Investors Pick: 5 Reasons You Should Consider Investing Into a Private Company
Most of the time, investors of all skill levels and wealth tend to trade in public stocks because it’s easier to do so.
Companies doing a pre-Initial Public Offering (IPO) or an IPO tend to be the ones that are looking for investors to drum up vast amounts of capital for growth and development, and they tend to be the ones that offer deals in stocks and other forms of equity to entice people to invest. In addition to that, once they finalize their IPO, they then become a publicly-traded company from which stocks can be bought and sold on a secondary market (stock market) and have a superior ability to be liquidated for most investors (there are some regulations that apply to investors that got in during the pre-IPO and earlier stages).
With private companies, you don’t really have that sort of safety net. Instead, it can be years before a private company can be sold, and prices tend to be negotiated between sellers and buyers directly, without the secondary market, which makes it very difficult for investors to liquidate their position.
It does seem that investing in a publicly-traded company is often better because they’re, well, a company with liquid stock, but really when you get down to it there are still a lot of reasons why you should invest in a private company over a publicly-traded one. In fact, let’s take a look at five of those reasons.
- Too focused on Quarterly Results: A major problem with public companies is that they’re more interested in the results every quarter, and as such tend to focus on the short-term plans more than the long-term plans. While for day traders this might not be a problem, for investors who want to look at the long game, they might not like the fact that public companies tend to think of the short-term gain rather than the long-term one.
- Better Management: Most public companies tend to be closely attached to Wall Street and the investing world there. While this isn’t a bad thing, as you have to go where the money and expertise goes, you often find that those investors who are in it for the short-term gain don’t really care about plans that might take years. Typically, a company that remains private aims to increase in productivity and often creates more jobs that become efficient when the Damocles sword of short-term vision is taken away. All of this can only be achieved through a long-term strategy that can only come from the best in the industry.
- Better Overall Profits: Public companies typically don´t pay dividends to their shareholders, meaning that all of your profit is retained. With private companies though, all the company’s earnings go directly to the owners of the company, which means that your take at the end of the day will be much higher depending on your stake in the private company.
- Better Control Over Money: Let’s get this out right now: private companies are not liquid assets. If you need to liquidate your stake in a private company, you need to sell your stake in it quickly, and there might not be a buyer for some time. However, because of that you know exactly what you’re getting into when it comes to investing in a private company, and you know where the money goes, what it does, and how the business itself is managed. This creates a desire for investors, founders, and directors into seeing the business succeed, since liquidating your stake in it is not easy.
- Looser Corporate Laws: Typically, the Securities Exchange Act overlooks public companies and their finances, decreeing that certain rules must be followed when it comes to trading, investing, and earning. The advantage that private companies have over public ones is that they don’t really need to adhere to all of these stipulations, since every transaction is contractual and is private. This allows any investor to have more flexibility and freedom to provide his input on how the company is run, especially those that prefer a more hands-on approach to the company they’re invested in.
As you can see, private companies have a lot of advantages over public ones in term of profit generation. However, there is one major downside to investing in one that stops a lot of major investors from making the plunge from public to private. The biggest reason being that with private companies it is not easy to liquidate your investments in a timely manner and there’s not a market for it.
At least, until now. Right now, as we speak there actually IS a private company that has created a liquid investment instrument that acts much like public stock, but has all of the advantages of both public and private equity at the same time with none of the drawbacks. This company, which has recently emerged, is quickly drawing a lot of attention from those who are unsure about investing in private companies.
Your financial goals may be even closer than you think. Watch this 30-second video clip to learn more about investing in this private company.