I once heard Morgan Housel say something like this:
Something will eventually come along to displace index investing.
The context of the comment was a discussion of Benjamin’s Graham’s famous book, The Intelligent Investor. Morgan mentioned that the book changed frequently because investing changed. What works now will not work forever.
Will Private Equity Disrupt Index Investing?
I’ve noticed that private equity is gaining momentum. Companies are waiting longer to go public. Note these valuations at IPO:
- Amazon (1997): 438 million
- Google (2004): 23 billion
- Facebook (2012): 104 billion
- Alibaba (2014): 170 billion (largest American IPO)
Now consider the valuations of the four largest private companies as of 9/14/2025:
- SpaceX: 400 billion
- ByteDance: 330 billion
- OpenAI: 300 billion
- Stripe: 70 billion
As far as I know, none of these companies have plans to go public any time soon. By the time they do go public (if they ever do), their valuations will most likely be much larger.
Do you see the trend? Companies are waiting longer to go public. What does this mean for index investors? Lost upside. Consider Amazon:
- IPO valuation: 23 billion
- Current valuation: 2.43 trillion
Amazon is 105x bigger now than it was at IPO! If you held VTSAX, you had a piece of this incredible action! If Amazon had IPO’d at 500 billion, the upside would have only been 5x.
I was feeling a bit lazy, so I asked ChatGPT to do some research. My prompt:
What is the trend of private stocks versus public stocks?
Companies Staying Private Longer
- 2000s: Tech companies like Google went public relatively early (Google IPO’d in 2004 at ~$23B valuation).
- 2020s: Giants like SpaceX, OpenAI, Stripe, and ByteDance are valued in the hundreds of billions while still private.
- Why?
- Abundant venture capital and private equity money.
- SoftBank, Tiger Global, Sequoia, sovereign wealth funds, and others provide late-stage funding that reduces the need for IPO cash.
- Regulatory & disclosure burdens of being public discourage IPOs.
2. Growth of Private Market Capitalization
- Private equity AUM (assets under management):
- ~$1 trillion in early 2000s.
- Now $8–10 trillion globally (2025).
- Unicorn count (private startups > $1B):
- 2013: ~40.
- 2025: ~1,400+ unicorns, worth ~$3.5–4T.
- The private market has become a parallel stock market of its own.
3. Shrinking Public Company Universe
- In the U.S.:
- 1996: ~8,000 public companies.
- 2025: ~4,000 public companies.
- Reasons:
- M&A and buyouts take firms private.
- Fewer IPOs than in the 1980s–1990s.
- Growth capital more available in private hands.
4. Market Cap Balance
- U.S. Public Market (2025): ~$62.8T.
- U.S. Private Market (est.): ~$7–8T.
- Global Public Markets (2024): ~$126T.
- Global Private Markets (est.): ~$15–20T.
Public markets are still far larger, but private markets have grown much faster (CAGR ~15–20%) than public (~7–10%) in the last two decades.
5. Key Trend Going Forward
- Private dominance in early/mid growth stages. Expect mega-unicorns ($100B+ valuations) to stay private much longer.
- Public markets = exit liquidity. IPOs will happen later, primarily when founders, VCs, or employees need liquidity.
- Retail access gap. Public investors get access much later in the lifecycle — meaning much of the upside happens privately.
In short:
- Public markets are still dominant in size and liquidity.
- Private markets are growing faster, capturing more value creation earlier, and blurring the line between private equity and public equity.
</end ChatGPT query>
Left Behind?
It sure looks like the public markets are diminishing in favor of the private markets. And ChatGPT didn’t even mention:
- You can still reward early investors. One reason is to go pubilc is to reward investors. However, early employees and investors can still sell shares in tender offers and via the private markets.
- Winner bias. If your business is already doing really well like SpaceX, OpenAI and Stripe are, you’re going to need public funding even less because there is so much private money available. Therefore, the best performing private companies will stay private longer.
So I’m concerned that investing is starting to change for the worst. Most investors can’t get into private companies and may suffer diminished returns.
Counterpoints:
- It’s painful to invest in private companies. But perhaps a new investing instrument comes around that will give those who aren’t accredited or qualified investors access. It is already starting to happen.
