Public vs Private: Master Your Wealth

Hello investors!

Today, I am excited to delve into a realm that piques the interest of many investors - buying private businesses versus investing in public equities.

In todays letter

• Learning: Public vs Private: Master Your Wealth

• News insights

  • Japan's M&A Ignites Amid Global Deal Drought

  • Oil Titans Pledge Green Transition

  • Exxon Eyes Pioneer Natural in Potentially 2023's Mega Deal

• Key takeaways from video w/ Michael Bloomberg on 60 Minutes

Public vs Private: Master Your Wealth

Let's demystify this with some insights from investment moguls like Warren Buffett and Charlie Munger.

Understanding the Terrain

• Private Businesses: These are companies that have not gone public, meaning their shares aren't traded on public exchanges. They often have a smaller number of shareholders and are not subject to the same rigorous regulatory scrutiny as public companies.

• Public Equities: These refer to shares of publicly traded companies that anyone can buy on exchanges like the NYSE or NASDAQ. They are subject to regulatory oversight by bodies like the SEC, which aims to protect investors by ensuring a level of transparency.

Buffett and Munger's Take

• Warren Buffett and Charlie Munger, the dynamic duo behind Berkshire Hathaway, have a storied history of investing in both private and public companies. While both are known for their long-term investment philosophy, Munger is often seen as the more patient of the two​¹​.

• Munger has spearheaded Berkshire's investments in private companies like electric car maker BYD Co and recently doubled stakes in Alibaba Group, showcasing his bullish stance on certain private ventures​​.

• On the flip side, some of Berkshire Hathaway's most lauded investments have been in public companies like Coca-Cola, American Express, and GEICO​​.

Comparative Insights

• Liquidity: Public equities generally offer better liquidity as they can be easily bought or sold on public exchanges. Private businesses lack this ease of liquidity.

• Transparency: Public companies are required to disclose financials and other operational details regularly, providing a layer of transparency not typically seen in private companies.

• Valuation: It can be easier to value public companies due to the availability of financial data. Private companies may pose a challenge in this regard.

• Return Potential: Private companies might offer higher return potentials if invested in at an early stage, albeit at a higher risk.

• Control and Influence: Investors may acquire a significant stake in private companies, thereby having a say in the operational decisions, which is less common in public investments.

A Contemporary Example

In recent years, the trend of private equity has seen a resurgence. For instance, the acquisition of GoodRx, a private company, by Silver Lake Partners in 2018, showcased a valuation jump from $2.8 billion to $12.8 billion within two years, underscoring the potential returns in private investments.

A more recent example is the ongoing negotiation by Carlyle Group Inc, one of the world's largest private equity firms, to acquire a majority stake in two medical device businesses of Medtronic Plc at a valuation of more than $7 billion. This acquisition, if finalized, would mark a significant private investment in the healthcare sector, which has been a lucrative avenue for private equity firms. In fact, Carlyle has a history of successful investments in the healthcare sector, including taking primary care clinic operator One Medical public and then selling it to Amazon.com Inc for $3.9 billion, as well as acquiring a medical screening business from Johnson & Johnson in 2014 for $4 billion before selling it to COVID-19 test maker Quidel Corp in a $6 billion cash-and-stock deal​​.

Furthermore, the private equity landscape in 2023 reflects a cautious optimism driven by consolidation trends and the digital infrastructure transition, as depicted in Cleary Gottlieb’s latest Private Equity Market Snapshot. Despite the economic headwinds, private equity firms continue to find ways to deploy their capital effectively. For instance, the first half of 2023 saw private equity's share of total Q1 deal value surpass 60%, driven by high-value tech deals such as Symphony Technology Group's significant acquisition, showcasing the continued potential for high returns in private investments​​.

These examples underscore the dynamic nature of private equity investments, and the opportunities they present for substantial returns. The ability to acquire significant stakes in promising private companies, coupled with the strategic vision to drive growth and profitability, often paves the way for value creation and lucrative exits for private equity investors.

Conclusion

The choice between private and public investments hinges on individual risk tolerance, liquidity needs, and investment horizon. While the allure of high returns in private ventures is tempting, the transparency and liquidity of public equities are reassuring.

Buffett and Munger’s diverse portfolio illustrates that a balanced approach, weighing the pros and cons of both private and public investments, can pave the path to financial success. Their sagacious investment choices teach us that understanding the inherent attributes of these investment avenues is crucial for making informed decisions.

