What does it mean for the average investor to own bigger stocks? Instead of buying stock in a collection of separate public companies, when you buy a share of Alphabet or Coca-Cola, you get many businesses wrapped up in one big package. You can’t always get detailed information about the performance of subsidiaries and divisions; if you own shares in those big companies, you just have to hope that the component parts are profitable and that their profits flow through to the parent company’s bottom line.

Still, buying big public companies is becoming a sure way to buy lots of small private ones. Many large public companies—including Intel, Johnson & Johnson, and Time Warner—have divisions that are explicitly tasked with investing in and sometimes acquiring private companies (some invest in public companies, too). When SoftBank Group, a Japanese conglomerate, created its Vision Fund last year to invest in technology companies, both private and public, some of the fund’s $100 billion came from Apple and Qualcomm.

All of this consolidation does pose challenges for investors. Traditionally, small stocks have delivered both higher risk and higher returns; if you own shares in an index fund, consolidation means you have less exposure to small stocks than in the past. If you want that exposure, you probably need to rejigger which funds you own. An SEC rule permits mutual funds to invest up to 15 percent of their assets in private companies, and more are doing so, although most actively traded funds remain below that limit. As of July, the 12th-largest investment in the $25 billion–plus Fidelity Blue Chip Growth Fund—behind Tesla and Home Depot but ahead of Mastercard and Netflix—was a $438 million stake in Juul, the private company behind the wildly popular vaping device.

The ways in which average investors can participate in the private market are imperfect. Unless you are very wealthy or well connected, you probably are not going to be buying into the leading venture-capital funds, such as Andreessen Horowitz and Sequoia Capital. We should be wary, however, of accepting a romantic notion of the past in which Wall Street was a level playing field for individual investors. When I was at Morgan Stanley in the 1990s, the bank’s senior employees had special access to a private-equity partnership called Princes Gate, which made early-stage investments in companies like Au Bon Pain and Cannondale and generated 30 percent–plus annual returns. Average investors were not invited. The markets have always been split, in some ways, between haves and have-nots.

As for public markets, there are responsible ways to encourage small-company IPOs. In July, lawmakers in the House of Representatives introduced a proposal to study the problem of high IPO fees for companies with less than $1 billion in revenue. Bigger companies can negotiate lower underwriting fees; Facebook, for instance, paid a 1.1 percent fee, whereas most smaller companies pay 7 percent. SEC Commissioner Jackson labels these high fees a “middle-market tax,” which deters small and midsize companies from going public. He’s called on investment bankers to price IPO fees more competitively. “We’ll be watching,” he told me.



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