Deciding between public and private markets to raise long-term capital represents a critical strategic crossroads for any company, as each path offers distinct advantages and tradeoffs.

Going public through an IPO provides access to deep pools of cash and enhanced visibility, while remaining private — whether through private equity investment or debt financing — allows for greater operational control and reduced regulatory burden.

As companies grow and their capital needs evolve, understanding how to navigate and leverage both public and private funding channels becomes essential for financial planning.

Going public to raise long-term capital

An initial public offering (IPO) is the process a private company goes through to become a publicly traded entity. This allows the company to raise capital by selling shares on major exchanges. At the same time, the company is subjecting itself to increased regulatory oversight and reporting requirements.

For finance professionals, the decision to go public requires careful consideration of both the immediate capital benefits and the long-term implications.

The advantages of going public include:

• Increased liquidity. The stock of privately held companies is difficult to buy and sell, i.e., illiquid, because they can only sell to specific types of investors, typically accredited investors or institutions that meet certain financial criteria. This creates two key challenges: 1) it's harder to find buyers when existing shareholders want to sell, and 2) it restricts the company's ability to raise new capital quickly when needed. Going public solves these problems by creating a liquid market for the company's shares.
• Increased transparency. For a stock to be listed publicly, the company has to meet strict transparency requirements (disclosure thresholds) set by regulators such as the U.S. Securities and Exchange Commission (SEC). Investors are more willing to purchase stock in a publicly traded firm due to the combination of transparency requirements and the fact that the market acts as a pricing engine.
• Improved ability to spin off divisions. When a publicly traded company wants to turn one of its divisions into a separate company through an IPO, they do what is called a spin-off. This is done when a part of a large company is worth more on its own. For example, a manufacturing company that developed a highly regarded software for computer-aided design may find it advantageous to spin off that part of the business.

The disadvantages of going public include:

• Regulatory disclosure. The level of disclosure required for an IPO can be costly and allow competitors to gain access to proprietary information.
• Control. Going public means giving up some level of control over the business, even if the owners retain majority interest. Smaller shareholders can hold sway over how the company runs and who sits on the board.
• Exposure to market conditions. The value of the equity shares of a publicly traded company is sensitive to capital market conditions. What this means is that even if the company is doing well, if there is a broad sell-off in an industry or geographical region, the value of the company’s equity shares could be reduced, making it vulnerable to a takeover or merger.

Deciding whether or not to list stock

Once it’s determined that going public is best for your company, it will need to be decided whether or not the stock will be listed with one of the larger exchanges, e.g., the New York Stock Exchange (NYSE) or the London Stock Exchange Group. Rules, requirements and taxes vary across countries and exchanges, so it’s important to consider all costs before deciding on an exchange.

Alternatively, some companies forgo organized exchanges and list securities on automated quotation systems, such as Nasdaq or Jasdaq. Whatever market your company chooses, be sure to work with sell-side analysts who will help ensure the stock is followed and rated in a manner that is consistent with the company’s objectives.

The main advantage of listing stock on one of the exchanges is that it increases marketability — it can be more widely traded and accessed by investors. The public exposure can also result in higher sales. Plus, with a greater level of disclosure comes the perception that a company is less of a market risk, which can translate into a lower weighted average cost of capital (WACC) and increase the company’s value.

The main disadvantage of listing stock is the significant increase in reporting and governance requirements. The additional requirements and resulting higher costs cause some companies to decide against listing their stock with an exchange.

Stock can also be delisted from an exchange, whether voluntarily or involuntarily. The latter occurs when a company fails to comply with the exchange’s requirements. Voluntary delisting typically happens when the exchange makes additional requirements. For example, when the NYSE added disclosure requirements in addition to the expense of audit and reporting compliance it imposes, some smaller firms chose to delist.

Issuing stock

When companies go public, they must decide which types of stock to issue. Stock can be issued in different classes, which offer different rights to the class of stockholder. This is called a dual-class or multi-class system.

For example, a company might decide to issue two classes of stock: Class A and Class B. Class B, also known as preferred stock, is sold to the general market and has limited voting rights. Class A is the stock the original owners and executives keep, and it has more voting power, which allows them to maintain control over the company.

IPO valuation

Setting the stock price of an IPO is an important but tricky process. If you set it too high, you might not sell all of the shares, and the underwriting bank will have to buy the unsold stock. If it’s priced too low, it will likely all sell, but then you’ll know you could have set the price higher, i.e., you missed out on additional funds.

Figuring out the right price is challenging, especially for new companies, as there is no previous stock market data to examine. Companies typically use two main approaches to find the right price: absolute valuation and relative valuation.

Absolute valuation is when you try to calculate the economic value of the company by looking at its expected future earnings and what they’re worth today. Relative valuation is when you look at companies similar to yours and use their stock prices as a comparison.

At the Market (ATM) programs

Instead of selling all shares at once, some companies opt for an ATM (At the Market) program. It’s like a credit line for selling stock — the company sells new shares a little at a time, whenever they need cash.

Appropriate disclosure documents still need to be filed, but once approved, a broker can be authorized to sell set amounts of new stock at the current market price. By selling stock in small batches, the company avoids impacting the market price of the stock. Due to the nature of the method, it’s also often referred to as a “dribble plan.”

Raising capital privately

Small and medium-sized businesses often rely on private stock issuance to raise capital. This generally takes the form of friends, associates of the founders or angel investors who provide funding in exchange for an equity share in the company.

But there are also large companies that opt for private placement. Some have simply morphed from a small company over the years, and others were once public and decided to go back to private ownership — typically via a private equity buyout of the publicly held stock.

Raising private debt

Private debt funds the operations of many organizations, regardless of whether they are publicly listed or privately held. Loans from financial institutions are not considered private debt, but any other form of borrowing is, including the sale of privately placed debt to institutional investors, e.g., pension or hedge funds.

The advantages of raising debt privately include:

• Less restrictive covenants
• Ability to offer relatively smaller issue sizes
• Reduced time to issuance
• Fewer reporting and disclosure requirements
• Lower costs
• Control over who purchases the debt initially
• Greater flexibility of terms and maturities

There are disadvantages to raising debt privately that should be considered as well, including:

• The high cost of locating investors relative to the number of placements, due to the smaller pool of investors.
• Investors’ desire for more equity because they are assuming greater risk and lower liquidity.

It is a crucial decision

When companies need to raise long-term capital, one of the most crucial strategic decisions is whether to go public or stay private. The choice your company makes impacts far more than just finances — it affects corporate governance, operational control and future flexibility.

A number of key factors that are unique to your company — including size, growth plans, desired control structure and immediate versus long-term capital needs — need to be considered when making this decision. As treasury professionals, it is up to you to carefully weigh the pros and cons of each approach in order to best align the company’s capital-raising strategy with its overarching business objectives.