Why fewer companies are going public, why it's a problem

[eclecticvalue]

Very good piece from the CollabFund. They have writing great stuff recently. http://www.collaborativefund.com/uploads/Collab%20Bad%20Side%20of%20a%20Good%20Idea4.pdf

[Travis Wiedower]

Great read. The entire article I was thinking about the Long-Term Stock Exchange... then it all made sense at the end ;D

 

I have talked to a few people who want to take their company public in the future and in each case I advised them not to. Running a public company sounds awful to me.

[premfan]

Nice data.  Less Supply is good for the retail player. I rather no company ever go public again. Us public guys will bid the earners to the moon. I dont see demand as a collective going away. We want passive income and its implied laziness.  As long as humans are lazy we will demand passive income and play the public market game. 

[Cardboard]

I am surprised that the author did not address the large number of takeovers which are largely driven by corporate managers wanting to expand the empire to earn larger pay and more pressure from active asset managers. I would think that they have gone up overtime but, I have no data to back that up.

 

Cardboard

[dcollon]

Cardboard,

 

Here is some data on M&A for you. 

 

https://imaa-institute.org/mergers-and-acquisitions-statistics/

 

 

[Guest longinvestor]

Excellent! Thanks for posting.

 

Clearly there are winners and losers from the increasing public capital. The real losers are the 50% of new entrants into stock ownership through 401k's/IRA's. All that money coming in over the past 30 years is the honey pot that the market players steal from, with impunity. You can call it CEO pay, incentives, fees, trading costs, legal costs... all activity with one goal, to steal.   

[constructive]

Over the last 15 years, average venture capital returns have been below public market returns. So public market investors are not actually missing out as this piece suggests, in fact they're benefiting from the trend toward fewer public companies.

[Philip Morris IV]

Over the last 15 years, average venture capital returns have been below public market returns. So public market investors are not actually missing out as this piece suggests, in fact they're benefiting from the trend toward fewer public companies.

 

I hear you, but don't those VC returns include a majority of companies that would never reach the point of going public anyway?  The report more or less presumes that the unicorns would go public around the time their success was fairly certain, adding to public returns thereafter.

 

On another note, the report didn't touch on the effect of valuation which is worth exploring.  Given that many of the unicorns aren't GAAP-profitable, the same weighted impact these companies would have on market returns would appear to put downward pressure on market earnings.  The return would be greater but the broad valuation would also move higher.

[LC]

Lot of interesting factors here. Availability of capital is a big one. Also I think more venture stage companies are highly scalable and require less capital to fund, hence less reliance on public $

[Uccmal]

Good article. 

 

Of course, had 1 trillion not been invested in the FANGs (if they were kept private), it would be available to go elsewhere. 

 

As to Reid Hastings, FB, or Google. They could stop making quarterly conference calls, and giving earnings projections, and instead focus on running their companies the best way they can.  It's not like all that noise is doing any more than causing stocks to gyrate unnecessarily.  Its not like alot of these companies need to kowtow to the markets to raise money.  These companies are being run by their founders for the long term much like Virgin, Koch Industries, Ikea, or Brk subs are run. 

 

Buffett has the right formula.  No conference calls.  Wait for my annual letter and AGM.  And if you dont like my method then sell the stock.  Of course the problem comes when you need to issue equity (ffh - 2000s) or raise funds in the debt markets.  Then you are beholden to the rule makers.  Or if your company is crappy, and you constantly need to jawbone the stock up. 

 

 

[Cardboard]

Amazon is a great example Al. Bezos never shows up at conference calls. They also don't seem to care too much about showing profits or meeting some target and the market cap is gigantic.

 

Cardboard

[Uccmal]

Amazon is a great example Al. Bezos never shows up at conference calls. They also don't seem to care too much about showing profits or meeting some target and the market cap is gigantic.

 

Cardboard

 

Indeed.  Christmas time makes me think of Amazon alot as they steal more and more marketshare and mind share. 

[thekiefs]

Over the last 15 years, average venture capital returns have been below public market returns.

 

Do you have a source for this? I was trying to find accurate numbers on average VC returns over the last 15 years but couldn't find anything for the average returns. I could only find returns for the outliers like Sequoia and AA, with numbers all over the place depending on how you mark their returns (http://a16z.com/2016/09/01/marks-offmark/).

[Gardener]

Over the last 15 years, average venture capital returns have been below public market returns.

 

Do you have a source for this? I was trying to find accurate numbers on average VC returns over the last 15 years but couldn't find anything for the average returns. I could only find returns for the outliers like Sequoia and AA, with numbers all over the place depending on how you mark their returns (http://a16z.com/2016/09/01/marks-offmark/).

