Why Everyone Needs Private Investments Today

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By Adam Sharp

When Amazon went public in 1997, the company was just two years old.

At that time, e-commerce was only getting started, and Amazon had done just $16 million in sales the quarter before its IPO.

But some investors had already seen the light. By the time trading closed, shares had risen from $18 to $23.50.

Amazon ended that first day of trading valued at $560 million.

In the 20 years since, those Amazon shares have increased in value by more than a whopping 50,000%.

It’s one of the great stock stories of all time.

And there’s almost no chance of similar returns happening in today’s stock market.

Allow me to explain…
Contrast With Today
Amazon was one of the last “hypergrowth” companies to go public early. It just doesn’t happen these days.

It’s been this way since the tech bubble burst and Sarbanes-Oxley was put in place (2002).

This chart from Grant Thornton shows the grisly outcome. There are far fewer IPOs, especially small ones…

Today, “hypergrowth” companies try to stay private as long as possible.

Take Airbnb, for example. The powerhouse valued at $31 billion just raised $1 billion from private investors, with no plans to IPO soon.

Uber is another prime example. It’s valued at $68 billion, with net revenue of around $5.5 billion last year, and we still don’t know when Uber’s going public…

Why should it? Uber just raised a whopping $5 billion round (the largest private round ever) from private investors at a high price multiple.

So why would it go through the hassle of an IPO any sooner than absolutely necessary – spending a year preparing and giving up a nice chunk of shares to investment bankers?

It wouldn’t.

So what we see today is that, by the time companies IPO, they naturally have far less growth potential. They’re later in their growth curves.

Look at Facebook (Nasdaq: FB). For as well as that stock has done, imagine if it would have IPO’d as early as Amazon did, instead of when it was already a $74 billion company. That would have made a world of difference for public market investors.

Because once a company reaches a certain size, investment returns are automatically capped by the sheer mass of the thing. There will be only so many $300 billion to $600 billion companies in the world at any given time, after all.

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The Solution(s)
Sadly, this is the new normal in stocks. The best, fastest-growing companies are simply not available to the vast majority of investors during their peak growth phases. That ship has sailed.

As the world adjusts to this new reality, mutual fund giants are being forced to go private to find growth.

However, most mutual funds hold no more than 1% of their assets in private companies. And unless you’re an accredited investor, it’s going to be difficult to get sufficient exposure through companies that, by all rights, should already be public – but remain private.

On the bright side of things, however, there is now a way for all investors to get exposure to early-stage private companies: equity crowdfunding.

This …read more

Source:: Investment You

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