Last week, JAB Holding, the family-controlled investment group, bought the US bakery and sandwich chain Panera Bread for $7.5 billion. The acquisition meant that Panera went from being a listed business to a privately-owned one.
A few years before, Michael Dell bought back Dell from the public markets and went private with his famous computer maker company. Exor, the huge family-controlled investment group, now only has one-half of its investments in public markets, compared with fourth-fifths a few years ago.
Privately-controlled businesses are all the rage these days. And much of their popularity is being driven by family enterprises. Family businesses and offices are driving this in two ways: by fuelling the demand for private businesses and by creating a culture more attuned to the long-term investment values of private businesses. These factors are helping to shrink the number of companies listed on global stock markets. In the US, the biggest equity market in the word in terms of market capitalisation, the number of listed businesses has fallen by nearly half since 1996. In 2015, there were 3,700 listed businesses, excluding investment trusts and funds, compared with 7,322 in 1996.
Shrinking Public Markets: US listed firms 1996-2015
There are many reasons for this shrinkage, but the culture of long-term decision making and investments, which has gained in influence since the financial crisis of 2008, is a big factor. The short-termism of quarterly earnings reporting is falling out of fashion. Also, businesses - and business owners - want more control of their companies and like the idea of long-term decision-making and investments.
Family-controlled investment groups like JAB Holdings want to hold privately controlled businesses because they can control them better. Maybe they are also learning from Berkshire Hathaway, which has often acquired public companies like General Reinsurance Corporation and taken them private. Although it is important to say that Warren Buffett, Berkshire’s CEO, is also a vocal advocate of public markets and holds some big stakes in many publicly listed businesses. He has recently backed a proposal to increase the number of public businesses.
Private equity managers are also playing a big role in the delisted surge. Since the financial crisis, they have improved their business models and are getting much better at allocating capital. Indeed, some might argue they are doing it better than public markets. Also, more and more private equity managers are tailoring their offerings to family businesses, and many funds are even willing to take more of a long-term approach to realising their returns. Some are even content to take dividends with minority stakes for many years.
Here’s what JPMorgan’s CEO Jamie Dimon said in his annual shareholder's letter recently about private equity and shrinking public markets. “Many private equity companies often stress that it is better to be owned by them because they operate with common sense corporate governance; i.e., less check-the-box corporate governance — whether addressing board membership, how a board spends its time, management compensation or long-term results vs. just quarterly earnings.”
Also, when family businesses want to fund their growth externally they look towards bank borrowing and private equity. Few are considering listings. “Family businesses are not thinking about raising finances through listing their businesses,” says Peter Englisch, global family business leader for EY. “They see this as a step too far, as they lose partial control and have to adhere to a new set of governance structures.”
Interestingly, out of the top 500 biggest family businesses in the world, as recorded by the Global Family Business Index compiled by the Swiss-based St Gallen University, 48% are listed and the rest are private. But this has changed from 52% listed last year. The change is more to do with the fact that new data on private companies is becoming increasingly available rather than delistings of businesses. Nevertheless, the trend towards private businesses in this sector is likely to continue in the years ahead.
Where does all this lead? The growing role of family enterprises in the world economy and the values they stand by suggests the shrinkage of global public equity markets will continue. Of course, few things happen in a straight trajectory for a long period of time and inevitably reformed public markets will stage a recovery sometime. But that might be many years from now.