Equity markets going private

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John Bird
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Equity markets going private

Post by John Bird »

The recent Economist article on the decline of the public company makes me wonder, are we pressing our noses against the glass as the equity markets move into a private sphere, unavailable to us retail invetors? Should we tilt away from equities into markets where we can still be full participants, cash, bonds, foreign exchange, perhaps real estate, and commodities?
Beagler
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Re: Equity markets going private

Post by Beagler »

VG's TSM fund holds fewer stocks than ever (just 3284 at last count https://personal.vanguard.com/us/funds/ ... hist=tab:2 ) Those seeking "broad diversification" are getting less diversification than ever. The fact that the stock market accounts for only roughly half of all domestic economic activity means that inverting in "the stock market" (via TSM) is a far cry from investing in "the U.S. economy."
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.
richard
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Re: Equity markets going private

Post by richard »

John Bird wrote:The recent Economist article on the decline of the public company makes me wonder, are we pressing our noses against the glass as the equity markets move into a private sphere, unavailable to us retail invetors? Should we tilt away from equities into markets where we can still be full participants, cash, bonds, foreign exchange, perhaps real estate, and commodities?
Why would we tilt away from equities as a result of some percentage of the equity markets moving into the private sphere?
yobria
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Re: Equity markets going private

Post by yobria »

Thanks, interesting article. Looking at the first graph, while there are fewer individual public companies, total stock market cap is still a lot higher than 1990s levels. So for example instead of owning 10 individually incorporated hot dog stands, you have one corp which owns all 10. As a passive investor, that's fine with me.

The other graphs imply a trend away from IPOs and toward private placements. It's a little soon to say how lasting this trend will be, and the graphs were misleading in showing only counts, not $ volume. Private equity is still only a small percent of public equity. I'm not sure it bothers me regardless - I'd rather have fewer, higher quality IPOs than a large number of junk companies, as went public during the dot com boom. It is something to keep an eye on over the next few decades though.
ilmartello
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Re: Equity markets going private

Post by ilmartello »

I don't find it worrisome that fraudulent companies can no longer go public and defraud the investing public.
zotty
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Re: Equity markets going private

Post by zotty »

I am cheering this change, in a contrarian sort of way.

I am more bothered more by the functioning of our public markets than by the participation rate. Long term strategic thinking has been replaced by quarterly earnings serfdom. My hope is that equities get less and less interesting, and eventually companies start thinking more like investors, long term.

Pick a list of stocks and watch them on the day after their quarterly release. It's hard to imagine how anyone can stomach that kind of volatility. The whole thing doesn't make any sense.
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Re: Equity markets going private

Post by nisiprius »

Only 3,284 stocks? Why, that's less than seventy pounds of stock certificates. Why in the old days I used to walk to my broker's carrying more stock certificates than that. In the snow. Uphill both ways.

Rebalancing wasn't for sissies then.

And look at what's in it. Where's the diversification in owning both the fossil fuel company Amerada Hess and Fossil, Inc.? Fossils are fossils. Great Lakes Dredge and Dock Company, Great Plains Energy, Great Wolf Resorts, great companies to be sure, but how much difference is there between them? AMR Corp, AON Corp, CSX Corp. CTS Corp, FMC Corp, LKQ Corp, LSI Corp, PHH Corp, SPX Corp, UGI Corp, VSE Corp... sound pretty much alike to me.

When you get right down to it, how much difference is there, really, between Microsoft and Intuitive Surgical, Inc.? Both of them use money, both of them make products. Why would you want your entire portfolio to be clogged up with companies all doing the same thing, using money to make products? What happens if you have a bad year for products?

Of course Bill McNabb talks about "a balanced investment program with diversified exposure to the three primary asset classes: stocks, bonds and cash;" look at what's in Vanguard's mutual funds--stocks, bonds, and cash!

No, it's time to quit putting our noses at the glass and yearning for the warm glow and appetizing smell of the goodies forever beyond our reach, and consider non-traditional investments, such as undersea real estate, frontier market nanocaps, collectible Beanie babies, and lottery tickets.
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larryswedroe
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Re: Equity markets going private

Post by larryswedroe »

FWIW, what has happened to great degree is that small stocks are no longer going public, staying private much longer--and of course you had the blow up of the dotcoms which lead to disappearance of many that never should have gone public
Now with Sarbox's extra costs and other issues related to going/being public companies are often waiting till they are much bigger. Recently was told that if want good reception should have $100mm in EBIT, several times more than what it used to be (unless of course you're a social networking company (:-))

One implication is that might be harder to capture a small premium because the really small stocks no longer public-and thus harder to stay small for long too,

Best wishes
Larry
xerty24
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Re: Equity markets going private

Post by xerty24 »

I agree this is a trend that doesn't work in favor of either indexers or small investors. Institutional investors can buy into private equity funds that cherry pick the top public prospects to go private and extract those returns from the index portfolio. Remember stock returns are very skewed, in that the bottom of returns 70% or so of companies are losers and only the top 30% are positive. The loss of diversification isn't too bad (3000 vs 5000 companies), but all those overpaid PE managers are busy trying to find only the best companies to take private... if they pull out a few too many out of top 30%, the public average could suffer.