- Private markets are still small (less than 5% of the value of public markets). Perhaps companies like SpaceX and Stripe are rare unicorns.
Update (9/15/2025): Well that didn’t take long. Regarding bullet point #1, look what Robinhood announced this morning: Robinhood Ventures Fund 1
What Do You Think?
I’m just a random, slightly above-average human who spends way too much time thinking about silly things. What do you think?
- Are private markets the threat that I see them as? If not, why not?
- Will index investing pivot to somehow capture these returns?
- Will another investing instrument come along that helps everyone invest in these companies?
I’d love to hear your thoughts. Please share in the comments.
Note: I have also asked the Blogfather, JL Collins for his opinion on the matter. If he responds, I’ll write a follow-up post.
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I work in the venture backed tech industry. It’s hard to say what this will do to index investing.
On one hand we’re all missing out on the massive gains from these companies. But how many of them are there? Seems like a handful. There are 1000s of unprofitable ones though with a $1bn valuation. Most of these will not make it. The whole VC plan is that they invest in all of them and hope for a few to be the next Facebook while the rest fail or tread water for many years.
I think the question would be, if we could add all of these private companies into VTSAX, what % of the total market cap would that make up? Is that big enough to care?
Personally I’m ok missing out on some of these private company gains by indexing. While I miss some big gains, I’m also missing a lot of losses from all the others. For simplicity I think it’s ok to leave these out. I’m guessing JL will say something similar.
Also these big gains are the reward for early employees and private investors. If it was easy for anyone to access they might not be as excited to jump in early.
“But how many of them are there? Seems like a handful. There are 1000s of unprofitable ones though with a $1bn valuation. Most of these will not make it. The whole VC plan is that they invest in all of them and hope for a few to be the next Facebook while the rest fail or tread water for many years.”
Yeah, kinda similar to an index fund where the overwhelming majority of companies underperform.
I do worry about the winner bias though. The companies that really do well have no need for private money, so while most private companies will fail, before the end of the decade, the biggest company in the world could be private (I think OpenAI and SpaceX both have a shot at this).
“I think the question would be, if we could add all of these private companies into VTSAX, what % of the total market cap would that make up? Is that big enough to care?”
Not yet. But the trend is going that way.
“Personally I’m ok missing out on some of these private company gains by indexing. While I miss some big gains, I’m also missing a lot of losses from all the others. For simplicity I think it’s ok to leave these out. I’m guessing JL will say something similar.”
One solution could be an index fund that captures them all. Just this morning, I saw this.
Thank you for your thoughts. I probably think about this stuff too much…
Was would be your goal of including these companies in your portfolio? Further diversification or bigger gains?
If further diversification is the answer I think that it only works if there is a cheap and easy way to access them. Maybe that new fund would do it. My guess though is that there would always be high fees to access something like this making it less interesting.
If bigger gains is the goal, I’d say this is just more speculative stock or sector picking. Which is fine, but goes against the idea of passive index investing.
If you’re looking for further diversification I think the best of these companies will be public eventually. If gains, go for it, but it’s still stock picking.
It is still worth considering if the fundamental premise of broad-based indexing holds: “invest in the total-ish market and seek to match those returns”.
Sure, we don’t distinguish too much between the S&P500 (largest 500-ish publicly traded US companies) and the total stock market (3500-ish publicly traded US companies). However, the premise doesn’t really take into account significant returns being driven by lots of behemoth-sized private companies. As that becomes more common, it may be that the publicly traded segment of the market doesn’t return as well.
I wouldn’t look at it as stock picking but more like something similar to asking the question “can we treat the public/private markets as existing in a similar relationship to the S&P500 and total US stock market”? Which is to say, “is investing in the S&P500 close enough to be considered equivalent to investing in the total US stock market (which I think continues to be the case) and is investing in the publicly traded market in a similarly broad way equivalent to investing in the public+private market?” The latter seems to be an open question.
Agreed on all points.
Every once in a while, I have a strong feeling about a company. I felt this way with Google and Facebook when they went public. Also with Apple when the iPhone was announced. I also feel this way about SpaceX. I could talk about methane burning rocket engines, the calculus that lands the rockets, and turbopumps all day. Big nerd stuff that most don’t want to hear about. So this is a stock pick. Most of my money still goes to index funds.
