Ararat Gocmen, Clara Martinez-Toledano and Vrinda Mittal at VoxEU:
Finally, the relationship between high-net-worth individuals’ increasing participation in private capital markets and rising economic inequalities appears to generate a self-reinforcing feedback loop. The entry of new high-net-worth individuals following the qualified small business stock (QSBS) reforms raised the value of incumbent high-net-worth individuals’ holdings, which in turn encouraged them to invest even more in early-stage companies.
We also find persistence in investors’ rankings within the return distribution. This suggests that skill, networks, or access to better deals may help some investors repeatedly earn higher returns. If so, then inequality can grow not only between those inside and outside private markets, but also within the group of private-market investors.
These findings do not imply that private capital market growth is undesirable. Young firms need financing, and high-net-worth individuals can fund companies that might otherwise struggle to grow. Rather, the point is that the growth of private capital markets has implications that extend beyond how companies raise financing and why fewer companies reach public markets.
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