The Boom in Private Markets Has Transformed Finance. Here’s How

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Where do companies get money to grow? Time was, if it was a startup, the big bucks for expansion would come from an initial public offering (IPO) on the stock market, while established firms would turn to the bond market. Those things still happen, but increasingly, the capital behind corporate growth around the world is a product of private, not public, markets. In private markets, deep pools of money are used to make deals directly, in what proponents see as a flexible approach for providing the fuel needed by the world’s most innovative companies. Critics see the trend as promoting both inequality — since there’s no opportunity for the public to invest – and systemic risk.

1. What are private markets? 

It’s a term given to the ecosystem of inves­tors — private-equity firms, venture capitalists, institutional investors, hedge funds, direct lenders and fund managers — and the companies seeking to sell shares or borrow large sums. They’re newly import­ant but not new: It’s the way J.P. Morgan, the quintessential private banker, worked in shaping the US steel industry. In the decades after World War II, such dealmak­ers were overshadowed by the buildup of robust public venues, such as the New York Stock Exchange and the Nasdaq, which helped make equities widely held among Americans, while traditional banks were the main source for loans.

A new phase began with the leveraged-buyout boom of the 1980s, as innova­tions in…

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