I usually try to keep this blog away from subjects of work, mostly because I like my job and would prefer not to get fired. Today I’d like to share some deep thoughts which are inspired by my work experience. Hopefully I will remain employed post-post.
A little over a year ago my employer, DoubleClick was acquired off of the public markets by private equity firm Hellman and Friedman* for roughly a billion dollars. They got quite a bargain.
Without divulging anything that anyone doesn’t know, DoubleClick is by far the leading technology company in Internet advertising, which is by far the fastest growing segment of advertising. Clients include AOL, eBay, MySpace, plus virtually every major interactive agency in the US.
Anyway, I’m not here to pimp DoubleClick. I’m here to talk about that bargain. Aren’t financial markets supposed to eliminate bargains? Didn’t I snooze through that in some bschool class? Efficient markets, perfect information, etc.
Since the acquisition (also not a secret to the industry) the new owners have seen significant increases in the value of the investment. Market share is up. Revenue is up. Everything is up. In short, the company is worth more now as a private company than it was a year ago as a public company.
The story of private equity and the detrimental effect of Sarbanes Oxley has been told before (PDF from the SEC on this topic). Public companies are being taken private to avoid costs and to take better risks with their capital beyond what Wall Street’s quarterly thinking allows. What I’m wondering this morning, is whether the net effect of the trends is a structural difference in equity returns from the public markets vs those available to wealthy investors through Private Equity, Hedge Funds, etc.
There’s always been an advantage to having large amounts of capital. I’m arguing that the most attractive equity returns are being systematically removed from the pubilc markets.
Here’s another way to look at it. Consider the lifecycle of a high growth firm from inception to maturity. In the past the investment opportunities in the early stages were restricted to the big money players (Angels, VCs), but eventually the company would mature enough to go public and retail investors could participate in the continued growth. Now, while this same pattern exists at the start of the curve, the later half of the corporate maturity cycle is also apt to be restricted to the large institutional investors. When companies falter or are under-valued they quickly get scooped off of the public markets. Only when a sufficient equity gain has been made will the public again be given access to the investment opportunity — exactly the opposite of what equity investing is supposed to be about.
Entering the realm of total speculation: Couldn’t the emergence of the private equity firm significantly dampen equity returns for the foreseeable future?
* – You know a private equity firm is bad-ass when their URL is only two letters long.