Comments on: The downside of companies staying private http://blogs.reuters.com/felix-salmon/2011/03/22/the-downside-of-companies-staying-private/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: Auros http://blogs.reuters.com/felix-salmon/2011/03/22/the-downside-of-companies-staying-private/comment-page-1/#comment-25308 Wed, 23 Mar 2011 04:01:19 +0000 http://blogs.reuters.com/felix-salmon/?p=7693#comment-25308 This would be less of a problem if all the nations of the world agreed to impose sufficiently progressive taxation that the wealth of the plutocrats was also funding a proper social safety net, including a defined benefit pension along the lines of that thing Matt Yglesias was talking about ( http://yglesias.thinkprogress.org/2011/0 2/they-could-call-it-social-security/ ).

At a fundamental level, if there simply weren’t enough people with sufficient wealth to fully fund significant sized companies — if the ONLY way to raise IPO-scale amounts of money was to ask for money from the top 10% richest, because there just wasn’t enough wealth available from the top 0.1% — then more companies would IPO.

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By: Derrida http://blogs.reuters.com/felix-salmon/2011/03/22/the-downside-of-companies-staying-private/comment-page-1/#comment-25306 Wed, 23 Mar 2011 03:35:01 +0000 http://blogs.reuters.com/felix-salmon/?p=7693#comment-25306 Amen. A transaction tax would reduce shareholder turnover, improve management incentives, and decrease the need for draconian compliance regimes to make up for dead hand holders not keeping boards/managements in line.

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By: nextstreet http://blogs.reuters.com/felix-salmon/2011/03/22/the-downside-of-companies-staying-private/comment-page-1/#comment-25303 Wed, 23 Mar 2011 01:47:11 +0000 http://blogs.reuters.com/felix-salmon/?p=7693#comment-25303 http://nextstreetjournal.com/2011/03/08/ yes-size-does-matter-the-current-ipo-lan dscape/

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By: TFF http://blogs.reuters.com/felix-salmon/2011/03/22/the-downside-of-companies-staying-private/comment-page-1/#comment-25301 Wed, 23 Mar 2011 01:31:14 +0000 http://blogs.reuters.com/felix-salmon/?p=7693#comment-25301 “If you work for a company with a defined-benefit pension plan, then it will invest wisely on your behalf.”

You are joking, right? I recently calculated my retirement account returns from 2005-2009, and my returns beat the average DB plan in every single year by a (annualized) average of 5%. (Admittedly a period during which my risk aversion has served me well.)

DB = “stupid money”. Many of them simply index. It is quite possible that your average DC participant is even stupider, but suggesting that DB plans “invest wisely” is simply silly.

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By: dWj http://blogs.reuters.com/felix-salmon/2011/03/22/the-downside-of-companies-staying-private/comment-page-1/#comment-25300 Tue, 22 Mar 2011 23:27:59 +0000 http://blogs.reuters.com/felix-salmon/?p=7693#comment-25300 http://www.google.com/finance?q=NYSE%3AM VC

It seems in principle like a good idea; I don’t know how well it’s carried out in practice.

I do object to any implication that having a defined-benefit plan obligates one to live paycheck-to-paycheck until the final vesting date; of course savings outside of retirement accounts is prudent regardless of your retirement plans. Indeed, saving is more important to building wealth than achieving a particularly good return is. This weakens, rather than refutes, your broad thesis, though.

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By: Gimlet http://blogs.reuters.com/felix-salmon/2011/03/22/the-downside-of-companies-staying-private/comment-page-1/#comment-25299 Tue, 22 Mar 2011 23:04:37 +0000 http://blogs.reuters.com/felix-salmon/?p=7693#comment-25299 Also, I think you’re underestimating the incentive-skewing effect of SOX and other recent regulations: http://www.professorbainbridge.com/profe ssorbainbridgecom/2011/01/impact-of-sox- on-the-ipo-market.html

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By: Gimlet http://blogs.reuters.com/felix-salmon/2011/03/22/the-downside-of-companies-staying-private/comment-page-1/#comment-25298 Tue, 22 Mar 2011 22:54:36 +0000 http://blogs.reuters.com/felix-salmon/?p=7693#comment-25298 The reason most people cannot invest in private companies is that we have paternalistic securities laws and regulations, going back to the ’33 Act and ’34 Act, which were passed in the wake of the Great Depression. It’s not worth the effort for private companies do deal with the mandatory disclosure requirements that would come with selling to anyone who is not an accredited investor (or otherwise exempted under something like an intra-state sale law – and then you have ongoing efforts to make sure to stay in compliance with the exemption, too).

