WEBVTT - Here's Why Companies Are Staying Private For Longer

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. I'm Stephen Carroll, and

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<v Speaker 1>this is Here's Why, where we take one new story

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<v Speaker 1>and explain it in just a few minutes with our

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<v Speaker 1>experts here at Bloomberg. The legendary investor Warren Buffett once wrote,

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<v Speaker 1>if you aren't willing to own a stock for ten years,

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<v Speaker 1>don't even think about owning it for ten minutes. But

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<v Speaker 1>what if you can't buy the stock in the first place.

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<v Speaker 2>Some tech companies, maybe a lot of tech companies, go

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<v Speaker 2>public a bit too early.

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<v Speaker 1>Some of the world's most exciting companies are remaining in

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<v Speaker 1>private hands. Take the example of payments giants Stripe, valued

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<v Speaker 1>at about seventy billion dollars. The co founder and CEO

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<v Speaker 1>John Collison says they're in no rush to go public.

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<v Speaker 2>We still see tons of opportunity to change and grow

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<v Speaker 2>the business quite a lot. You look at analysts following

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<v Speaker 2>public companies and obsessing over guidance and what'll be this

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<v Speaker 2>quarter and things like that. Culturally, we've ended up I

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<v Speaker 2>think in a bit more of a world where public

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<v Speaker 2>companies are suited for the extract stage of the sigmoid

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<v Speaker 2>curve rather than the expand stage.

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<v Speaker 1>And stripes not alone. SpaceX cemented its status as the

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<v Speaker 1>world's most valuable private startup with a share sale that

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<v Speaker 1>valued it at about three hundred and fifty billion dollars,

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<v Speaker 1>and at open Aiy's last fundraising round, it was valued

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<v Speaker 1>at one hundred and fifty seven billion. So here's why

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<v Speaker 1>companies are staying private for longer. Joining me now to

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<v Speaker 1>discuss is the person at Bloomberg who specializes in covering

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<v Speaker 1>how companies go public, Bailey Lipschaltz. Billy, thanks for joining us.

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<v Speaker 1>Does this mean you're out of a job? How widespread

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<v Speaker 1>is this trend of companies staying private?

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<v Speaker 3>So far, not out of a job, but it definitely

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<v Speaker 3>makes you want to find some other areas to write about.

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<v Speaker 3>But it is a widespread trend that has been really

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<v Speaker 3>taking place over the last two two and a half decades.

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<v Speaker 3>When you look at the US alone, the number of

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<v Speaker 3>publicly traded companies has been cut in half from about

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<v Speaker 3>seventy five hundred to four thousand. So this is something

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<v Speaker 3>that has been a real ce shift that has been

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<v Speaker 3>taking place. Again really when you go back to the

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<v Speaker 3>mid two thousands, with companies preferring to stay private after

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<v Speaker 3>the fallout of the dot com.

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<v Speaker 1>Bubble, So why are they making this decision? Why are

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<v Speaker 1>they chasing to stay privus.

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<v Speaker 3>Easier access to capital. We've seen such a big push

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<v Speaker 3>from some of the biggest investors to wanting to get

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<v Speaker 3>a piece of some of these companies earlier. You also

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<v Speaker 3>don't have to deal with activist investors, deal with journalists

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<v Speaker 3>kind of digging through filings and financial updates. And also

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<v Speaker 3>it costs a lot of money to be public. So

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<v Speaker 3>if you can be data Bricks who just raised ten

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<v Speaker 3>billion dollars at a sixty two billion dollar valuation. You

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<v Speaker 3>mentioned SpaceX, Open AI to a number of other companies,

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<v Speaker 3>they really, when you talk to management, an IPO could

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<v Speaker 3>be the path at some point, but they prefer to

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<v Speaker 3>stay private just because they can continue to give investors,

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<v Speaker 3>early investors, employees access to liquidity, ability to sell some

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<v Speaker 3>of their shares, to actually turn paper profits into real cash,

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<v Speaker 3>and they're not dealing with the headache that come with

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<v Speaker 3>being a public company.

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<v Speaker 1>But it seems like in a lot of cases these

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<v Speaker 1>companies are sort of keeping the option open that they

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<v Speaker 1>could go public at some point down the line. Do

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<v Speaker 1>we have any idea of how much money is tied

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<v Speaker 1>up in these private companies that could, in theory list

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<v Speaker 1>if they wanted to.

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<v Speaker 3>So we've seen data with private equity owned companies alone,

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<v Speaker 3>there's about two point nine trillion dollars worth of value

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<v Speaker 3>that needs to be either sold through a sale or

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<v Speaker 3>brought public through an IPO, and you have a number

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<v Speaker 3>that's pretty similar on the venture capitalist side of things.

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<v Speaker 3>So this is trillions of dollars in terms of companies

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<v Speaker 3>that are tied up in these private investments. It's just

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<v Speaker 3>a question of when they would go public, what that

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<v Speaker 3>would look like, and whether valuations make sense for venture capitalists,

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<v Speaker 3>private equity firms, or if they want that branding event

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<v Speaker 3>where they're ringing the bell at the Stock Exchange here

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<v Speaker 3>in New York and have the ability to point to

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<v Speaker 3>a ticker that trades on the New York Stock Exchange

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<v Speaker 3>or on the Nasdaq.

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<v Speaker 1>And we mentioned valuations there. How reliably can we value

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<v Speaker 1>a company that stays privates.

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<v Speaker 3>It's a hotly contested debate because when you look at

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<v Speaker 3>companies like open Ai being valued to one hundred and

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<v Speaker 3>fifty seven billion dollars, that means they found enough investors

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<v Speaker 3>who thought that that was worth writing a check for.

