Why private equity is winning against the public markets

Others are costly regulations, cookie-cutter board governance, shareholder activism, less compensation flexibility, heightened public scrutiny and the relentless pressure of quarterly earnings as some of the key reasons. But it's his take on private markets that I found fascinating. To use a comic film analogy; he presents both banks and private equity or credit (PE) as Batman and Robin (the good guys) but in certain situations, he believes PE behaves more like Talon, the main antagonist in the animated film. Why?

This is what Mr Dimon thinks. Banks generally try to be there for their borrowers in difficult times - striving to roll over loans, negotiate terms and raise additional capital. He explains why this happens and gives multiple reasons: They normally feel an obligation to help their clients, they have long-term relationships and can commonly earn other sources of revenue from client-driven transactions.

On the other hand, while he believes the goal for PE players is to make the right decisions for the future of their clients, in times of stress (read: high interest rates), they can create a little bit of a “credit crunch” for their borrowers since it might be hard for them to roll over loans due to time-bound nature of these funds. Consequently, under these stressful conditions, private creditors would have to charge exorbitant prices that companies simply cannot afford in order to book the new loan at par. Bad deal, Ha?

Although his arguments are compelling, it doesn’t explain one thing; the dwindling listings of public markets' contrasted with the rising number of private US companies backed by PE firms — which he notes to have grown from 1,900 to 11,200 over the last two decades.

Does this contrast mean that the public form of limited companies is less suited to the business models of firms in the 21st Century than it was to the business models of firms last century? Why is it that public markets appear to be struggling while private markets are expanding rapidly and attracting considerable capital? Or is it that regulatory changes have decreased the advantage of the public form of limited companies?

Hard to explain the phenomenon. What’s clear is that there’s a battle going on between the public markets and private equity, and private equity is winning. There’s no denying that PE has become a very big business. But perhaps to try to make sense of it all, some Batman quotes may help.

For private markets, this is what the Joker said, “I believe what doesn’t kill you simply makes you stronger, “ For public markets, the Two-Face attorney said, “the night is darkest just before the dawn. And I promise you, the dawn is coming.”

Mwanyasi is MD, Canaan Capital.