You’ve heard of private companies going public, but you don’t hear much about public companies going private. However, last October, one of the world’s most recognizable public companies went private, which piqued a lot of curiosity about the move from public to private. That company was Twitter.
On October 27, 2022, Elon Musk, the world’s richest man, completed his acquisition of Twitter for $44 billion and took it private. Twitter shares ceased trading on the NYSE, and the existing shareholders received $54.20 per share.
Why did Elon Musk take Twitter private, and why would any public company decide to go private? Musk wanted to make sweeping changes at Twitter, which would be easier as a private company. As a private company, Musk has more flexibility to make big changes at Twitter without the scrutiny of thousands of shareholders and a Board of Directors and worrying about all the public filings and regulatory requirements imposed by the Securities and Exchange Commission.
Flexibility is the big advantage of being a private company vs. a public company.
Just as there are advantages to companies going private, there are also advantages for investors to take their investments private, i.e., investing in private vs. public companies. If the investing habits of ultra-wealthy investors are any indication, there must be something to the idea of investing in private companies.
Take, for example, the investing habits of the members of TIGER 21, an exclusive peer-to-peer investing club of ultra-high-net-worth individuals consisting of successful entrepreneurs, professionals, and executives.
Prospective members must show a minimum of $50M in investable assets to join. Each quarter, the members of TIGER 21 publish an asset allocation report showing how they allocate their assets, and according to the latest report, the #1 asset preferred by the members of TIGER 21 is private equity – investment in private companies.
So why private companies? The most obvious reason must be returns. Why else would sophisticated investors allocate heavily to this asset class unless it was profitable?
The data backs up the value of private investments in enhancing portfolio returns
– Source: Cambridge Associates
The chart above shows that the more an investor allocates to private investments, the better the returns. Because private companies are not publicly traded, they’re shielded from the herding behavior and volatility that afflicts the stock market. So, private investments have the ability to not only generate higher returns than public equities but do so with less volatility.
The ability of private companies to generate higher risk-adjusted returns has to do with flexibility and the ability of management to make decisions quickly and efficiently without the specter of the SEC, investing public, Wall Street, and the media looking over their shoulders.
Besides the regulatory oversight and myriad compliance issues public companies have to deal with, the other big problem with big public companies is that they are so big and bloated that they get bogged down with mismanagement and are inefficient. Lean, private companies stay focused on the business of the company. They can manage effectively and efficiently to put more money in investors’ pockets instead of wasting it on bloat and inefficiencies.
Another reason ultra-wealthy investors gravitate towards private companies is transparency. The decision-makers of private companies make themselves more accessible to their investors – keeping management accountable to their investors and allowing investors to align their interests with those of the private company in which they’re investing.
There are other reasons for you to consider taking your investments private. The ultra-wealthy love private investments, but they’re keen on particular investments – mainly cash-flowing ones backed by hard assets like income-producing businesses and private commercial real estate (i.e., non-public REIT investments). The ultra-wealthy gravitate towards these assets because they offer advantages for creating, increasing and maintaining wealth.
These advantages include:
- Passive income.
- Intrinsic value from a tangible asset.
- Insulation from market volatility and recession.
- Hedge against inflation.
- Tax benefits.
The latest investment trends indicate increasingly higher allocations among the ultra-wealthy towards private investments. Maybe this has to do with high inflation and the threat of recession on the horizon. If inflation and recession are the driving factors, then it’s no surprise that private investments are garnering more attention.
Investing in the right cash-flowing private assets – assets deemed essential and with a demand that keeps pace with or exceeds inflation – is ideal for hedging against decreased buying power from inflation or potential income loss.
Financial independence means never having to worry about money again. Along those lines, it means never worrying about unemployment or recession.
Smart investors have achieved financial independence for decades by allocating to private investments.
That’s why maybe it’s time to take your investments private.