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Contrast corporate issuers that are publicly owned with those held privately

CFA® Level I · Corporate Finance · Organizational Forms, Corporate Issuer Features, and Ownership · CI.8.b

The idea

Publicly owned companies have shares listed on an exchange, which gives investors liquidity, observable prices and wide ownership, and gives the company access to deep pools of capital. In return they face extensive, ongoing disclosure, regulatory costs and pressure from short-term market expectations. Privately owned companies have no public market for their shares, lighter disclosure and usually concentrated ownership, which can allow a longer-term focus but makes the shares illiquid and capital harder to raise. A private company can go public through an initial public offering, a direct listing or a merger with a special purpose acquisition company. A public company can be taken private, often through a leveraged buyout that removes its listing and adds substantial debt to its balance sheet.

A practice question

From the question bank, with the reason each wrong option is wrong.

Which is a way for a private company to become publicly traded?

  1. A leveraged buyoutWhy not: A leveraged buyout typically takes a public company private, the opposite direction.
  2. A merger with a SPAC - correct
  3. A private placementWhy not: A private placement sells securities to a few investors without a public listing.

A private company can go public through an initial public offering, a direct listing of existing shares, or a merger with a special purpose acquisition company that is already listed.

A harder one

One advantage often attributed to private ownership compared with public ownership is that management can:

  1. raise capital from the public at lower costWhy not: Access to public capital markets is an advantage of being listed, not of private ownership.
  2. focus on long-term goals over quarterly results - correct
  3. avoid all regulatory oversight of the businessWhy not: Private companies remain subject to laws and regulation; they avoid only listing and public disclosure rules.

Without public market pressure and quarterly reporting, private owners and managers can pursue long-term strategies, and concentrated ownership aligns owners' and managers' interests more closely.

The hardest tier

A private equity firm acquires all the shares of a listed company using a large amount of borrowed money. The most likely outcomes are:

  1. the company delists and its leverage rises - correct
  2. the company stays listed and its leverage fallsWhy not: Buying out all the shares removes the public float, and the borrowed money raises the company's debt.
  3. the company delists and its leverage fallsWhy not: Delisting is right, but a buyout financed mainly with debt leaves the company more, not less, leveraged.

This is a leveraged buyout, a take-private transaction. The acquired company is removed from the exchange and the acquisition debt is typically placed on its balance sheet, increasing leverage substantially.

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