Large, privately held companies in the U.S. are growing at a faster rate than publicly traded companies and are generating higher profit margins, according to data from Sageworks, a financial information company. In other words, while Wall Street gets most of the headlines, these large, private firms are churning out key growth for the U.S. economy.
Private companies with more than $500 million in revenue have increased sales each year since 2011 at more than three times the rate of public companies, according to Sageworks' financial statement analysis. In the most recent 12-month period, for example, large, private companies grew sales by an average of nearly 11 percent, while public companies increased sales by nearly 3 percent. Since the recession, the only time period publicly traded companies grew sales more quickly than private firms was the 12 months ended Aug. 14, 2010. (To analyze the public and private firms, Sageworks compared results from large, private companies in its database with data from Thomson Reuters on all public firms for five comparable 12 month-periods ended Aug. 14. See below for more details.)
Profit margins for large, private companies have also topped average margins for public firms during these time periods, according to Sageworks' analysis. In the most recent period, the private companies earned net profit margins, on average, of 8.6 percent, compared with 7.5 percent average margins for public companies.
Sageworks Chairman Brian Hamilton said that while it's not exactly clear why large, private companies outperformed the public firms in Sageworks' study, it's not surprising. "Being private allows you to cut through the noise, and focus on what matters," he said. "That is, growing your business."
Sageworks analyst Libby Bierman added, "While public-company execs have to navigate expectations and feedback from the market, private-company owners instead can make decisions based solely on what will grow the company, for example reinvestment of profits or risky acquisitions."
Researchers from Harvard and NYU, using data from Sageworks in a separate analysis of public- and private-company data, found that public firms invest less and are less responsive to changes in investment opportunities, particularly in industries for which stock prices are most sensitive to earnings news.
The financial performance of private companies is important because nearly all of the almost 28 million businesses in the U.S. are privately held. In fact, publicly traded firms make up less than 1 percent of the 6 million firms that even have employees. The Harvard and NYU researchers estimated that in 2010, private U.S. firms accounted for 52.8% of aggregate non-residential fixed investment, 68.7% of private-sector employment, 58.7% of sales, and 48.9% of aggregate pre-tax profits.
Even among the biggest U.S. companies, private owners dominate. Five out of 6 U.S. firms with more than 500 employees were also privately held, according to the researchers.
Hamilton said there's a general misconception that "private" means "small." "In reality, private companies come in different shapes, sizes, varieties and revenue figures," he said. "A lot of them have chosen to remain private, despite many opportunities to do otherwise."
Others, such as computer technology giant Dell Inc. and its chairman, Michael Dell, realized being private was preferred after spending many years on public exchanges, Hamilton said. "Here was an entrepreneur who understood the benefits of operating a company outside of the day-to-day scrutiny and volatility of the markets."
Through its cooperative data model, Sageworks collects financial statements for private companies from accounting firms, banks and credit unions, and aggregates the data at an approximate rate of 1,000 statements a day. Net profit margin has been adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries. These adjustments are commonly made to private company financials in order to provide a more accurate picture of the companies' operational performance.