Private Equity vs Public Equity

* Private Equity and Public equity ownership represent very different packages of costs and benefits. * In the current environment raising money private makes sense because valuations appear to be quite high. * The incentive to invest privately is that early stage investors are allowed to cash out of their investments. This forces investors to need a liquidity event. * A strategic acquisition rather than an IPO may be the preferred exit opportunity. * Private markets on the other hand, may benefit here since going public is a burden. * ETFs, Mutual Funds, and other retail investment vehicles now invest into these private transactions. This gives the retail investor a way to invest in private markets. This will make going public a sub optimal exit strategy.

Why bother to do an IPO?

* If a company can stay private and find money and liquidity why do an IPO? IPOs have the following problems for company founders. * 1) Six month lockup and continual restriction on stock sales. 2) Expensive and burdensome reporting regulations. 3) Having to manage your company quarter to quarter and worry endlessly about meeting analyst expectations rather than concentrate on strategic milestones.

Cost of an IPO

* IPOs can be a very long and expensive process. Obtaining SEC approval is a 6-9 month process. * Costs such as legal counsel, auditors, underwriters, and registration fees, all add up fast. These costs on average are $13 million for a company raising $100-$200million (PriceWater House Cooper). * Besides the ongoing costs of remaining a public company, consider that a new public company must; build a reporting infrastructure that’s complies with SEC, Staff for functions like SEC reporting, investor relations, and accounting, and publish annual and quarterly financials. * These costs are known to total $3-4million a year.

Public Market Scrutiny

* Public companies are under the watchful eye of research analysts and institutional investors. This adds a ton of pressure to CEOs. * Research analyst focuses on short term metrics for earnings, which makes longer term investing more difficult. * Intuitional players like, hedge funds, high frequency traders, and short sellers, are battling CEOs in the markets over the share price while trying to manage a growing business.

Past 10 years private equity beating public markets

* Private Equity returns continue to outpace stocks over the long term. * As of March, returns of Private Equity net of fees beat the S&P 500 by 6.6% over the last 10 years. * Private Equity has returned 14% in the past 10 years, while the S&P 500 returned 7.4% in the last 10 years.

Staying Private Longer

* Average age to IPO was 11 years in 2014, compared with 4 years in 2004. * According to National Venture Capital Association, the median time to IPO exit since first funding for venture-backed companies was 3.1 years in 2000, and 7.4 years in 2013. * There are 49 US Venture Capital backed companies valued at $1 billion or more, whereas in 2000, only 10 such companies were private. * 35 U.S. companies have raised venture capital at Unicorn valuations in 2014. That is more than all of 2012 and 2013. We can see the trend continuing. * In the 1990s, it was common for companies to go public at valuations of just a few hundred million dollars, today tech startup are choosing to wait longer in private, before going public at multi-billion dollar valuations. * Tech companies tend to stay private longer than most other industries. Amazon went public in 1997, just 2 years after its first round of financing, at a market cap of $440 million. * Compare that with-on demand service Uber Technologies, which remains private close to 6 years after raising $1.2 billion at a $40 billion valuation. * Regulations have also made it much harder to go public and easier to stay private.

Private company’s high valuations

* Most private companies would rather stay private as investments tend to do better for themselves and investors. * Going public with such a high valuation can be a huge issue for investors. * For some tech companies that tested the water and went public, their market performance was diminished. * Cloud storage comp Box, went public January, at pre IPO valuation of $2.4 billion. By time it went public, its valuation dropped more than $700 million to $1.7 billion. * Twitter is another example. Current value of its shares outstanding is $21 billion, about 20% lower than its immediate post IPO market cap in 2013. * This trend is driven by companies staying private longer and raising mega rounds in private markets.

First 10 years from inception

* Between 1971 and 1997 we have seen 4 major tech giants go public; Intel, Apple, Yahoo, and Amazon. * They stood private average 1-3 years, and then went public to the markets. * They all saw major growth phase’s years after their IPO date. * Between 2011 and 2013, we have seen 4 new major tech giants go public; LinkedIn, Groupon, Zynga, and Facebook. They all stood private between 3-8 years. * The results of the IPOs weren’t like they use to be. Valuations of the companies have shrunk and share prices have tumbled.
It shows how most companies are benefiting by not exiting into the public market.