 

From The Economist, 22th of October:

"This July, in an update of a previous study*, business-school professors at the Universities of Chicago, Oxford and Virginia found that, although in recent years buy-out funds had not done much better than stockmarket averages, those raised between 1984 and 2005 had outperformed the S&P 500, or its equivalent benchmarks in Europe, by three to four percentage points annually after fees. That is a lot. Ludovic Phalippou, also of Oxford, is more sceptical; he argues that when you control for the size and type of asset the funds invest in, their long-term results have never looked better than market-tracking indices. That said, getting the same size and type of assets by other means is not easy.

 

The average return, disputed as it may be, does not tell the whole story. Studies find some evidence that private-equity managers who do well with one fund have been able to replicate their success (though again the effect seems to have decreased in the past decade). The biggest inducement to invest may simply be a lack of alternatives. Private equity’s current appeal rests not on whether it can repeat the absolute returns achieved in the past (which for the big firms were often said to be in excess of 20% annually) but on whether it has a plausible chance of doing better than today’s lacklustre alternatives. This is a particular issue for pension funds, which often need to earn 7% or 8% to meet their obligations."

 

And the study to which they refer in case anybody is interested:

http://www.investmentcouncil.org/app/uploads/ssrn-id2597259.pdf

[Travis Wiedower]

This article enticed me to read and think about VCs quite a bit the past few days. I jotted down some rambling thoughts you guys might enjoy (I could be totally wrong, who knows):

 

"The best VC funds have a moat similar to top basketball programs. UK, Duke, Kansas, and North Carolina are always near the top. You get the best coach, you get good players, you get results, you attract more talent and it's a flywheel effect. Every once in a while a team like Butler breaks out, but the majority of the best teams every year are the same. Similar flywheel effect with VCs--they have great investors that find great investments, generate high returns, attract more of the top potential companies, and repeat. Very hard for a new VC fund to become a big player (though it has happened a few times). In general, you hear about the same VC funds generating great returns.

 

Because of this, even if VC returns as a whole are above average, the majority of those returns are in the top funds and the rest are underperforming. Could be a VC bubble that results in more small companies going public."

[racemize]

I thought this article from 2014 was really interesting (20 years of VC investing):

 

https://www.dropbox.com/s/53prwfvncidph2k/20%20years%20of%20VC%20investing.pdf?dl=0

[Travis Wiedower]

Joel,

 

Only read the executive summary but that's really interesting. Sounds eerily similar to hedge funds!

[thekiefs]

Over the last 15 years, average venture capital returns have been below public market returns.

 

Do you have a source for this? I was trying to find accurate numbers on average VC returns over the last 15 years but couldn't find anything for the average returns. I could only find returns for the outliers like Sequoia and AA, with numbers all over the place depending on how you mark their returns (http://a16z.com/2016/09/01/marks-offmark/).

 

From The Economist, 22th of October:

"This July, in an update of a previous study*, business-school professors at the Universities of Chicago, Oxford and Virginia found that, although in recent years buy-out funds had not done much better than stockmarket averages, those raised between 1984 and 2005 had outperformed the S&P 500, or its equivalent benchmarks in Europe, by three to four percentage points annually after fees. That is a lot. Ludovic Phalippou, also of Oxford, is more sceptical; he argues that when you control for the size and type of asset the funds invest in, their long-term results have never looked better than market-tracking indices. That said, getting the same size and type of assets by other means is not easy.

 

The average return, disputed as it may be, does not tell the whole story. Studies find some evidence that private-equity managers who do well with one fund have been able to replicate their success (though again the effect seems to have decreased in the past decade). The biggest inducement to invest may simply be a lack of alternatives. Private equity’s current appeal rests not on whether it can repeat the absolute returns achieved in the past (which for the big firms were often said to be in excess of 20% annually) but on whether it has a plausible chance of doing better than today’s lacklustre alternatives. This is a particular issue for pension funds, which often need to earn 7% or 8% to meet their obligations."

 

And the study to which they refer in case anybody is interested:

http://www.investmentcouncil.org/app/uploads/ssrn-id2597259.pdf

 

Even with the higher-end performance estimate, a 3 to 4 percentage point S&P beat is low in comparison to many value funds that adhere to the original Buffett/Graham philosophy--even pales to returns from "amateur" members on this board. Actually, shoulda just bought BRK in 1990. For some reason I was thinking 20%+ CAGR for many VC firms. At least, it's certainly not the average. That might be the elite ones that like to squawk about unrealized returns (the whole marking unrealized gains issue).

 

I also wonder what their definition of "buyout" funds is, or at least what their breakout by type is. Tech-focused ones might perform better than funds similar to 3G. They don't break it out by sector or fund type.

 

The money quote in the abstract I think nails it "Post-2005 vintage year returns have been roughly equal to those of public markets."

 

Thank you for sourcing this.