Alright last week I started a post on Private Equity, but it quickly snowballed into an off topic rant about how damn macroey the markets are right now (and STILL are today but that’s besides the point) and ran out of viewers reading capacity. So this is the re-do!
The idea behind private equity is similar to regular old publicly traded equity in that you are putting money into a company in exchange for an ownership share with the idea that it will use that money to make widgets, or sell Dr. Pepper, or cure antiboner syndrome or whatever and make the value of your ownership share grow right. Now with public equity, the odds of your 500 bucks from your Zeeco account that you buy stock with actually physically ending up getting used by some gentleman with a monacle (standard issue CEOwear) are 0%. This is cause you’re not buying shares from the company (unless it’s an IPO or another public offering), you’re buying shares from someone whose selling them. Now monacle man and his crew of flunkies could technically check at any time who exactly owns their shares, but outside of large institutional ownership and large activist investors, they don’t give a fig about you and your 0.0001% stake in their company.
Private Equity on the other hand is (usually) about buying a much larger stake in a company that is not actively traded on any exchange. In exchange for this you, again get an ownership share, but usually one big enough to influence the operations of the company (therefore forcing figs to be given). Which is precisely what you do to either:
- Finance a companies growth in a direction acceptable to the investor
- Develop a new product
- Restructure the companies structure or management
It’s been a while since I’ve created a sweet hooker analogy so let’s go! The difference between public equity and private equity is like the difference between a casual lunch between gentlemen at Barbarellas and a…uhhh…significantly less casual encounter in a Vegas penthouse (though after the one on the card didn’t show up several times, nice try BARRY).
Public equity is wayyyy more hands off you watch, you analyze, maybe it even moves a little bit (or…gets a little misty? I dunno are male strippers attractive or a joke? I’ve never figured out girls opinions on this… it’s just like….a dong….in your face….hitting you? That sounds awful…anyways), but in the end you pay your tab, spray some cologne on, and you move along. Other than some dubious eggrolls, it’s relatively safe, you can leave at any time (very liquid market, hundreds of millions of shares trade a day), and you usually get a whole variety for a relatively low price (to diversify your meat portfolio! It’s the key to success)
Vegas penthouse time though, hoooeyyyy, you’re in there rearranging shit, inventing new stuff, and getting called titles you’ve never even HEARD of before man! BUT! Unless you are a baller on an “I created my own breed of mini giraffe for kicks” type scale, it’s pretty friggin hard to get a wide variety in there with you (given the capital required PE is expensive to get into). Also, after you jump in….if you try to get out before the appropriate time… there is usually a fairly significantly sized gentlemen named Throatopener Charlie blocking your way (very limited secondary market to sell out of private equity positions), and the worst part….if you pick the wrong one your dink explodes (…..you really need the financial equivalent of that?).
I’ll flesh out PE more later (hehehe), including where it fits into a portfolio, why it is sweet to have in a portfolio, and how to get access to it without having to subsequently rock HJs in an alley to make rent.
Till next week.