what it is

“Equity” means ownership interest.

“Private” equity is a subset of equity that consists of the shares of stock of companies that are not traded on a public equity exchange like NYSE or NASDAQ. This blog, for example, is a product of LD Capital (not to be confused with the Singaporean crypto firm), the US-registered company, all of whose stock I own.

A key advantage, or at least, characteristic, of private equity is that companies aren’t subject to the rigorous legal disclosure requirements that publicly-traded companies are–like comprehensive information about business structure and earnings results through publicly-available audited financials, or prompt disclosure of material changes in the company, or limits on/disclosure of trading in the stock by company officials. To my mind, this makes them riskier.

For an outside observer like me, there are lots of flavors of private equity:

–there were the corporate raiders of the 1980s, whose positive social function (if any) was to force modernization of companies who were unable to compete against foreign competition with newer, rebuilt post-WWII, plant and equipment

–there are consolidators, stringing together mom-and-pop companies, either for resale or to combine into one corporate giant

–there are venture capitalists, hoping to grow promising startups onto behemoths.

What ties them all together is that they don’t fund themselves in the public equity market.

Starting in the 1980s, investors with very long investment horizons, and no immediate need for a considerable part of their assets, began to acquire states in privately-held companies. The most important of these was Yale, acting on the theories and advice of that university’s economics department. Eventually other universities, and then sponsors of defined benefit pension plans followed. The general idea was to obtain the superior returns that, in theory at least, come along as payment for accepting illiquidity.

For the early entrants at least, this approach has provided superior returns vs. investing in publicly-traded stocks and bonds.

tradeoffs, i.e., risks

The tradeoffs, of course, are two, I think:

–the lack of liquidity, and

–confidence in the completeness and accuracy of the financials, given that the big stick of the SEC is not in play.

sellers emerging?

Two (related?) factors are beginning to disturb the private equity market, as I see it:

–there’s talk of offering private equity investments to you and me, and in relatively small amounts, at least vs. typical PE clients. This suggests that the big-ticket pension plan and endowment market is saturated. Otherwise, why take on the added expense of selling to retail? Of course, it may also be that the big PE holders want to reduce their PE exposure–rather than just not buy any more–and this is the best way to do so. If so, same issue, but potentially bigger problem

–Trump’s attack on private universities, which are apparently beginning to take the sensible step of looking to offload less liquid assets in order to pay legal defense fees.

If there is a significant shift underway in the pension and endowment market, this is arguably good for the public markets, particularly for public equity. Hard to know at this point how big any uplift may eventually be.