News insights

Japan's M&A Ignites Amid Global Deal Drought

The Japanese M&A market has bucked the global trend of declining deals, growing by 14% year-on-year to $111 billion in the first nine months of 2023, driven mainly by domestic transactions including significant buyouts of Toshiba and JSR, amidst favorable conditions like low interest rates and new governmental guidelines encouraging corporate takeovers.

[📝Full article]

Key takeaway

This growth in M&A activity signals a robust domestic corporate restructuring trend, influenced by rising costs, shareholder pressures, and stricter governance rules, all amidst a challenging global economic environment. For investors, this scenario presents an opportunity to explore strategic positions in Japanese companies, especially as the nation shows resilience and adaptability to economic pressures, although a careful analysis of individual deals and market conditions is crucial to mitigate risks and align with long-term investment objectives.

Oil Titans Pledge Green Transition

The top executives of major oil companies are committing to energy transition, defending their ongoing strategies at the ADIPEC energy conference, and over 20 companies are discussing joining a new 'Global Decarbonization Alliance' to be introduced at the upcoming COP28 summit. The oil and gas industry is urged to invest more in decarbonization, with the sector being identified as a pivotal player in the transition, although energy security concerns have recently overshadowed net-zero plans, emphasizing the continued need for fossil fuels alongside efforts towards decarbonization.

[📝Full article]

Key takeaway

This shift towards energy transition among major oil players indicates a growing recognition of the sector's crucial role in global decarbonization efforts, which could potentially lead to more collaborative initiatives and investments in cleaner energy solutions. For investors, this suggests a long-term industry trend towards aligning with global climate goals which may open up opportunities in emerging clean energy technologies and initiatives within the oil and gas sector, however, evaluating the pace of transition and the strategies of individual companies remains essential to understand the associated risks and potential returns.

Exxon Eyes Pioneer Natural in Potentially 2023's Mega Deal

Exxon Mobil Corp is nearing a potential acquisition of Pioneer Natural Resources Co, which could be valued at around $60 billion, marking it as possibly the largest takeover of 2023 and Exxon's biggest since merging with Mobil Corp in 1999. This deal could significantly bolster Exxon's position in the US shale sector, uniting two of the largest acreage holders in the Permian Basin, thus making Exxon the biggest oil producer in the formation with an output of about 1.2 million barrels a day.

[📝Full article]

Key takeaway

This development reflects a strategic move by Exxon to dominate the US shale industry and could signify a renewed phase of consolidation within the sector, offering economies of scale and operational synergies. For investors, this potential acquisition might indicate a robust corporate strategy to capitalize on shale assets, which could impact Exxon's stock positively if the deal goes through and operational efficiencies are realized. Evaluating the broader implications of such consolidations in the energy sector and Exxon's financial performance post-acquisition would be crucial in making informed investment decisions.

Key takeaways from video w/ Michael Bloomberg on 60 Minutes

Here are five key takeaways:

1. Bloomberg's Financial Empire: Michael Bloomberg, the founder of the Bloomberg financial media empire, is one of the world's wealthiest individuals. He has accumulated a net worth of $47 billion and is among the growing number of extremely wealthy individuals who plan to give most of their money away for philanthropic causes.

2. Bloomberg Terminal: A significant portion of Bloomberg's profits comes from the Bloomberg terminal, a piece of equipment that sits on the desks of financial professionals worldwide. This terminal provides a vast amount of financial data, live streams from stock exchanges, and other valuable information. Professionals pay around $25,000 to rent this terminal for a year.

3. Mayor of New York City: Bloomberg served as the mayor of New York City and was elected three times. He managed the city's recovery after 9/11, oversaw significant development and construction, and implemented public health initiatives. Under his leadership, life expectancy in New York increased by three years.

4. Philanthropic Efforts: Bloomberg has already donated over $5 billion to various causes that align with his political interests. He has spent significant amounts on public health initiatives, gun control, and environmental causes. For instance, he has contributed $135 million to combat the NRA on gun control and $100 million to assist the Sierra Club in shutting down coal-fired plants.

5. Views on Coal Industry: Bloomberg is a strong advocate for environmental causes and has expressed concerns about the coal industry's impact on health and the environment. He believes that technology, not environmental activism, is the primary reason for the decline in coal jobs. He emphasizes the need to find alternative employment opportunities for coal miners and invest in reeducation and skill development.

[🎥Full video]

That’s all for today. Thank you for reading.