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The Evolution of the Private Equity Market and the Decline in IPOs

65 Pages Posted: 15 Aug 2017 Last revised: 17 Nov 2017

Michael Ewens

California Institute of Technology - Division of the Humanities and Social Sciences

Joan Farre-Mensa

Cornerstone Research

Date Written: November 15, 2017

Abstract

Despite the large drop in the number of initial public offerings (IPOs) in the United States, privately-held startups backed by venture capital continue to achieve capital raising, revenue, and employment levels historically available only to their public peers. We show that startups' ability to finance their late-stage growth while remaining private has been facilitated by a marked increase in the supply of private entrepreneurial capital, both from traditional and non-traditional startup investors. We investigate one factor that contributed to this increase: regulatory changes that have decreased the frictions faced by startups and their financiers when raising private capital, among them a major securities law passed in 1996 (NSMIA). Our evidence suggests that the lower IPO volume stems from their founders/managers choosing to remain private, rather than a market failure in the going-public process. Consistent with this interpretation, we show that exogenous increases in founder control increase the likelihood that a firm remains private late in its life.

Keywords: Initial Public Offerings (IPOs), Venture Capital, Private Equity, Founder Equity, NSMIA

JEL Classification: G32, G24, G28

Suggested Citation

Ewens, Michael and Farre-Mensa, Joan, The Evolution of the Private Equity Market and the Decline in IPOs (November 15, 2017). Available at SSRN: https://ssrn.com/abstract=3017610

Michael Ewens (Contact Author)

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
Pasadena, CA 91125
United States

Joan Farre-Mensa

Cornerstone Research ( email )

Boston, MA 02115
United States
617-927-3014 (Phone)

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