Private markets are the new public markets I keep banging on the theme that private markets are the new public markets, so I was pleased to see that the Financial Times has a "Big Read" about, uh, that: Investors have rushed to back fast-growing private companies, even though they may be less profitable and more difficult to sell than public competitors. This has distorted global capital markets and fomented fears of a bubble in private markets that may spill over into the public realm. … "Companies are staying private for longer and getting funded longer," says Jim Cooney, head of equity capital markets for the Americas at Bank of America. In 2013, a quarter of the equity raised from new shares came from the private markets, according to the bank's data. Today that amount stands at 48 per cent — a trajectory set to continue, Mr Cooney says. … By delaying an IPO, businesses ignore profitability and "create a culture of growth at any expense", says Larry Fink, chief executive of BlackRock, the world's largest fund manager. "That's why so many recent IPOs haven't done well. Public markets force more financial discipline," Mr Fink says. "Private companies are waiting too long to go public." This is somewhat funny coming from Larry Fink, who in other contexts spends a lot of time complaining that public markets are too short-term-oriented. "Financial discipline" is just another way of saying "short-termism"! The simple model is: - Corporate managers want to be left alone to do whatever they want.
- They always say, and in most cases honestly believe, that if they are left alone to do whatever they want, the long-term result will be increased value for shareholders.
- Sometimes they are wrong.
- Shareholders cannot observe the long term until it is too late.
- But they can observe whether profit goes up or down each quarter.
- If it keeps going down, that's a bad sign for the long run—not a perfectly reliable sign, but the only unbiased sign that the shareholders get.
- So shareholders tend to like managers who make profits go up and dislike ones who make it go down.
This looks like "financial discipline" if you compare it to "shareholders let managers keep losing money forever," but it looks like "short-termism" if you compare it to "shareholders let managers lose money for a while in order to increase long-term value." The point is that those things mostly look the same to public shareholders; managers who lose money forever will keep saying that they'll increase value in the long run. One possibility is that private shareholders have better tools for distinguishing those things than public shareholders do. Public shareholders invest in lots of companies, are often pretty passive, and tend to get their information from public filings and press releases; short-term results are the most salient way for them to evaluate long-term potential. Private shareholders (stereotypically) invest larger chunks in fewer companies, spend time meeting the managers, serve on the board of directors, and tend to have more direct involvement with the company and the management teams; they can look founders in the eye and decide for themselves if the managers will create long-term value, rather than just relying on accounting statements to see if they're making money now. Long-term bets on visionary projects are a genuine source of value that private markets can create and public markets can't. This is clearly a view held by some number of venture capitalists and private-equity investors, and some number of private-company CEOs who dread going public (and public-company CEOs who wish they were private), but notice that it is not quite Larry Fink's view. Another possibility is that all the board seats and face-to-face contact are mostly worthless and that private shareholders think they are better at long-term evaluations than public shareholders, but they are wrong. Consider WeWork, etc. A third possibility is that stereotypical old-style private investors, with their board seats and long track records of evaluating founders, are good at making long-term bets on money-losing companies, but as private markets get so much bigger—"The global market for private equity, including venture capital, has swelled fivefold in the past two decades to $4.2tn," says the FT—they become increasingly dominated by more public-style investors who don't have that discernment. "We have invested in a private company, and private companies are supposed to lose money, so let's just go with it I guess," the mutual funds who buy later rounds in big tech unicorns might think, unable to distinguish between good and bad money-losing the way traditional venture capitalists would. Public markets force more financial discipline, but public investors in private markets don't. Maybe public markets are good at one thing (financial