Public or Private? Determining the Optimal Ownership Structure

Abstract

Increasingly, institutional investors are owners of private companies. This article develops a framework for evaluating the trade-offs involved with public versus private ownership from the perspective of equity holders. The authors contend that the ownership decision can be understood by comparing governance benefits of private ownership with the lower capital costs of public ownership. They discuss the conditions under which firms maximally benefit from private ownership and argue that the governance engineering by private equity sponsors can explain the continued rise of private markets. Their framework improves understanding of asset management decisions for portfolios with private company investments.