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<v Speaker 3>If you're publicly traded, you're getting kind of marked to

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<v Speaker 3>market every second that a market is open for trading,

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<v Speaker 3>So it's a bit opaque. It's a bit of a

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<v Speaker 3>black box in terms of how some of these valuations

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<v Speaker 3>end up. But presumably the investors, the thrive capitals of

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<v Speaker 3>the world, the venture capitalists of these private equity firms

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<v Speaker 3>who take these companies private, they have an expectation and

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<v Speaker 3>kind of a specialization that those numbers do make sense.

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<v Speaker 3>But the big debate we've been seeing and why we've

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<v Speaker 3>seen such a dearth of offerings and really the last

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<v Speaker 3>three years partly has been companies were either taken private

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<v Speaker 3>by private equity or have remained private in venture capital,

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<v Speaker 3>and they don't like what they would get if they

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<v Speaker 3>were to go public and sell shares to public investors

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<v Speaker 3>and have to deal with being kind of re rated

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<v Speaker 3>on an ongoing quarterly basis.

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<v Speaker 1>Are there regulatory concerns involved here as well? If we

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<v Speaker 1>have companies that are this valuable, talking about some that

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<v Speaker 1>are hun ndreds of billions of dollars that aren't subject

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<v Speaker 1>to the same oversize that publicly listed firms are.

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<v Speaker 3>I don't think so. The expectation it depends kind of

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<v Speaker 3>who your stakeholders are. Securities regulations are there to protect

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<v Speaker 3>unsophisticated investors, So you have to be an incredited investor,

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<v Speaker 3>you have to actually have access to buying a SpaceX,

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<v Speaker 3>and you have to kind of have the ability to

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<v Speaker 3>get in the door with an open AI to actually

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<v Speaker 3>write a check. So there are some regulatory walls put

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<v Speaker 3>up in terms of investing in some of these companies.

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<v Speaker 3>And just broadly speaking, as it relates to reporting, if

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<v Speaker 3>you're publicly listed, you obviously have to have earnings every

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<v Speaker 3>quarter and have to be kind of in the books

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<v Speaker 3>and have lawyers and consultants and other people on the payroll.

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<v Speaker 3>If you're private, you can kind of operate at least

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<v Speaker 3>to some extent how you would like.

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<v Speaker 1>Broadly speaking, is it a problem if these companies don't

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<v Speaker 1>ever go public? You know, we think about some of

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<v Speaker 1>the really high profile ones like SpaceX or open AI.

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<v Speaker 3>It depends who you talk to if you are a company,

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<v Speaker 3>or if I talk to lawyers and investors. As long

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<v Speaker 3>as the earlier stage investors or employees have the ability

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<v Speaker 3>to take advantage of the equity they've built up in

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<v Speaker 3>the company, then there's really no reason to go public.

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<v Speaker 3>When I talk to advisors, the question when they're talking

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<v Speaker 3>to management teams are why do you want to go

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<v Speaker 3>to public? What do you gain from being publicly listed?

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<v Speaker 3>The downside, though, is if you don't have a strong

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<v Speaker 3>public markets, you don't have that transparency that you mentioned,

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<v Speaker 3>you don't have the ability to kind of hold some

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<v Speaker 3>companies accountable, and you also don't have the ability for

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<v Speaker 3>people to actually buy some of these companies. So by

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<v Speaker 3>the time open AI or to go public via IPO,

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<v Speaker 3>by the time SpaceX could go public or Starling could

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<v Speaker 3>go public, a lot of that valuation and kind of

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<v Speaker 3>growth could be sapped out of the market. And now

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<v Speaker 3>you're bringing a company that already is one of the

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<v Speaker 3>biggest companies in the world straight to the public markets

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<v Speaker 3>and investors at least in the public markets who don't

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<v Speaker 3>have the ability to have access to it or can't

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<v Speaker 3>afford to pay someone for those private investments. Is joining

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<v Speaker 3>the party late?

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<v Speaker 1>Is this becoming a question of prestige, Is it just

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<v Speaker 1>a sort of badge of honor to be a public company,

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<v Speaker 1>or is even that dwindling?

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<v Speaker 3>It feels like that is dwindling depending who you talk to. Obviously,

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<v Speaker 3>the exchanges want companies to continue listing. But if open

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<v Speaker 3>ai can be valued one hundred and fifty seven billion dollars,

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<v Speaker 3>if SpaceX can get its funding round, and employees, according

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<v Speaker 3>to Elon Musk, don't want to sell shares. Everyone knows

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<v Speaker 3>who some of these companies are. There is still a

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<v Speaker 3>branding event with being publicly listed. There is some validity

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<v Speaker 3>depending on the industry you operate in, where you can

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<v Speaker 3>talk to customers and clients and say, hey, we're publicly listed.

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<v Speaker 3>We trade on New York Stock Exchange. Here are our

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<v Speaker 3>quarterly results. But for some of these name brand companies,

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<v Speaker 3>some of the top kind of upper echelon firms, the

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<v Speaker 3>question really is what would be the reason to go public?

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<v Speaker 3>And if there's not a good business reason, then for

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<v Speaker 3>all intensive purposes, staying private makes a lot of sense.

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<v Speaker 1>Okay, Bloomberg's Billy Lipshellz thanks very much for joining us.

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<v Speaker 1>For more explanations like this from our team of twenty

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<v Speaker 1>nine hundred journalists and analysts around the world. Search for

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<v Speaker 1>quick take on the Bloomberg website or Bloomberg Business app.

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<v Speaker 1>Stephen Carol, this is here's why. I'll be back next

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<v Speaker 1>week with more. Thanks for listening,