Over the past 20 years, a growing share of America’s most attractive smaller businesses has moved from public to private markets.
This trend is the logical result of higher public listing costs, heavier public company compliance burdens, and abundant private capital. Morgan Stanley estimates that between 2000 and 2024, the number of publicly traded U.S. companies fell more than 40%, from 6,917 to 4,010, while the number of private-equity-backed companies grew more than sixfold, from 1,929 to 11,808[1].
With approximately $900 billion of US public-to-private transactions removing high quality, cash flow positive businesses from public markets over the past decade[2], it would seem that opportunities to invest in American small company growth now lie exclusively in private equity.
(Source: Meketa, “Investing in Small Companies via Private Equity”, July 2026)
Twenty-five years ago, public markets offered broad access to smaller, growing American businesses. Today, institutional investors increasingly turn to private equity as public markets are challenged with:
- fewer companies
- fewer IPOs relative to earlier periods
- greater regulatory/reporting burden
- passive indexes increasingly dominated by larger companies
- reduced fundamental research and sell-side coverage for smaller public companies
The private equity opportunity set continues to evolve. The modern leveraged buyout industry rose to prominence with large “Golden Age” acquisitions such as KKR’s 1988 $25 billion acquisition of RJR Nabisco. At the time, it was the largest corporate takeover in U.S. history. For context, the largest public company in the world at that time was IBM with a roughly $39 billion market cap. RJR Nabisco was among the largest public companies of its time.
Today, private equity still pursues large corporate buyouts, but rarely the largest publicly traded companies. Instead, the private equity opportunity set has expanded substantially into smaller businesses. The “lower middle market”, with its fragmented industries and companies with potential for operational improvement, has become a prime target. There is now an interesting academic argument that much of the historical “small-cap premium” has effectively moved to private markets. But private equity faces its own challenges.
The private equity asset class has accumulated an enormous amount of undeployed capital (“dry powder”). Morgan Stanley estimates that more than $600 billion (~55%) of PE dry powder is in funds more than two years old and is waiting to be deployed against a backlog of more than 30,000 unsold PE assets.
Dry Powder and Invested Assets Have Aged to Record Levels
Falling interest rates helped fuel private equity’s expansion. Since the start of the “Golden Age” of private equity, interest rates have consistently trended downward:
1: Historical 50-year chart of Federal Funds Effective Rate
Post-pandemic, we are entering a reversal of this trend and structurally elevated inflation expectations likely support higher rates into the foreseeable future. That shift creates pressure across the private equity investment cycle:
- Financing – Higher rates increase borrowing costs
- Purchase Valuations – Higher rates make high purchase multiples harder to justify
- Exit Valuations – Higher rates can reduce exit multiples and delay exits
- Fewer exits – Fewer exits lead to longer holding periods and lower IRRs for investors
For Limited Partners, the greatest concern may be liquidity.
If private equity has increasingly captured the smaller-company opportunity set, what happens when managers must deploy dry powder or return capital tied up in those businesses? This capital was raised under more favorable market conditions and is now approaching the end of its investment period. This could increase competition, encourage aggressive bidding or irrational entry prices, and compress returns. Reluctant to realize lower returns, managers will delay exits. Extension funds partly solve the problem but may just be kicking the can. Meanwhile LPs will increasingly need liquidity to fund distributions for existing and new commitments. In a rising rate environment, liquidity itself has become more valuable.
Has the pendulum swung too far toward private markets?
The structure of U.S. capital markets has changed. Private equity has become a significant owner and source of capital for smaller operating businesses, but its economics are affected by financing costs, exit timing, and the need to return capital to LPs. We believe public equities, specifically in the small cap range, provides an attractive avenue for accessing some of the same exposure to smaller, profitable, growing businesses by trading control for transparency, market liquidity, and the ability to manage exposure flexibly.
[1] https://advisor.morganstanley.com/kevin.pilarski/documents/field/k/ke/kevin-m–pilarski/Tug_of_War_Public_vs_Private.pdf
[2] “The Migration of Small Cap Premia into Private Markets and Historical Lessons in Manager Selection”, September 2026, Kevin Widmaier, CAIA
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