Apollo’s Slok: ’no alpha left’ as IPOs grow long in the tooth

Apollo Chief Economist Torsten Slok highlights a significant structural shift in public equity markets, characterized by a declining number of public companies and a dramatic increase in the median age of firms going public, now at 14 years. This trend is attributed to companies choosing to remain private longer, fueled by deep pools of private capital and a desire to avoid public market scrutiny and compliance costs. Slok argues this has resulted in public markets dominated by a few large stocks, diminishing alpha opportunities for active managers and suggesting that investors seeking differentiated returns may increasingly need to explore private markets.

Analysis

A significant structural shift is underway in U.S. equity markets, as highlighted by Apollo Chief Economist Torsten Slok. The median age of a company at its initial public offering has nearly doubled from eight years in 2022 to 14 years today, a stark increase from just five years in 1999. This trend is not a temporary effect of monetary policy but a deliberate choice by companies to remain private for longer, facilitated by deep pools of private capital from venture and private equity sources. By doing so, firms avoid the regulatory scrutiny, compliance costs, and short-term performance pressures of public markets. The primary consequence for public equity investors is a diminishing set of opportunities, or a "shrinking playground," where markets are increasingly concentrated in a handful of mega-cap stocks. This concentration fuels higher correlations and erodes the potential for alpha generation through traditional active management, leading Slok to assert that "there is no alpha left in public markets." This structural change suggests that the most dynamic phase of corporate growth is now largely occurring in private markets, posing a fundamental challenge for public market investors seeking outsized returns.

Key Decisions for Investors

• Investors should consider evaluating an allocation to private markets, such as private equity and venture capital, to gain exposure to the high-growth phase of companies that are delaying their public listings.
• It is prudent to re-evaluate public equity strategies, as the diminishing number of public companies and market concentration may favor either passive index-tracking approaches or highly specialized active strategies focused on the dominant mega-cap leaders.
• Before increasing exposure to private assets, investors must conduct rigorous due diligence and acknowledge the associated higher risks, reduced liquidity, and longer capital lock-up periods compared to public equities.