With more companies able to raise money in the private markets, it’s easier to stay private longer. And when a company does choose to exit, many wait until they reach unicorn status ($1 billion valuation) or end up getting acquired rather than go public. A study from the National Venture Capital Association found that of all the venture capital-backed companies to have an exit in 2017, 85% were via a merger or acquisition compared to just 15% via traditional IPO. 

Even in 2020, a year that has seen the explosion of SPACs and a 37% year-over-year growth in capital raised according to Renaissance Capital, the IPO process remains largely skewed towards large, late-stage companies. For many small early-stage companies, trading on an established market like OTC Markets is preferred, if only, way to raise money via the U.S. capital markets. 

“The general theme for a number of years, and this has come from exchanges themselves, is the concept that exchanges are not adequately serving the needs of the [small and medium enterprise] market,” said Paltrowitz. “The general consensus is that the type of company that makes sense to be on an exchange is significantly bigger than it used to be.”

This has created an opportunity for alternatives. In particular, Paltrowitz said they are seeing increased interest from early-stage companies in the mining and pharmaceutical industries looking to trade on their market. The capital-intensive nature of both industries, stemming from the need to fund mining projects and drug research years in advance, can make it a challenge for these companies to raise private capital. 

“Markets find a way. When there’s something more efficient companies tend to migrate towards that. And that’s what we’re seeing. We’re seeing companies still going public but taking a different approach through the ‘Slow PO’ process [OTC Markets’ version of a direct listing].” 

More International Companies Are Also Coming To America

The other main cohort that is driving demand is international companies, such as those in Australia, Canada, and the UK. Many of these firms don’t want to list on another exchange, but still want to have a secondary trading in the U.S. 

Part of this, Paltrowitz said, is due to the relative outperformance of the U.S. market over everybody else, but it’s also due to the increased amount of participation from retail investors. 

“What we’re seeing is more interest from companies abroad looking to access U.S. retail [investors]. You see companies that are realizing through COVID that expanding their investor base to include U.S. retail is important.”

Monetary And Regulatory Developments Also Contribute

These shifts in the way companies approach the U.S. capital markets are long-term, secular trends. But it also seems likely that specific developments in 2020 are a contributing factor. 

The massive stimulus package from the Federal Reserve and central banks around the world has created a favorable environment for equities, attracting more participants to the public markets on both the investor and issuer side. Paltrowitz also pointed to a recent regulatory change from the SEC that he said will make it easier for more companies to be quoted on their markets. All of these factors together have increased overall interest. 

“We’re starting to see the numbers tick up substantially in terms of applications coming in and new companies coming to market.”

 

 

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