The Pitfalls of Private Investing in the Obama Era

Investing in public companies or public debt is reasonably apparent. You talk to your broker, and off you go. The investment is highly liquid: a phone call gets you in or out.

Private investing is different. There is no certainty that the investment will ever become liquid again: the only ways to liquefy an investment in a private company are to sell the investment itself to a third party, to sell the entire company, or to take the company public in an IPO. It’s a lot easier to sell an entire company; that is the usual way liquidity events occur. The public markets are fickle -- particularly in the wake of the disastrous Facebook IPO -- and most private investors are not very interested in buying only a piece of a company as it is very difficult to get that next liquidity event, especially when the investment is not a control position.

Because of this, the holding period for a private investment is usually measured in years, not days, weeks, or even months. A lot can happen in a “years” time frame, particularly as we will see below.

The basis of any investment is ultimately a “go/no go” decision. This investment decision is an actual "yes or no" decision, based on the assessment of risks that are to be taken by the investor. This is particularly important in a private investing decision when a liquidity event takes place in an uncertain time frame.

Which is where I think so many on the left are bereft of common sense.

The refrain from many liberals I know these days: “Where are the jobs? Why aren’t businesses investing?” There are no mandates that an investor is required to make investments that he or she might not otherwise make. If I don’t like the risk I perceive, I am not going to make the investment and will choose to wait for a better time.

There are all sorts of risks that are taken when one considers any investment decision. Some that all investors engage in: environmental risk (not what it sounds like -- see below), industry risk, enterprise risk, management risk, time horizon risk, and liquidity risk. I’m only going to discuss environmental risk, as it impacts decision-making; the rest of these should be self-evident.