Staying Public : Institutional Investors in U.S. Capital Markets

This paper questions the ascendance of U.S. private capital markets. Data on capital formation over the past decade (before the Panic of 2008) cast doubt on the story of capital users increasing their relative reliance on private capital. Further, the investment rules and culture) under which institutional investors operate suggest that private capital has only a limited pool from which to draw. Institutional investors, which collectively hold more than three-fourths of U.S. capital market investments, have not moved significantly from public trading markets to private trading markets. Rather than “going private,” they have “stayed public.” The paper assembles data (apparently for the first time) on the investment practices of the major categories of institutional investors in the United States. It finds that institutional allocation between public and private capital has been relatively stable over the past decade. While the proportion of private investments has risen slightly for some U.S. institutional investors (private and public pension plans, endowment funds), it has fallen slightly for others (mutual funds, insurance companies). Institutional reticence toward private capital derives from the various investment restrictions on institutional investors and an institutional culture that focuses on “comparative”, not “absolute” returns.(The paper was prepared for a 2008 Brooklyn Law School symposium on the "Going Private" Phenomenon in U.S. Capital Markets.)