The decline in publicly traded firms has been well-documented. A result of the excessive cost and reporting requirements combined with an ocean of private capital has compelled many successful firms to stay private as long as possible. Back in the day, an initial public offering (IPO) was an opportunity to raise growth capital while providing smaller investors with an opportunity to benefit from the firm’s growth. Today, an IPO has morphed into more of an exit opportunity for VCs and the very wealthy with most of the gains hoovered up before a public float. Institutional investors that is not necessarily VCs are aware of this phenomenon and have worked to jump ahead of the capital gains queue to drive returns for their investors. Pitchbook has taken the time to provide a high-level overview of this shift in private firm investing.
Presented at the SEC’s Small Business Capital Formation Advisory Committee meeting held earlier today, Pitchbook shows that “crossover investing” has risen dramatically as these firms seek alpha returns. In 2021 alone, 885 deals garnered the support of crossover investors with most participating in later stage rounds. VC IPO exits have more than doubled in the past ten years and now – crossovers are leading some rounds.
So who loses out when more value is created in private markets than public markets? Smaller retail investors who are frequently blocked from backing many of these firms. While there are some avenues for retail to join in on later-stage private funding, more needs to be done – including an expansion of the definition of an accredited investor and more funds in the sector available to retail investors.
The Pitchbook presentation is embedded below.