The Weekly (4/19)

Econ 101 teaches students the basic laws of supply and demand: supply being the number of goods or services available to be sold, and demand functioning as the number of people willing to buy.

If the expectation is that when the price of something goes up, producers bring more to market, it's reasonable to wonder what might be going on with global stock markets.

Global share prices are rising and despite the recent April pull back, are trading close to all time highs having risen mid double digits over the last year. But at the same time, the supply of stocks is shrinking.

The pace of company listings is slower this year than last, and last year was already one of the slowest in recent memory. Combine this with stock buybacks, equity issuance, per JP Morgan, is at its lowest point since 1999.

Massive enterprises including TikTok’s parent company ByteDance, OpenAI, Stripe, Anthropic, and others have valuations in the hundreds of billions of dollars and yet are choosing to remain private.

The cost of being a publicly traded company offers a potential explanation for the phenomenon. Going public is an expensive exercise: financial reporting, increased headcount, elevated environmental, social and governance standards and the pressure of quarterly earnings reports offer one explanation for the trend.

Another explanation for the disappearing stock market is a side-effect of something more positive for company founders: they simply have more options. According to McKinsey, private equity funds managed more than $8.2 trillion in assets in 2023. If founders don’t want to go public they don’t have to – there are plenty of investors who are eager to provide the necessary financing.

The rise of intangible assets offers a third. Such assets range from copyrights, software and other intellectual property and when it comes to ideas, data, research and other intangibles, the less rival firms know, the better. If a company tries to withhold information when listing, it may be undervalued. Or even worse, it may be breaking the law.

Are shrinking private markets cause for concern? Jamie Dimon, the CEO of JP Morgan, thinks yes.

Public markets are more transparent than their private peers. Thus their reduced importance matters not just for investors, but for regulators too.

Stocks also still tend to be the cornerstone of portfolios for the everyday investor. As quality companies stay private for longer, the everyday investor doesn’t gain access to their growth stories. By the time they go public, much of the value to be created might have already passed.

Although pension and mutual fund allocation towards these asset classes have increased, most investors (specifically younger investors) gain access to these companies through more traditional offerings like individual stocks and ETFs.

As a result, the best hope for stock markets may lie with the greed of private investors. Public markets still provide the preferred exit route for those who would like to turn corporate holdings into cold, hard cash. At some point, limited partners and investors will want the money back and as regulatory oversight surrounding strategic M&A increases, public offerings may be the only off ramp.

But until then, the confounding departure from the laws of supply and demand will continue to handicap public market investors. If we believe that markets are efficient (which we do), these sorts of anomalies shouldn’t last long.

Have a great weekend,

– Your Titan team

Disclosures:

As of writing, Anthropic is a 5.49% holding and OpenAI is a holding in the ARK Venture Fund. The weight of the OpenAI holding within the Fund has not yet been disclosed by ARK.

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