Why Are More 

Companies Staying 

Private?

Meeting of SEC Advisory Committee on 

Small and Emerging Companies

Jamie Hutchinson 

February 15, 2017
Why Are More Companies Staying Private?

1

BECAUSE THEY CAN
Reasons Why More Companies Are Staying Private

2

• Large Amounts of Private Capital

• Employees Don’t Demand It

• Early Investors Don’t Need It...Or Maybe Even Want It?

• Certain Securities Laws Have Become More Flexible

• New Generation Of Entrepreneurs Have Different Priorities

• Negative Press Phenomenon

• CASH, the “New” Acquisition Currency

• M&A = Innovation

• High Costs of Being a Public Company

• Other Potential Pitfalls
Large Amounts of Private Capital

3

• Markets are global and awash in private capital

• The types of investors in private companies have expanded

- VC Funds investing across the growth spectrum from early stage to late stage

- Traditional Private Equity no longer focused on just buyouts but increasingly 

on “growth equity”

- Corporate Venture Capital

- Hedge Funds have large “private” mandates

- Sovereign Wealth Funds

- Mutual Fund Complexes

- Family Offices

• “Rifle Shot Funds” are commonplace
Large Amounts of Private Capital

4

1 Back to Reality: EY Global Venture Capital Trends 2015, ERNST & YOUNG (2016).

36

58.2

72.3

8.7

11.3

14.4

5.2

17.3

48.9

2013 2014 2015

US Europe China

Totals:

(number of 

deals) 5,225 6,801 7,125

Totals:

(US$b) 49.9 86.8 135.6

Global Annual VC Investment
Large Amounts of Private Capital

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• Companies are staying private longer

• The average age of US technology companies that went public in 1999 

was four years, in 2014 it was eleven years.1

1 McKinsey&Company (Feb. 13, 2017) (May 2016), http://www.mckinsey.com/industries/high-tech/our-insights/grow-fast-or-die-slow-why-unicorns-are-staying-private 
Employees Don’t Demand It

6

• Private Liquidity Programs increasingly commonplace

• Liquidity as a key to winning the “Talent Wars”

“Facebook announced that 

Digital Sky Technologies (DST) 

has made a $200 million 

investment in exchange for a 

preferred stock, representing a 

1.96 percent equity stake at a 

$10 billion valuation. DST...is 

planning to offer to purchase 

at least $100 million of 

Facebook common stock from 

existing common 

stockholders...”

“This liquidity program will 

allow our people to focus on 

growing our business and 

continuing to create value,” 

Jack Ma, Alibaba’s chief 

executive, said in a statement. 

“We believe the high-quality 

investors making commitments 

to this important program 

share our mission and 

philosophy, and we welcome 

them as shareholders of the 

company.”

“Yelp announced that 

private equity firm Elevation 

Partners has agreed to make 

a $25 million investment in 

Yelp through the purchase of 

Series E preferred stock [and 

a] $100 million [investment] 

through a planned purchase 

of shares from vested 

employees and other 

eligible shareholders.”
TO

Employees Don’t Demand It

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• Secondary liquidity has developed from the “Wild West” to highly 

structured and controlled Private Liquidity Programs

- Founder and employee liquidity no longer taboo

- New technology facilitates efficient liquidity transactions

P = Primary S = Secondary TO = 3rd Party Tender

Potential Combinations

R=Company Repurchase 

TO

P S

TO

P P S

R

P
Early Investors Don’t Need It...Or Maybe Even Want It?