discipline), and private markets are good at another thing (long-term bets), but "private markets are the new public markets" aren't good at either. Jho Low So the basic deal is that a guy named Jho Low allegedly worked with the government of Malaysia to set up a state development fund called 1MDB, helped raise billions of dollars for that fund, and then stole most of it. He kept a lot of the money for himself, but also allegedly funneled a lot of it to Malaysian and Middle Eastern political figures, Goldman Sachs Group Inc. bankers, and others who were in on the scheme. Eventually the 1MDB scheme was discovered and Low made himself scarce. He had put about $1 billion of the stolen money into a comical assortment of assets—New York and California real estate, a super-yacht, the "Wolf of Wall Street" movie—that he couldn't take with him, and that U.S. prosecutors could seize. So they did, while also charging Low with crimes. (Why is stealing money from a Malaysian development fund a crime in the U.S.? Ehh everything is a crime in the U.S.) This was a bad situation for Low in a number of ways. He had to lay low to avoid prosecution in the U.S. and Malaysia. Also U.S. prosecutors had his stuff, so he couldn't use it to, like, be rich. Also he couldn't use it to pay his lawyers. It was not ideal for U.S. prosecutors either. They couldn't prosecute Low, because he was not around. Also they couldn't do anything with his stuff either, because it was stuck in contested court forfeiture proceedings. Yesterday a settlement was reached in which the U.S. authorities got to keep almost all of the assets they had seized, but Chris Christie got to keep $15 million. (No, I kid, "but prosecutors did agree to allow some of the seized assets to be used for $15 million in fees billed by Mr. Low's legal team," which includes Christie and others.) Somehow it seems appropriate that when Low's grift was caught he had to give up most of his money, but a U.S. political figure was allowed to keep some of it. You can't just give back all of the money; some of it has to go to Chris Christie. Presumably the U.S. prosecutors will give much of the money back to the government of Malaysia, which was the victim (and also kind of the accomplice!) of Low's theft, but maybe they'll get to keep some too. The basic lesson of all of this, both the crime and the punishment, is that massive international politicized capital flows can be leaky. This doesn't settle the criminal case. Low is still allowed to hide, and U.S. (and Malaysian) prosecutors are still allowed to look for him. (I mean technically he is not allowed to hide, but he's hiding anyway, and the forfeiture settlement doesn't change that.) The forfeiture settlement also is not technically an admission by Low that he is guilty; it is just an acknowledgment of the fact that (1) the authorities currently have the money and (2) lol he's not gonna show up to claim it. So he might as well let them have it free and clear in exchange for a $15 million payment for his legal team. Or I suppose that is his thinking. "I suppose that is his legal team's thinking" would be a way to put it. He's not in the room, you know? The lawyers would surely prefer to have the $15 million. But honestly it is a perfectly fair result for their client, who really was not getting that billion dollars back under any plausible circumstances. Might as well get something in exchange for giving it up. "The two sides negotiated a deal to avoid the legal costs and uncertainty of extended litigation." All of this is perfectly logical and sensible, in the context of the system in which we operate, and yet it is also kind of absurd. How's Masayoshi Son doing? He's had better days: The hall was nearly empty when Masayoshi Son, the chief executive officer of SoftBank Group Corp., took the stage at Saudi Arabia's biggest and glitziest business forum. Son was one of four speakers on a panel on how investors and entrepreneurs can advance the movement toward deep tech. Yet, the Japanese billionaire spoke briefly -- mainly about artificial intelligence and entrepreneurship -- and didn't mention anything about Saudi Arabia's commitment to his second $100 billion Vision Fund. … Son's poorly attended panel underscores to some extent the diminished appeal of his Vision Fund idea, which less than two years ago emerged as one of the kingdom's boldest and certainly most expensive bets to help diversify its economy. As the Vision Fund copes with the controversy around co-working company WeWork, prime backers Saudi Arabia and the United Arab Emirates remain undecided as to whether to invest in Vision Fund 2. Honestly if I had just written off a lot of sovereign money controlled by a guy who reportedly orders the torture and murder of his enemies, I would discover a last-minute scheduling conflict that prevented me from