Wow…the public financial markets…what a circus! GameStop, Bitcoin, Robinhood, SPACs…more entertaining than anything you can find on Netflix. Heck, even the yield curve is at its steepest slope in 4 years. OK, I guess that’s not as exciting.
With the public markets in full on schizoid mode, I don’t know how you make sense of it. Doesn’t it feel more like a shell game or going to Vegas than it ever has? It sure seems that way to me.
So, if you have that cocktail in hand that I suggested you fix after my last post, let’s get down to brass tacks about where the opportunities are to make money in private company investing.
First of all, an acknowledgement…the private markets, particularly on the upper end, are experiencing their own interesting gyrations as well. There is an incredible amount of capital looking for and being injected into large private equity deals. But things on the lower end, with smaller companies, are not nearly as frothy. And that is where the opportunity lies.
In my experience, there are three main characteristics endemic in private company investment success — Potential, Growth, and Predictability. If you can find a company with a strong profile of one of these characteristics, you will greatly enhance prospects of a compelling return. Let’s dig in a bit to each to see how and why.
Venture Capital (VC) is a popular form of private company investing. Most commonly, VC investing is associated with companies developing new technologies or ground-breaking products. The companies, known as startups, are not traditional businesses in the sense that they are not profitable entities. Very often, startups are not generating revenue or even have a product in the market.
VC investment is predicated on potential. A VC investor is essentially making a bet that a company will develop a technology or a product that will create or disrupt a market. If that potential is realized, which very often takes several years, there can be tremendous value created.
Growth is a classic driver of company value. Increasing revenue and profitability almost always increases the value of the business. It stands to reason that a company whose annual financial performance goes from $10 million in revenue and $1 million in profits to $50 million in revenue and $5 million in profits will be a lot more valuable over time.
But growth extends beyond improved financial performance. It can manifest in expanded product lines, new service capabilities, expanded geography, deeper executive team, more employees, etc. Sure, there are limitations to the concept of bigger being better, but when it comes to investing, growth is good.
Whereby, in private company investing, potential is often not realized and growth can be far from a certainty, there is a certain attraction to predictability. As an investor, having a good idea of what will happen, understanding what you are getting, and mitigating downside risk has tremendous appeal.
Subordinated debt — debt that is junior to senior bank debt — is becoming an increasingly common way to invest in private companies. In a low-rate environment where fixed income returns are minimal, subordinate debt in a privately held company is a means to achieve an acceptable return, with less risk than an equity investment. The interest coupon is known and the company’s financial profile is relatively stable. There’s a risk/reward profile that is suitable for many private company investors.
So breaking down private company investing into these basic elements makes it seem easy enough to make money. But, like most things with investing and doing deals, the devil is in the details. Accurately assessing potential, growth, and predictability is an impossible-to-define amalgamation of art and science. Access to information, nurturing relationships, performing due diligence, and good old fashioned experience are all a part of the equation / picture.
About Merrette Moore: Merrette Moore is the Managing Partner of Tidewater Investment Company, overseeing the operations of the firm. Merrette has over 25 years experience working in finance, company management and innovation. He has been involved in over 50 private investments, serving as the lead investment representative for many of these deals. Merrette has participated on the boards of several privately held companies either as the executive chairman, director or an observer.
About Tidewater Investment Company: Tidewater Investment Co. is a North Carolina investment firm focusing on small company direct investment as well as healthcare venture capital. Tidewater provides unique access to subordinated debt, small company private equity, growth capital, and venture capital investments for high net worth individuals, family offices, and small institutional investors. The firm’s investment platform allows investors the flexibility to invest on a deal-by-deal basis without any upfront commitment of long-term obligation.
For More Information, please visit our website: www.tidewaterinvestco.com.
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