The traditional IPO exit is being replaced by a perpetual secondary market for elite private companies. This new paradigm provides liquidity for investors and employees without the high costs and regulatory burdens of going public. This shift fundamentally alters the venture capital lifecycle, enabling longer private holding periods.

High dilution costs and a focus on narrative-driven stocks (AI, crypto) make public markets unattractive for traditional businesses. These companies now favor private credit for growth capital, creating a bifurcation where public markets are dominated by speculative assets while real economic value stays private.

The quality of public small-cap companies, measured by Return on Invested Capital (ROIC), has plummeted from 7.5% to 3% over 30 years. This degradation means high-growth opportunities now predominantly exist in the later-stage private markets. Institutional investors must shift their asset allocation to venture and growth equity, which has become "the big leagues," not a bespoke asset class.

The S&P 600 small-cap index has massively outperformed the more popular Russell 2000. The key difference is the S&P 600's requirement for profitability, which screens out speculative, pre-revenue "junk" companies that drag down the Russell 2000's returns, especially during speculative bubbles.

The true differentiator for top-tier companies isn't their ability to attract investors, but how efficiently they convert invested capital into high-margin, high-growth revenue. This 'capital efficiency' is the key metric Karmel Capital uses to identify elite performers among a universe of well-funded businesses.

The venture capital paradigm has inverted. Historically, private companies traded at an "illiquidity discount" to their public counterparts. Now, for elite companies, there is an "access premium" where investors pay more for private shares due to scarcity and hype. This makes staying private longer more attractive.

The dominance of passive, systematic investing has transformed public equities into a speculative "ghost town" driven by algorithms, not fundamentals. Consequently, financing for significant, long-term industrial innovation is shifting to private markets, leaving public markets rife with short-term, meme-driven behavior.

While many investors screen for companies with high Return on Invested Capital (ROIC), a more powerful indicator is the trajectory of ROIC. A company improving from a 4% to 8% ROIC is often a better investment than one stagnant at 12%, as there is a direct correlation between rising ROIC and stock performance.

The trend of companies staying private longer and raising huge late-stage rounds isn't just about VC exuberance. It's a direct consequence of a series of regulations (like Sarbanes-Oxley) that made going public extremely costly and onerous. As a result, the private capital markets evolved to fill the gap, fundamentally changing venture capital.