Chart of the Week: How private companies are reshaping public markets
Our latest take from the US Manager Research team.
This week’s Chart of the Week comes from the Morningstar US Manager Research team, who offered their latest take on how private markets are fundamentally transforming public markets in the US.
They note the effect has been most acute on the small-cap landscape, as smaller companies have weaker fundamentals and fewer competitive advantages than larger firms.
We think a surge in private capital flows are shaping public small-cap investing in three primary ways:
- Venture capital funding is keeping high-growth-potential companies private, allowing most of their growth to accrue outside the reach of most investors—and outside the scrutiny of public markets.
- Record venture capital and private equity funding is causing private firms to compete aggressively with public firms. Low-quality small-cap stocks are most vulnerable to increasing competition.
- Small-cap firms are increasingly being taken out of public markets by private equity firms.
Public companies taken private
There is an emerging trend of small-cap stocks being plucked out of public markets by private equity firms. Exhibit 8 shows the number of public companies taken private and their median post-money valuation since 2006.
Public companies rarely go private, but it’s happening more often than it used to, and the companies taken private are larger than they used to be.
The effect on the small-cap investment universe is small for now, but as private equity balance sheets grow, it’s likely that small-cap public companies will increasingly be the target of leveraged buyouts.
For the most part, private equity is not taking weak firms out of public markets. Of the 36 firms that were bought out of public markets in 2024, 20 had valuations of more than USD 1 billion, and 10 had annual revenue greater than USD 1 billion.
Recent US policy changes could be a tailwind for this trend. President Donald Trump’s Aug. 7, 2025 executive order aims to open up private assets to 401(k) plans.
According to the Investment Company Institute, Americans held USD 8.7 trillion in 401(k) plans as of March 31, 2025. This is an enormous untapped market for private equity companies. Even a slight uptick in private equity adoption in 401(k)s would represent a windfall for private equity funding, which is already large and growing.
What are the implications for investors?
The evolving environment has started to influence portfolio construction in the small-cap segment. Active small-cap fund managers are increasingly aware of the impact that competition from private companies can have on their publicly traded portfolio companies.
Small-cap index funds aren’t immune to these effects. Rules that define what they hold could alter their risk and return characteristics down the road.
Some of these effects can already be observed to a degree. Small-cap indexes look riskier given the changing landscape and declining relative quality. All the while, small-cap stock returns continue to fall further behind their large-cap counterparts.
The full report is available here.
You can find previous editions of Chart of the Week here.
