One of the most important decisions an investor can make is how to allocate their portfolio across asset classes. For many U.S. investors, one of the largest allocations is to U.S. large-cap stocks.
While some investors choose to invest in a handful of large-cap names, others want access to the entire universe of large-cap companies — as indicated by the investments in broadly diversified index funds, which hold hundreds of securities (e.g., S&P 500, Russell 1000 index based funds).
However, if investors want exposure to large U.S. companies, they should consider investing in more than just publicly listed companies. In a world where capital is readily available and regulatory frameworks may not favor long-term decision making, many of the world’s most innovative companies have chosen to stay private for an extended period of time.
For example, in the 1980s the typical private-growth company went public (IPO’ed) six years after their founding. Today, some companies stay private for 10 years or longer. As a result, a number of large-cap companies are staying out of the publicly traded U.S. equity universe.
Well-known Startups Staying Private … For Now
There are numerous examples of companies across industries that have chosen to remain private as their market capitalization crosses from small cap to large cap.
To put this in context, the market cap breakpoint for the Russell 1000 index — a broadly followed large-cap index — was $3.7 billion as of the June 2018 index reconstitution.
Based on analysis from Forge, there are currently 21 privately held companies that would be part of the Russell 1000 index based on Russell’s market capitalization breakpoint.
2019 Holds Promise for Large Cap Companies
2019 will see several of the aforementioned private U.S. large-cap companies go public and subsequently join the ranks of publicly traded companies.
This was the case at the last Russell 1000 index reconstitution when DocuSign (in addition to three other IPO’s) was included in the index of publicly traded U.S. large-cap stocks in 2018.
But, DocuSign waited 15 years before going public in April 2018, so many investors didn’t hold this innovative company in their portfolios until that time.
Additionally, numerous unicorns may cross into large-cap territory in 2019. If investors are only focused on publicly held companies, they may miss the chance to have full U.S. large-cap exposure.
The U.S. equity market is the largest in the world and if investors want full exposure to the value created by U.S. companies, they should consider both private and public large-cap companies.
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