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• IPO is just another financing event while Secondary Sale or M&A is often 

a cleaner exit

- No Lock-ups

- No ongoing market risk

• Early Stage VCs selling to Growth Equity Investors selling to Mutual 

Funds and Sovereign Wealth Funds
Certain Securities Laws Have Become More Flexible

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• Jobs Act Section 501 – Threshold for mandatory registration from 500 to 

2,000 shareholders “of record”

• Fast Act – Section 4(a)(7) safe harbor for secondary sales
New Generation of Entrepreneurs Have Different 

Priorities

10

• Focused on long-term growth

• Focused on control

1 Photo credits: Photoshot/Everett Collection; Business Builders Academy; Zumapress.com.

 

Mark Zuckerberg Evan Spiegel Jack Dorsey
Negative Press Phenomenon

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• Negative press in public markets largely focuses on profitability, rather 

than growth trajectory or market cycles

• Private companies can take long-term view and ride out market cycles 

more easily without same concern for negative press

- Private companies can increase valuations without providing detailed 

information to the broader market
Cash = The New Acquisition Currency

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• Historically, going public provided publicly traded shares as attractive 

acquisition currency

• Today, historically low-rate borrowing environment coupled with ability for 

late-stage private companies to borrow large sums make dilution caused 

by using stock consideration in M&A less attractive

1 Douglas MacMillan and Justin Baer, Uber Raises $1.6 Billion in Debt Offering, WALL ST. J. (Jan. 21, 2015), https://www.wsj.com/articles/uber-raises-1-6-billion-ingoldman-debt-offering-1421877376. 2 Kyle Stanford, Here’s Why the Biggest Unicorns in the World Are Taking on Billions in Debt, PITCHBOOK (June 17, 2016). 3 Kyle Stanford, Here’s Why the Biggest Unicorns in the World Are Taking on Billions in Debt, PITCHBOOK (June 17, 2016).

1 2 3

$2B Leveraged Loan $2.5B Syndicated Loan $1B Debt Financing
M&A = Innovation

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• Big Strategics have large cash reserves and must innovate

• Repatriation of overseas cash may accelerate M&A

• Recent acquisitions (since January 2012)1

• “Dual-Track” deals continue

- Cisco acquisition of AppDynamics for $3.7B (expected market cap of $1.5B)

- Stone Canyon Industries acquisition of Mauser Group for $2.3B (expected 

market cap of $1B)

1 CRUNCHBASE, https://www.crunchbase.com (Feb. 9, 2017). 

 

50

98

39

48
High Costs of Being a Public Company

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• Costs include:

- Costs directly attributable to the IPO

- Recurring expenses of being a public company

▪ In 2011, EY estimated that a new U.S.-listed public company can expect to 

spend, on average, an additional $2.5 million annually post-IPO

▪ Increased costs relate to:

▪ Management salary increases2

▪ Expansion of Board

▪ Recurring advisory fees

▪ New investments in technology 

- Other “Management Attention” Costs

▪ Shareholder litigation

▪ Compliance

▪ Transparency to competition

1 Graph: Considering an IPO? An Insight into the Costs Post-JOBS Act, PWC (2016), http://www.pwc.com/us/en/deals/assets/pwc-ipo-costs-considerations-pwc-deals.pdf. 2 Ernst & Young's True Costs of IPOs Survey Finds Investing in Management Team is Central Element to Companies Going Public, PRNewswire, 

http://www.prnewswire.com/news-releases/ernst--youngs-true-costs-of-ipos-survey-finds-investing-in-management-team-is-central-element-to-companies-going-public133801088.html. 

 
Other Potential Pitfalls

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• Short-Seller Pressure

• Expansion of Activist Investor Environment

1 Adam Brown, Activist Investors Eye Small and Mid-Cap Companies, IR MAG. (Nov. 23, 2015), https://www.irmagazine.com/articles/activism/21101/activist-investorseye-small-and-mid-cap-companies/. 

 

“Although several proxy fights in the $50 bn+ market cap space have 

garnered a large amount of media attention in the past year, 

according to Activist Insight data, companies in the $10 bn+ range 

have accounted for just 13 percent of all activist targets since 2010,” 

the study authors write. “By contrast, 71 percent of companies 

targeted had a market cap of less than $2 bn, which lends credence 

to the sentiment of these activists.”

Adam Brown
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