Why We Need Better Access to Private Markets

One of the most infamous merger failures of all time was between Quaker Oats and the popular juice brand Snapple. In the 90s Quaker was having immense success with its sports drink brand, Gatorade. In 92’ Gatorade sales were around $700 million dollars and because of this success, Quaker Oats wanted to repeat it with Snapple.

In 1994 Quaker Oats acquired Snapple for a heavy price tag of $1.7 billion, nearly 2.5x the annual revenue of Snapple at the time. It’s parent company now, PepsiCo, trades for about 3x sales but is a much more diversified beverage and snacks company. But the much smaller and less diversified Kelloggs trades for about 1.6x sales, making a 2.5x undiversified Snapple acquisition pretty risky.

Just a little over two years later, they sold Snapple for only $300 million dollars, taking a $1.4 billion loss.

This meant that a lack of diversification led to a couple of bad years for the company and the same can be said about your investment portfolio.

One large bad investment can set you back years.

This is inherently the problem with private markets for ordinary people, they can’t even get access to the diversifying benefits of private markets, and they especially can’t get access cheaply.

And there has been a lot of talk about how people can invest as the large multibillion-dollar endowments do.

The problem is you need to meet the $500,000 investment minimum, be an accredited investor, or you need to go through a feeder fund or fund of funds. The problem with feeder funds and fund of funds is the funds that the fund is investing in will charge a 2% fee with a 20% performance fee and the fund of funds will also charge a likely 2% fee on top of that. So by the time the cash gets down to you, significant cuts have been taken out, and even if you go direct with a fund it still has performance and asset management fees on top.

Pre-modern times IPOs were a natural stage in a company's journey, they would raise money in seed rounds, grow into series A rounds, learn to sell, become profitable, then go public. Usually, companies that went public weren’t huge, maybe at most a few hundred million in valuation.

Now companies are staying private for longer, and part of that has to do with the increased regulatory requirements demanded by the SEC post the Dotcom bubble and post the Financial Crisis. It is just easier to stay private and avoid heavier regulations and reporting requirements.

When a company stays private for longer its valuation becomes inflated to what would be a small-mid-large cap company in the public markets.

Some of the largest privately held companies could have valuations that would reach the status of a large-cap company, meaning its valuation would be over $10 billion.

Recently both SpaceX and OpenAI, the parent company of ChatGPT, announced that they would be raising or soon be raising capital.

SpaceX is raising millions of dollars at a whopping $137 billion valuation, which makes it larger than John Deere, Starbux, Boeing, Goldman Sachs, and Intel.

OpenAI is in talks with investors on whether or not it could raise money at a $29 billion valuation (making it one of the most valuable startups).

Both of those valuations would put those companies in the S&P 500, which means they would be of the largest in the world, but because they are private the regular retail public doesn’t have access to invest in them.

Let's take Apple, Amazon, and Microsoft and delay their IPO until they reached a $137 billion valuation.

If your investment advisor told you that there is this hot new company called Apple in 1983 but you couldn’t have invested in it yet because it wasn’t public and it was going to be public until it reached a valuation of $137 billion, you would’ve missed out on nearly 8,000% in gains. Those gains would’ve all been captured by wealthy people and the private equity/venture capital firms that could’ve invested in Apple.

Post $137 billion valuation Apple posted nearly 2,500% in gains, nothing to shy away from but had you held shares from IPO to today you would have posted nearly 200,000% in gain, and that is the power of compound interest.

Microsoft has just about the same story, from IPO to a $137 billion valuation it posted nearly 14,000% in gains, but after it hit $137 billion it returned only ~2,500% in gains to today.

Amazon would’ve had a slightly worse story than Apple and Microsoft because you would have missed out on 15,000% in gains had Amazon waited to go public until it reached a $137 billion valuation but since Amazon has reached that point it has returned only 481%.

This isn’t to say that this is the case with every single company and public and private market valuations are different things.

There are two inherent problems in today’s world that will undoubtedly get solved. Back in the early days of investing you had to buy blocks of stocks, 100 shares at a time, and you had to call your broker to execute your trade then you would receive a stock certificate in the mail. Today we have automated market makers, electronic holding, and you can buy $1 in partial shares in public companies.

But for now, if you want access to private markets you will have to pay 20% off your performance and 2% of the assets that your manager manages.