Michael Mauboussin - Great Migration Public to Private Equity

Principles & Lessons:

• The declining number of public companies masks a deeper structural shift in capital formation: Mauboussin highlights that while the number of U.S. public companies has halved since 1996, this does not mean less economic activity. Many small companies now sell to incumbents instead of going public, as the costs of listing—legal, regulatory, and structural—have outpaced the benefits for smaller firms. Moreover, looking at total assets rather than just the number of listed entities reveals that public markets still house nearly all the economic mass. As he explains, “the assets are only down about 5%” despite the dramatic drop in listed companies, suggesting the real story is consolidation and delayed public listing, not diminished activity.
• Buyouts are increasingly a recycling mechanism, not a transformation machine: In the early days, buyout firms were expected to improve operations, cut costs, and drive performance. Now, as Mauboussin notes, “companies just bounce from one buyout firm to another.” The rise of secondary buyout transactions—where one PE firm sells to another—raises the question of whether operational value creation is still occurring or if the industry is becoming more about asset reshuffling. The implication is that allocators may be mistaking movement for progress unless they see clear evidence of value-added operational improvement.
• Returns in private equity are more about selection than asset class: While average buyout returns have been similar to public markets (using PME methodology), venture capital displays a high dispersion and persistent outperformance among top quartile managers. Mauboussin attributes this to “preferential access,” where top firms attract the best entrepreneurs, creating a feedback loop. The implication is stark: access to top-tier VCs is critical. Without it, LPs are likely buying into average returns with illiquidity risk. As Mauboussin puts it, “they know about the base rates for the industry… but they don’t think those base rates apply to them.”
• Stock-based compensation acts as a stealth capital source, distorting financial analysis: In Mauboussin’s view, the pervasive use of stock-based comp means many high-growth tech companies are indirectly financing themselves via employee equity, not external capital. “It should be in the financing section of the cash flow statement,” he notes, not added back to operations as it often is. This blurs the true economics of the business and overstates operational cash flow. For analysts, this demands reclassification of these items and greater skepticism of “cash flow” definitions that ignore dilution and real economic cost.
• Intangible investments reshape value measurement, but are difficult to quantify at the firm level: While aggregate measures show intangibles (e.g. R&D, brand, training, software) now exceed tangible investments, the challenge is firm-level estimation. SG&A, for instance, includes both maintenance and investment elements, but GAAP treats it all as expense. As Mauboussin summarizes, “you have to take it off the income statement and put it on the balance sheet,” yet doing this rigorously is hard. This has major implications: traditional valuation metrics like price/book and ROIC are deeply distorted unless one adjusts for hidden investment. Not adjusting risks misclassifying innovative companies as overvalued or low-return.
• The rise of superstar firms is not an illusion—it reflects structural economic changes: The increasing gap in returns on capital between top firms and the rest (e.g., from 15% to 30%+) isn’t just luck or timing. Mauboussin attributes this to scale economies in both supply-side and demand-side economics. “As your output increases, your cost per unit goes down… but your willingness to pay goes up,” especially in networked businesses. This explains the dominance of certain firms and why returns are durable, not mean-reverting. Analysts must abandon overly simplistic base rate thinking in favor of understanding how economic moats scale differently in an intangible economy.
• High prices in buyouts compress returns in predictable, not mysterious, ways: There’s a near-linear inverse relationship between entry multiples and returns. Mauboussin references a Steve Kaplan chart showing that “the more you pay, the less the PMEs are in the future.” This isn’t surprising, but many allocators underweight price discipline in private markets. Compounding this are aggressive EBITDA adjustments, often based on anticipated cost savings, which “miss those forecasts by a meaningful amount.” The discipline that underpins public investing (e.g., price paid matters) applies just as much in private markets, but is often obscured by IRRs and forecasts.
• Public market active management remains viable, but demands adaptive reasoning, not nostalgia: Mauboussin resists deterministic claims about the death of alpha but is clear that competition and efficiency have changed the game. He cites the fact that there are now 27 CFA charterholders per public company, compared to one in 1976. His recommendation: don’t lament the past, adapt to the present. Opportunities exist—especially in under-theorized areas like intangibles, customer lifetime value, and cognitive diversity in teams—but require new mental models. As he states: “Don’t complain about the world. Figure out a way to thrive in it.”

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