flying to that guy's investment conference! That's just me. But as it happens, Son just had to ... speak on a sparsely attended panel. I will say that Masayoshi Son seems to be a fun and insightful speaker, and I am not sure that you should rate his insights any lower now after he lost a bajillion dollars on WeWork than you would have a year ago. His thing has always been making huge wild bets that seem crazy to everyone else, and he is rich and famous because a certain number of those bets have worked out really well. But of course some of them will be disasters. Son's story so far had been one of early success, followed by near-total failure, followed by glorious redemption. It would be weird if that was the end of the story and it was all good news from now on. You have to expect him to be a cyclical kind of guy. Maybe he's more thoughtful after the losses? By the way, you know who I bet could pack a room, in Saudi Arabia or anywhere else people get together to talk about tech and entrepreneurship? Adam Neumann! Man, that guy has figured a thing out. There's a lot you can learn from him. Elsewhere in endless WeWork news, "WeWork said it received an early payment of $1.5 billion from SoftBank Group Corp., as the co-working company was weeks away from running out of money," congrats everyone. And this is odd: Fidelity Investments cut the value of Contrafund's stake in WeWork Companies Inc by 35% in September amid turmoil surrounding the office-sharing startup's failed initial public offering (IPO). Fidelity disclosed on Wednesday that Contrafund (FCNTX.O) held $193.1 million in Series E WeWork shares at the end of September, down from $295.1 million the previous month. Bloomberg tells me that Contrafund owns 4,464,465 WeWork Series E shares at a carrying value of $193,059,548, or $35.33 per share, which is rather more than the $19.19 price per share in SoftBank's bailout tender offer. I guess the bailout happened after the September date for that valuation. And Matt Zeitlin gives WeWork the n+1 treatment: If WeWork is what happens when capital is in the hands of resource-rich autocracies, futurist telecom executives, and cash-rich mature companies, perhaps it can serve as a launching point for thinking about how capital would behave differently under the aegis of democratic control. The "We" in WeWork was the customers working in the offices, living in the apartment buildings, and learning in the schools—not the people determining where any of this was built, and in what quantity. If money is indeed piling up on the balance sheets of large corporations and in the coffers of the Saudi Treasury as proceeds for burning the planet—and if that money is ultimately at the disposal of a farseeing Japanese cell phone mogul—one might ask if it could be managed differently if it were in the hands of, well, "We," instead of flooded into commercial real estate for the purpose of acclimatizing office workers to ever smaller workspaces. I have to say that while WeWork is a high-profile and hilarious failure of financial capitalism, it is not a particularly serious one. Nobody lost their life savings because of a mad rush to make levered retail bets on WeWork or whatever; people will lose jobs but many of them are well-educated tech workers in big markets. Basically what happened is that for a few years Saudi oil money was funneled into buying beer for workers at tech startups. It was a misallocation of resources, yes, but it could have been a lot worse. Rounding error This is old news, but it was new to me, and maybe to you: In the early 1980s, a new stock index at the Vancouver Stock Exchange tracked a steady and mysterious loss in value. An investigation revealed that floor() was being used instead of round(), with the lost fractions of cents accumulating to almost a 50 percent loss of value in 22 months. The programming mistake was finally fixed; the index closed around 500 on a Friday and reopened the following Monday at over 1,000, the lost value restored. I have questions that I am not going to answer by Googling! I hope someone became a billionaire by arbing index futures against the constituents, you know? Things happen Cash-Market Volatility Adds to Worries Facing Libor Replacement. Fiat Chrysler and Peugeot Owner PSA Agree to Merge. Plunging Peugeot Shows Who the Buyer Is in Merger of Equals. Weird stuff at Medley Capital. 'Magic Internet Money' May Be Too Volatile to Attain Gold Status. Lyft Focuses on Profitability as Cash-Burning Companies Lose Luster. Cohen's Point 72 backs fitness start-up to work out. "Unemployed individuals who do not suffer from material deprivation may not experience a life satisfaction decrease and may even experience a life satisfaction increase." Airbnb scam. Conlangers. "Arms / Ammunition Dealing." 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