On the small end, insiders with decent ownership can buy back their companies with little oversight or outside approval, leaving value investors cashed out of a good company at a price that might not be fair. If there's a SCV premium, why would the insiders want that to go to public investors when it could go to themselves?
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Snowjob
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Re: Equity markets going private

Post by Snowjob »

Another an arguement for higher allocations to PE and Reits I suppose.
Valuethinker
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Re: Equity markets going private

Post by Valuethinker »

John Bird wrote:The recent Economist article on the decline of the public company makes me wonder, are we pressing our noses against the glass as the equity markets move into a private sphere, unavailable to us retail invetors?
The prices of public securities still represent the economic value of transactions with private entities. So it's not as simple as we are not exposed.
Should we tilt away from equities into markets where we can still be full participants, cash, bonds, foreign exchange, perhaps real estate, and commodities?
No. Definitely not.

In fact all this talk of 'alternatives' at investment conferences convinces me of the value of common garden variety quoted equities.

You can buy US blue chips on PE 13 times. Or 15 times at least. Whilst that might not be 'cheap' by historical standards, contrast to say 2000, it's certainly 'value' relative to other asset classes.
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Re: Equity markets going private

Post by Valuethinker »

yobria wrote:Thanks, interesting article. Looking at the first graph, while there are fewer individual public companies, total stock market cap is still a lot higher than 1990s levels. So for example instead of owning 10 individually incorporated hot dog stands, you have one corp which owns all 10. As a passive investor, that's fine with me.

The other graphs imply a trend away from IPOs and toward private placements. It's a little soon to say how lasting this trend will be, and the graphs were misleading in showing only counts, not $ volume. Private equity is still only a small percent of public equity. I'm not sure it bothers me regardless - I'd rather have fewer, higher quality IPOs than a large number of junk companies, as went public during the dot com boom. It is something to keep an eye on over the next few decades though.
the junk bond market has, to an extent, become a substitute for the IPO market.

Small cap companies that have cash flows, borrow via junk bonds rather than via IPOs. No point listing unless you are big, or a growth stock.

A lot of junk is issued by private equity backed LBOs. It has quasi-equity status in those capital structures.
Valuethinker
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Re: Equity markets going private

Post by Valuethinker »

Beagler wrote:VG's TSM fund holds fewer stocks than ever (just 3284 at last count https://personal.vanguard.com/us/funds/ ... hist=tab:2 ) Those seeking "broad diversification" are getting less diversification than ever. The fact that the stock market accounts for only roughly half of all domestic economic activity means that inverting in "the stock market" (via TSM) is a far cry from investing in "the U.S. economy."
you want a play on 'the US economy'?

Then Saudi Aramco would be one of the biggest. Alas totally state owned. But then BAE and General Dynamics are plays on the Saudi government/ defence market.

'roughly half' is a huge percentage compared to say the Canadian index and Canada's economy. And you've got, for example, a lot of tech and healthcare there. Plus of course banking and insurance.

US REIT sector is pretty big and liquid by world standards, too.
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Re: Equity markets going private

Post by abuss368 »

Beagler wrote:VG's TSM fund holds fewer stocks than ever (just 3284 at last count https://personal.vanguard.com/us/funds/ ... hist=tab:2 ) Those seeking "broad diversification" are getting less diversification than ever. The fact that the stock market accounts for only roughly half of all domestic economic activity means that inverting in "the stock market" (via TSM) is a far cry from investing in "the U.S. economy."

Hi Beagler,

Do you know of a better alternative?
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staythecourse
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Re: Equity markets going private

Post by staythecourse »

larryswedroe wrote:FWIW, what has happened to great degree is that small stocks are no longer going public, staying private much longer--and of course you had the blow up of the dotcoms which lead to disappearance of many that never should have gone public
Now with Sarbox's extra costs and other issues related to going/being public companies are often waiting till they are much bigger. Recently was told that if want good reception should have $100mm in EBIT, several times more than what it used to be (unless of course you're a social networking company (:-))

One implication is that might be harder to capture a small premium because the really small stocks no longer public-and thus harder to stay small for long too,

Best wishes
Larry

Good points. However, when the economy starts chugging along again you can trust that those small companies will be more then happy to start listing for public trading to generate the big bucks for the owners and the venture capitalists funding them.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
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