Private vs. Public market tensions
There is a fundamental disconnect between the timing required for Progress to emerge — meaning long-term themes — and the noise of the day-to-day in public financial markets.
On the one hand this presents buying opportunities as people over-react to short term noise. But on the other hand, this noise is also distracting to companies, shareholders and employees — plus they lose money if they need to sell.
Thus, it makes sense that many high growth companies want to stay private.
However, this presents 2 main issues:
- Most folks can’t put the large majority of their wealth in private only investments; they need exposure to the public markets, and if the best companies stay private — public companies won’t be as good as the private markets. In theory, this could become a structural issue.
- Private funds with limited lives ultimately need liquidity — investors need to sell to return capital to limited partners and the general partners themselves. Thus, IPOs ultimately are required unless fund structures change.
There are a few emergent phenomena from this “want to stay private forever but can’t” reality.
- Public and “cross-over” investors have deployed capital into the private markets driving up the valuations of the private companies more than they might otherwise be driven up due to the lack of liquidity (this is the “unicorn” issue).
- Some companies ultimately must make it “through the IPO window” (given liquidity needs mentioned above), but they then inevitably suffer the volatilities of the public markets.
As a result, what seems to be the emergent reality is that medium stage growth companies are stuck with a tough decision: Go public to have the liquidity and benefits of public markets but be subjected to the noise and negative impacts of that noise or try to eek it out longer in the private markets until fund lives force the issue.
In a way, the active trading of private securities of still-private companies by large institutions seems to be the “market” trying to find a middle ground: some liquidity and benefits of public markets, without the noise.
However, this solution seems imperfect.
Maybe better would be a longer-term focus in public markets.
Of course this is no panacea either. Given the reality of market cycles, the way institutions and others measure performance and the difficulty of investing, it is hard to imagine a shift in focus could be possible. Especially during an earnings season when security prices have fallen 30–50% at times based on a single set of earnings guidance, the reality of public markets price movements is striking.
Perhaps the best solution is a fusion of these two. Maybe Buffett’s long-term (evergreen) structure (Berkshire Hathaway) and investment philosophy is ultimately a way to bridge these issues. If more investors had this structure it would allow for longer-term horizons in the public markets while also allowing private market investors to “hold forever” without the requirement to sell that private fund structures currently mandate.
Maybe some kind of government run pension fund that has personal allocations to individuals through their 401k could accomplish a similar thing. If this capital source was relatively permanent (meaning, the pool remains relatively constant as contributions offset redemptions) perhaps it could also be run with a long time horizon in mind.
These changes in structure seem to be the best candidate to change the duration of capital necessary to truly change the mindset of public markets investors to have them be more aligned with the reality of value creation.
Perhaps these vehicles could be managed similarly to sophisticated endowments like Yale which combine public and private investing in a way that enables participation across markets and companies.
Unfortunately, in the mean time there is no easy answer. The good news is innovators are thinking about these challenges everyday, and in the long run, the way we invest and manage money will be far different (and hopefully better!) than the way it works today.