Is It the Twilight of the Publicly-Traded Company?

With the surge of hedge funds and other private equity vehicles, and with some saying it is only matter of time before a private equity fund buys a $100 billion market cap public company, are we witnessing the decline and eventual marginalization of the public company. A recent article in the Financial Times heralding the FT’s Non-Public 150 raised the issue with a quote from Harvard Business School professor Michael Jensen indicating that the public company, the main engine of the US economy for a century, has outlived its usefulness. If you combine this statement, with the statement from the Carlyle Group’s David Rubinstein that private equity is now the face of American capitalism, you begin to understand my concern about the twilight of the listed company. My main problem with this trend, which may be inexorable, is that the move from public to private capital also means a move from the regulated to the unregulated, from the transparent to the opaque, and in that sense regressive.

This scenario raises the issue of whether hedge funds and alternative investment vehicles should be subject to federal securities regulation. If a may wax philosophical for a moment, allow me to posit that the listed public company is a recent invention in human history, and yes it had to be invented just like the wheel. The public company as we know it has only been around for about 300 years, which as we know is a very short time in historical terms. So I am not saying that the public company is the only or best way to collectively organize human economic activity. What I am saying is that we should examine why Congress gave private equity vehicles an exemption from SEC regulation way back in 1940, which as we all know was a totally different world, and whether those exemptions are still valid today. Again, do we really want to move from the transparent to the opaque in terms of raising capital?

If I may wax even more philosophical, perhaps we may find useful Hegel’s theory of thesis—antithesis—synthesis. Applying that to securities regulation, the Hegelian model would be public company—private company—hybrid company combining the best of both forms. Yes, I do believe private companies have benefits over public companies. The most important being the ability of private companies to focus on the long term, unhindered by the quarterly earnings reports mandated by the federal securities laws. The challenge is to amend the securities laws to create such a synthesis.