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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is senior adviser at Engine AI and Investa, and former chief global equity strategist at Citigroup
Investors have been attracted to private markets by higher expected returns and lower reported volatility, but it’s often hard to get your money out. This implicit liquidity sacrifice has reached its limit.
For much of the 1980s and 1990s, public equity markets seemed unbeatable. They offered investors strong returns and generous liquidity. They offered companies cheap capital and a powerful acquisition currency. Equitisation was everywhere. Governments privatised. Mutuals demutualised. Companies rushed to IPO. No other asset class could compete.
Then came the 2000-03 bear market. Investors discovered that liquidity had a downside. With asset prices continuously marked-to-market, losses were painfully visible. Pension funds, insurance companies, retail investors and regulators were scarred by this experience. The search for lower-volatility assets had begun.
One alternative was bonds. Another was private assets, which offered the attractive combination of high expected returns and smoothed reported performance. No horrible mark-to-market swings here. The downside was lower liquidity. It’s hard to get your money out, but that was a sacrifice many investors were willing to make to avoid the tyranny of daily portfolio pricing.
Companies followed the money. Fast-growing young technology firms found that they could fund continued expansion without resorting to an IPO. No need to accept the burdensome disclosure requirements and volatility of public equity markets.
More mature public companies were delisted by traditional private equity (ie non-VC) funds. Balance sheets were geared up using cheap debt. Dividend recapitalisations allowed sponsors to extract cash to return to their investors. In the zero-rate era, leverage became a partial substitute for liquidity.
Meanwhile, public equity markets were changing. Passive funds enjoyed enormous inflows. They usually avoid IPOs, instead waiting until companies become big and mature enough to enter the large cap benchmarks that they track. Public equity markets increasingly became warehouses for giant older companies, not greenhouses for younger ones. Traditional mid-cap IPOs withered alongside the active managers who historically financed them.
Wall Street always follows the money. A cost-obsessed passive equity fund offers fewer revenue opportunities than a private equity or venture capital fund charging management fees plus carried interest. Investors sacrificed public equity liquidity in exchange for private equity’s higher expected returns and smoother marks. Unlisted companies stayed unlisted for longer. Private markets grew while public markets shrank.
But it seems that this private market model may be hitting its limits. On the primary side, the capital requirements of the AI boom look too big, even for the VC megafunds. On the secondary side, investors are becoming more aware of liquidity limitations outside public markets. They might want to get their money out of ageing private equity portfolios, but often can’t.
The industry has come up with clever ways to help, including secondary sales and continuation funds. But these smell of financial engineering, are littered with conflicts of interest and require continued net inflows to be sustainable.
It seems that liquidity is desirable again. Only public markets can deliver primary liquidity to SpaceX, Anthropic and OpenAI while also delivering secondary liquidity to their shareholders. They stayed private for as long as they could, but these latest blockbuster IPOs were inevitable. A public listing also makes their shares more attractive as an acquisition currency — SpaceX has already announced an all-share deal for AI coding start-up Cursor.
At last, public equity investors are being presented with a new supply of large cap US tech stocks. Even IPO-resistant passive funds are getting involved as their index providers accelerate the inclusion of these new listings. Public companies are also tapping the public markets, with Alphabet issuing its first shares in two decades.
But this precious liquidity is not available to all. For the more mature mid cap companies piling up in private equity portfolios, the IPO market remains dormant. Of course, there is always a level where the public market is willing to buy, but that remains well below the levels where PE funds are willing (or can afford) to sell.
And don’t forget that this liquidity superpower comes at a price. Share prices go up or down every day. Private investors are just about to rediscover that reality.