Most companies wouldn’t choose to be a ’34 Act reporting company and not avail themselves of the public market via a ’33 Act public offering, but I guess FB may prove to be an exception.

What would be interesting would be to look at the underlying economics that would allow a private company to raise that kind of capital (hundreds of millions of $) without giving its investors an exit event through either a public market or a merger. Is the private market for the securities going to become large enough to give the VCs and similar investors a good enough exit event? Maybe for a FB, but I can’t see that happening for a large swath of companies – at least, not without the SEC sticking its nose in to see how to mess it up.

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By: Curmudgeon http://blogs.reuters.com/felix-salmon/2011/03/22/the-downside-of-companies-staying-private/comment-page-1/#comment-25297 Tue, 22 Mar 2011 22:49:13 +0000 http://blogs.reuters.com/felix-salmon/?p=7693#comment-25297 I have an example of a little-known manufacturer based in New England, with over a billion dollars annual turnover, that has funded healthy growth entirely internally. Its shares are held by a few members of the founding family, and it throws off enough cash (around $100 million a year) to keep those shareholders satisfied. There is absolutely no reason for them to go public.

You are describing a very different situation – where companies need or want external funding, yet can get adequate valuation and investment without having to trade. *That* is what has changed. But while you name a couple of high-profile examples, are they the rule or the exception? You haven’t answered that question yet. If they are the exception, then there’s no problem. Yet I don’t think what you described is broad-based enough to be the rule yet. You tell me.

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By: The_Governor http://blogs.reuters.com/felix-salmon/2011/03/22/the-downside-of-companies-staying-private/comment-page-1/#comment-25296 Tue, 22 Mar 2011 22:31:20 +0000 http://blogs.reuters.com/felix-salmon/?p=7693#comment-25296 I had a brief conversation with Jack Bogle about this a few years ago, he was in town speaking at an event celebrating the 50 year anniversary of the S&P 500. Some mega-PE buyout must have prompted me, and I went ahead and asked Jack Bogle whether he felt public markets were becoming irrelevant and whether the best businesses were being taken private. It was a few years ago, and I don’t recall exactly how he phrased it, but in essence he said that there had always been great privately-held businesses, and there had always been great publicly-held businesses.

At the time I didn’t buy the argument, but I’ve since reconsidered. The trajectory of every business is different. There have always been phenomenally great businesses that are closely held. For example as an investor in public markets, I would love to have a piece of Ikea, Cargill, Hermes or Mars at a reasonable price. They are all great businesses and very attractive. And there are great businesses that are organized as public companies. Similarly, there are very poor businesses that are privately held (banks which were nationalized decades ago) and very poor ones which are public (nationalized banks when they first list on public markets).

All capital intensive businesses will, sooner or later, approach the public markets for financing and offer up either debt or equity in return. And at some point, every large privately held company (including Facebook) will have a majority of owners who want it to be publicly listed, and it will be. It might take many years and multiple generations of owners (UPS) or a very talented and opportunistic buyer (see Louis Vuitton and Bernard Arnault). And at some point either during their public or private lives these businesses will be available at an attractive price (usually not at the IPO). As either private or public market investors our job is to recognize and take advantage of the opportunity when it presents itself.

I would argue strongly against the blanket assumption that equity returns (public or private) will exceed bond or cash returns over every long-term investment time-frame. As Derman points out, every investment strategy works at the margins and you could argue that there is a lot of dumb money floating around again, convinced by various professionals that stocks always outperform other investments. There is also a lot of institutional money that now believes private equity necessarily outperforms other types of investments (and you can’t hold Swensen responsible for that).

That said, Jack Bogle is one of the few good guys in finance and a personal hero, it was a real pleasure to meet him. He’s very unassuming and humble, there was a line of limos for every other executive there, Jack was probably the one most people came to see and a couple of us helped him hail a cab. As an aside, he said then and has said publicly since that his personal portfolio is split between stock and bond index funds, following the “(100-age) = percentage in bonds” rule of thumb.

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By: 3oosion http://blogs.reuters.com/felix-salmon/2011/03/22/the-downside-of-companies-staying-private/comment-page-1/#comment-25295 Tue, 22 Mar 2011 22:28:13 +0000 http://blogs.reuters.com/felix-salmon/?p=7693#comment-25295 1) Plutocrats can own big public companies as easily as they can own private companies. A small percentage owns the vast majority of public equity.

2) Stocks have often returned more than bonds. They are expected to return more, but there are no guarantees. Look at Japan equities over the past decade or so.

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