The following are a sampling of the reasons why we prefer origination and management of Direct Private Equity platforms over trading public Stocks and Bonds.
1. The public markets are fraught with Greed, Impatience and Selfishness at every level. ENRON is the perfect example of these characteristics. If you do the research, it is not unusual in the public markets to find these extreme versions of Greed, Impatience and Selfishness in a majority of the companies in the marketplace. Gold faucets, private jets and extreme benefits are commonplace. Time after time we have seen where a chain of brokers and attorneys receive as much as 10% of the invested equity through fees and commissions without contributing to the profits of the company what-so-ever. In our Private Equity structures, the management team doing the work and the partners putting up the money, receive the benefits of the success of the research, due diligence and execution of the platform.
2. Public companies, for instance, Amazon, have made significant profits for their shareholders with no underlying economics to support the price – a poor business model if ever there was one. In August 2022, the price-to-earnings ratio of Amazon was above 110 with estimated earnings of $1.11 per share and the company pays no dividends. This means that if the company were to pay all their “profits” to the shareholders for the next 110 years, the investor might have their investment returned. That certainly does not meet our goals.
3. In general, with publicly traded companies, a significant amount of profits go to upper management instead of stockholders and line workers. For example, in 2012 the 500 highest-paid executives of U.S. public companies received, on average, $30+ million in compensation from stock options and awards, a staggering number indeed. As I said before, greed is rampant on Wall Street.
4. As a common shareholder, you do not own a secure interest in the assets of the company. If the company you own common stock in happens to go bankrupt (annually over 500 do), then you are left holding the bag, your money lost.
5. Public stock/bond values are determined by an in-efficient marketplace. As a veteran stock analyst and reader of thousands of annual reports throughout my 40 year career, I can tell you that I have never read an annual report that “told the whole truth and nothing but the truth”. In our programs, when you own a direct interest in a private company and can call the management team on their cell phones, can audit the books with a simple request and have a direct say in how things are managed, you can get to the truth rather quickly.
6. Rumors hurt your value. I receive calls daily from brokers “pushing” a rumor for a public company, increasing trading activity on a stock (known as KITING on the street). This increased activity raises the stock price so their management can sell and make money. All based on rumors and lies. One of the masters in 2022 of this technique is Elon Musk, with his twitter account. Every time Elon decides to tweet something about one of his companies, the stock price increases or decreases, damaging the common shareholder.
Any experienced private equity manager will structure a platform with a simple structured compensation and profit sharing that everyone agrees upon. Partners should be able to check on a platforms’ performance between monthly reports if they like, as many times as they like.