Josh's Weblog: Private Equity

Private Equity

Today's Wall Street Journal has an opinion piece about how many public firms have been moving to private equity, despite the expenses and other problems. The piece indicates a drive to private firms has been the ready availability of capital here (hedge funds and other private equity firms have impressive returns) and avoidance of Sarbanes-Oxley reporting requirements.

Let's look at it from the other side. Startups often get Angel and VC money to get going (private equity) so what is the impetus to finally IPO? The primary reason to IPO is to let the Angels and VCs get their money back out of the investment, but now it looks like rolling over into private equity is the way to go. A smart VC would have a system for performing this rollover and for prepping the company for this eventuality. A smart hedge fund would now fund early startups, VC rounds, and mature private firms all under one umbrella.

Looking at Vonage's IPO it was a disaster for them to go public. If they had done a well-structured and prepared private equity deal it might have gone a great deal better. I am a Vonage customer and was given the option to go in on the IPO, but it didn't look good for me. (I'm focused on building equity in the house at the moment.)

It will be interesting to see if there's a correction that swings the pendulum away from the over-regulation of Sarbanes-Oxley, and whether some firms grow for decades without ever going public. However, there seems to be an incredible inertia that drives regulation and never erodes it.

Josh Poulson

Posted Saturday, Jun 3 2006 11:10 AM