But I’m also going to watch to see if this trend continues. If private companies get to a point where they’re at least 10% of the public markets, it may start to get interesting. And if it happens, I hope someone brings a lot cost, index fund that helps the normal person get in.
I agree. If we can get a low cost index fund for private equity I think it has a place in a diversified indexed portfolio. I just think it’ll be hard to get there. The VC funds have a strong interest in protecting their early stake in these companies. If it’s easy for anyone to get in they lose some of their advantage.
This wasn’t something I had really thought of before but I’d respectfully disagree on the companies you mentioned as having the potential of being the largest in the world. OpenAI is just hemorrhaging money while delivering a product that (to me) doesn’t even seem to be the best in its field (not to mention its weird quasi-non-profit/for-profit split). SpaceX is so weird with how much it relies on government subsidies to function.
Now of course that paragraph I just typed sounds suspiciously like trying to engage in stock picking – so it circles back to your original thesis that actually yah maybe we should be a little concerned that all these companies aren’t being included in the index since we can never be certain of the winners! Good food for thought.
Now I’m curious; which AIs are you paying attention to and which one do you thing is the best? I’ve been loosely paying attention to Gemini, Grok, Anthropic, and ChatGPT. I don’t use them enough to have a strong opinion.
With the caveat that I’m a bit of a genAI skeptic, and nothing close to an expert in the field or even a power user – I’ve tried to implement genAI into my workflow when appropriate, mainly ChatGPT and Gemini. In these cases I’ve found Gemini to be often superior (less sycophantic fluff and more functionality, especially around writing code).
Even if someone wants to argue that ChatGPT is in fact much better than Gemini (or any of the others), I think it would be hard to make the case that it is leaps and bounds ahead, and therefore I don’t see how a ~$300B company (at last raise valuation) would jump ahead Alphabet (over $3T Market Cap of which Gemini is just a small part) without their product being truly revolutionary.
I do think there is space for someone to really change the game with AI, but more in the area of what would have just been called machine learning back in the day (thinking in Bio/Pharma, Materials Research, Digital Twins, etc.) – areas where the ability to test trillions of combinations in an ‘intelligent’ model could really revolutionize the speed and breadth at which new discoveries could be made. In that case though, I fall back on the old idea of how the people who made money off of the California gold rush weren’t the miners, but the folks who sold the miners their equipment (hello Nvidia and your $4.3T market cap!)
My amateur take: Alphabet is a great company and it’s probably ahead of everyone regarding AI. People perceive it as being behind because its AI wasn’t customer facing like ChatGPT. I’ll bet Alphabet has been killing it with AI in its back end systems though.
Very interesting and something to think about.
I am terrible at picking winning stocks so I am fine doing the average with index investing. The knowing which private company to buy, with also having the correct timing (buy and sell) is just not something I am good at doing.
I had a conversation about gold investing just last week with a buddy. I follow Warren Buffett view of gold (that is might be a good hedge for inflation, but it does not generate income or cash flow) so not something I would invest in. However my buddy pulled out some charts and showed me some numbers which had me second guess my views. “Between 2004 and 2024, gold delivered a 543% total return (9.8% annualized), actually surpassing the S&P 500’s 482% gain (9.2% annualized).” Similar to your data above of private equity it makes me think with an open mind.
At the end of the day one of the comforts I see with full index investing is that I do own some gold miners and the manufactures of the picks and shovels… Same with the AI in the form of hardware and software companies, for SpaceX the rocket fuel chemical companies. These are all are in the public space so I am getting some exposure. The amazing returns are for those smarter (or luckier) than I am that can pick the winners and time the buys and sells correctly. I am just happy being average, and letting the slow and powerful force of compounding drive my wealth.
Thanks for posting as always mind opening.
“I am terrible at picking winning stocks so I am fine doing the average with index investing. The knowing which private company to buy, with also having the correct timing (buy and sell) is just not something I am good at doing.”
Hopefully an index fund of these things comes out.
