Private Company Trends to Watch in 2023

We've all seen the numbers: there are far fewer publicly listed companies in the United States today than there were two decades ago. To Rafael Pastor, a director on the boards of KinderCare Education, Edisability, and RosettaBooks, this means that there are a lot more opportunities to be members of the boards of private companies.

And in some ways, with fewer stringent regulatory requirements leaving more time for strategy and innovation compared to public company peers, being a private company board director can be more attractive than being a public company one. As opportunities abound for experienced and newer directors alike at private companies, there are some key trends private company directors—and those aspiring to private company directorship—should pay attention to in this new year.

IPO Hesitancy

Many companies in 2022 held off on or even withdrew plans to go public as geopolitical tensions, record inflation, and other factors pushed uncertainty into the stock market. In a similar vein, numerous public companies were taken private: notably, Citrix Systems and Twitter.

While initial public offering (IPO) hesitancy may not be completely novel in 2023, the threat of a recession looms closer. The results of the 2023 NACD Board Trends and Priorities Survey, published in the 2023 Governance Outlook report in mid-December, reveal that 65 percent of respondents believe there will be a recession and 6 percent believe there will be a severe recession in the United States by the end of the second quarter. With the fear of recession will come continued doubt about whether now is the right time to go public.

What's more, being a public company is less attractive to many businesses these days, due in no small part to the regulatory burden public companies must bear.

"It's getting to be harder than ever for board members of public companies to focus on what they like to focus on which is strategy, succession planning, and risk mitigation. So much of their time now and increasingly into the next two years while Democrats are still in charge of regulatory [bodies] like the SEC… is now spent on compliance," Pastor said. "If you're on the board of a private company that is considering going public, you've got to factor in what going public means."

That said, as private company boards help their companies wade through the uncertainty, they should not be afraid of going public just because of the state of the markets. If a company has strong processes and financials and is confident in its ability to deliver value through its products or services, then an IPO can still be a great next step for those companies that are ready, even if there are market challenges. However, if a company can use this "waiting period" to restrategize or even innovate in a way that they may not be able to as a public company, then remaining private may be the best option.

Increased M&A

Given the predicted IPO hesitancy and even the trend of public companies going private, Pastor believes there will be an increase in mergers and acquisitions (M&A) activity. As of the third quarter of 2022, there was still $1.2 trillion of dry powder among private equity firms ready to be deployed, according to PitchBook data. Though down slightly from 2022's earlier dry powder high, there's still reason to believe investors will be looking to put this capital to good use in the new year.

"What we're going to see, particularly in an environment of IPO resistance, is more deals. But they're not going to be going-public deals, they're going to be companies that buy other companies and absorb them," Pastor said. "They could be public companies buying private companies—that's not the same thing as going public. There's going to be other private companies that buy private companies, and there's going to be more private equity firms buying more private companies."

There may also be more hybrid transactions, or private equity firms selling a portion of a company to another investor as a partial exit.

"This may seem contradictory to [IPO hesitancy]," Pastor said, but "[if] the economy improves somewhat, as inflation may recede somewhat, as interest rates may become at least stabilized… all of these will point toward greater M&A activity."

For Marisol Angelini, NACD.DC, a C-suite executive advisor at Executive Coaching Connections and a board member of Bush Brothers & Co. and the NACD Atlanta Chapter, the increase in M&A next year may come as a result of short-term needs. "[Companies] might get into M&A that may not be as strategic, but it's motivated in the short term to be able to get sales back on track, more profitability if they buy something that has a higher margin," Angelini said. "When there are a lot of crises, there's a lot of consolidation as well."

Board Skill Evolution

As the NACD Future of the American Board report notes, boards are at an inflection point. Public and private company boards alike are having to maneuver this unprecedented period with no end in sight. Cybersecurity threats that have been elevated to new heights; more and more stakeholders—and shareholders—calling for companies to pay attention to environmental, social, and governance matters; and the Russian invasion of Ukraine and tensions with China help paint an uncertain and disruptive future. This will require new skills in the boardroom.

Stuart Levine, chair and CEO of Stuart Levine & Associates, pointed out that at some family-owned private companies there's a culture, even at the board level, that has been ingrained in the business for a hundred years, and that makes it hard to change and be self-reflective.

"I think we're at a moment of truth in private companies, particularly for independent assessments," Levine said. "With these existential threats out there… what does the lifespan of a director look like? And at what point do you lose your independence as a director of a company—10, 12 years? Have a board evolution around that assessment. That will likely become a critical trend that I believe we'll see more."

Pastor believes that the skill sets sought by private company boards will follow the trend of those sought by public company boards in no longer looking exclusively for people with experience in strategy and operations, or across various industries—people that are well rounded and can provide a breadth of wisdom.

"Now, it's much more vertical. Now, it's, ‘I need someone who knows my industry, or I need functional expertise. In this day and age, there's so much on social media, I need to have somebody on the board who knows how they can use social media to advance my product or service,'" he said.

In addition, Pastor sees verticalization of director skills as a way for board members to ensure that they can stand on their own two feet and have their own opinions on important topics, without being reliant on or automatically adopting the opinion of third-party advisors.

"They have to ask the right questions, they have to have a healthy skepticism, and they have to have their own point of view to challenge what these outside advisors are advising," he said. "It's not that those outsiders should not be wholly relied upon, but they have their own incentives."

Talent Tensions

"A friend of mind said, ‘In real estate, it's about location and business. For a private company, it's all about people,'" Levine said.

The first NACD Private Company Directorship newsletter of 2022 featured an article about the battle for talent at private companies. While we are perhaps no longer at the height of the Great Resignation, there are new talent issues that private companies will likely be discussing in 2023, including finding the right skills, strengthening culture, and working through layoffs. The latter was noted by both Levine and Angelini.

"[Family companies] tend to be paternalistic and they tend to protect the employee," Angelini said. "[For example,] if somebody doesn't have the skill set, doesn't have the risk appetite to be in a supply chain position, to make those investments—they still don't let them go. They feel that that goes against their culture. Those are the kinds of things that family businesses need to start looking into because that's a competitive disadvantage. They have to recognize that they have to make an operation that is lean, that is efficient, that is effective."

Levine also sees layoffs—at other companies—as an opportunity.

"Private companies will have some opportunities in their organizations as we see in the public company sector the elimination of jobs. A lot of those people are really talented and they will have been soured by the public sector companies and so there will be opportunities to acquire people," Levine said.

Pastor agrees. "Private companies in various industries have the capacity to be much more flexible than very big companies do in making the case to people who are looking for jobs," he said. "We have some flexibility in the balance between on-site and remote work. We have some flexibility between the rigor of what we demand or expect of our workers and also a respect for their individual lifestyle and value orientations."

Prepare Now

Looking at what may come this year, proper preparation is essential for private company boards.

"Have an honest conversation. Can our existing team of people at the top handle the type of challenges that are coming not through any fault of ours but through the reality of a global construct that none of us signed on for?" Levine said. "It might not be the worst thing to make sure that the security of your core platform financially is secure."

And while talent may be cited by board members as a private company trend to watch, it is also where the heart of preparing for what's to come lies. As talent tensions continue to fluctuate, it's a steady fact that having the right people in the boardroom and at the top of private organizations will improve the chances that these companies succeed, no matter what may come.