Monday, April 25, 2011

Private equity markets grow and prosper

In Saturday's post, "Future Shock", it was mentioned that private information flows and private equity markets were in the center of prescient wealth creation. Here's an example of that in the private equity markets, not that one is needed when we watch the private valuations of entities like Facebook and Groupon soar, outside of the broader investment public's reach.

In areas of technical and technological innovation and research, one might think that investing in ETF representing a sector of opportunity would be a great safe way to benefit. As examples, there are alternative energy, nanotechnology, biotech, water, the "cloud", and other areas, even social networking, that represent areas where rapid growth and significant research is underway. Investing in an ETF representing an area (in the experience here, water, nanotech, and biotech) often leaves an investor with a security that performs in line with or modestly better than the overall market. Why would that be the case?

By the time a company in those areas reaches the public markets, much of the money, the big payoff, has already been made. Private investors hold on for longer periods of gestation for many reasons, not the least of which is to avoid the legal problems and risks of being a public company and the reporting demands of regulators and Sarbanes-Oxley. With so much money held out of the public markets after the '08-'09 debacle, there are far more resources with the patience to wait for the bigger payoff and dig deep in pockets to fund a build out a company before hitting the NYSE or Nasdaq.

I wish that I had the exact statistic at hand but I don't. That statistic would suggest that the number of publicly traded companies has declined by about 40% since the year 2000. What is available to the general investor public, both individual investors and mutual funds, has become more limited. Private equity is an opportunity generally for high net worth, very high, and pension funds and other institutions that have access and choose to allocate a portion of their portfolios to private equity investments.

The playing field tilts further.


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