Carl, I’ve come to realize something similar…by accident. Probably 70% of my net worth is in SpaceX as an early employee. I’m fortunate to have hit my FIRE number because of the incredible gains from SpaceX valuation bumps in recent years. Im unable to rebalance my portfolio in the traditional 60/40 index/securities split that would allow me to follow the 4% rule because I can only participate in company buybacks twice a year and they’re capped at how much I can pull. It’s always liquid enough that I can pull what I need for annual expenses. Even so, hard to pull the trigger with so much allocated to a single stock. Would you and Mindy consider yourselves FIRE in a situation like this?
Congratulations on the incredible fortune of working for SpaceX!
This is an interesting one to ponder. Random thoughts:
That’s just my thought vomit and all stuff you know already.
Again, what a great opportunity. I hope you enjoy your job! I know working at a Musk company can be an absolute grind.
Look me up next time you make it to Colorado! I’ll talk rockets with you all day!
Thanks for the insight. Much of this aligns with my thoughts as well and why I’ve been diversifying less aggressively than I would have if I didn’t experience big private market gains before reading Simple Path to Wealth for the first time. At the end of the day, it’s a gamble, but yes, will be diversifying more aggressively from here on out as risk mitigation. I’ve enjoyed my time here the last 10+ years and still enjoy engineering so not ready for early retirement just yet. I’m hoping future endeavors are just as fun. Will reach out if I’m ever in Longmont!
The first thing this made me think of was a SPAC which were all the rage a few years ago now you barely hear about them. My guess, this is potentially possible but seems to me more risky. I know a bunch of people that go hear pitches on a much more micro level and the # that fall apart is quite large. Let’s do a calendar check-in every 5 years and compare the robinhood fund against the major averages.
Many, if not most, large PE firms and investment banks themselves are publicly traded. So if you’re an investor in Blackstone or Goldman Sachs, because they’re part of the index fund, then you’re also indirectly investing in private companies they’re investing in. Sure, you won’t get exposure to every large private company that’s growing rapidly, but your exposure is significantly more than zero and non-trivial at that. There’s nothing barring publicly traded holding companies from investing in privately held companies and you can easily tap that value by continuing to invest in index funds. FOMO and chasing exotic and risky PE investments without the disclosures that public companies provide is the riskier move here without a clear, measurable, and reliable alpha. Cherry picking a few winners doesn’t prove a point – there are many more similar investments that went totally or nearly bust despite great hype (e.g. Nikola, Virgin Galactic). No one, I repeat, no one can successfully pick winners consistently. VT and chill. 🤘
“Cherry picking a few winners doesn’t prove a point – there are many more similar investments that went totally or nearly bust despite great hype (e.g. Nikola, Virgin Galactic).”
Exactly! This is how index investing works too. Very few companies outperform, so you buy them all to get the small minority that do. If private equity continues to outgrow the public markets, I hope that someone creates an index fund around it.
And to further your point, I’d argue that picking a private company is even harder. Like you implied, the act of going public is a quality filter.
But if there are trillion dollar private companies as I believe there will be before the decade is done, I’d continue to argue that most are missing out on a lot of upside.
Back to your original point about Blackstone and Goldman. I wonder how many other companies own private ones? The big one I can think of is Alphabet which owns 7.5% of SpaceX.
MSFT owns 49% of OpenAI.
But can you trust the valuations of private companies? OpenAI is losing money every quarter. If they had to publish quarterly 10-Q reports, would the market value the business so generously? I bet it would be a lot less than $300B. In some respects, private equity is a lot of hype.
I’ve wondered this myself.
I worry about long tail events bringing down index investing. Written about by many but I can’ put the question down of what happens when close to 100 percent of people index. Last stat I saw said it is now north of 50 percent. If we get to 100 does it mean it will just go up forever?
It takes me back to my youth when pyramid schemes went around school. The winners were the one who go in early and got their money. The last ones in lost everything. I am not saying indexing will go there but I can’t really see a conclusion.
Interesting article. This is a trend in the Australian market also that is getting a lot of financial media attention. The market regulator studied this as the Australian listed entity universe actually shrank a few years ago. They found the administrative requirements and costs of listing plus the ongoing compliance and regulation being a publicly listed entity were dissuading companies from listing. Perhaps this is playing out in the US market also.
Interestingly, there are a number of funds in Australia (including ETFs) that now exist to cater to unlisted companies in the Australian market.