Subject: Private Market Comments

From: <[email-masked]>
Date: Tue, 2 Jan 2001 13:03:56

As 2000 has come to an end, the sophisticated investor must look back on one of the most entertaining, if not disheartening, years ever.  The public markets, the ones followed by virtually everyone, were increasingly subjected to intense review and comment by the media- both investment professional and general interest.  2000 was the year everyone would get rich and thanks must be given to the kids with the great internet ideas.

Since April, the world has changed and the easy, simple investment times have disappeared. As many commentators and academics have stated, the world has not changed- the sun still rises in the East, the Yankees are still the best team in baseball and the election clearly shows what America wants (well, two out of three isn’t bad).  And more importantly, revenue and profits do matter.

Other than for some scientists and researchers, great technology is not the objective.  Being able to use that technology in ways that people value and that they are willing to pay for gives meaning to technological progress.

The public market has realized that technology-driven companies without meaningful revenue and sustainable profit margins cannot be good long-term investments.  We have all seen companies with wonderful technology survive only because more investment is put in; at some point that must stop.

Given the strong correlation between the public and the private markets, what do these trends mean for private investment?  Generally, this is a good and improving time for the private investor.   Since valuations must ultimately reflect public market pricing (the most readily apparent and generally accepted valuation method), values for private companies are coming down to reasonable levels.

This reflects two related facts- due to the liquidity disadvantage of private investments, they must always be valued at a discount to comparable public companies.  As the prices for the traded companies fall, so too does the value of the privates.  

But of greater import is the cycle effect (yes, business cycles still exist).  A private investment made now can mature and be ready for a liquidity transaction in two or three years when the cycle again turns up.  

Technology is still being developed (some say the pace of tech change continues to increase as research becomes more productive, reflecting the tools now available and the expandied knowledge base) and greater emphasis is being placed on how it addresses peoples’ wants and desires and their willingness to pay for it.  These opportunities continue to arise and with better (i.e. lesser) valuation for the private investor.

We also know that technology is proceeding as fast if not faster in areas outside of the internet and information tech areas- in life sciences, material sciences and many other areas.  Additionally, more traditional, “old (i.e. real businesses selling products and services people have been and continue to want and pay for) economy” companies are using new tools and technologies to increase their own financial results.

Now and for the foreseeable future is a good time to look for private investments.  Just concentrate on businesses that can sell their products and services at prices that give them profit.  And know the cycle will turn and the investment returns will be there.  Remember- the one key asset private investors have always needed, and still need, is patience.  It will be rewarded.

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Sincerely,
Jason Meyers
Angelstreet
312-836-1333
[email-masked]