Whooptie-freaking-do. Consolidated Edison stock is down 7% this year. It’s up 7% over the past five years. It pays owners a ho-freaking-hum 3% dividend. It’s the kind of public company that sucks the fun out investing. But it holds one amazing distinction. Anyone?
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ConEd is the oldest continuously publicly traded company in America. This year, it’s celebrating its centennial. Yep. What started as New York Gas Light in 1824 is still chugging along boring the crap out of public investors.
In fairness, maybe ConEd is just out of place and just out of time.
A hundred years ago, it was cool to be public. The captains of young companies, recently commissioned, aspired to grow up to be Generals of Electric or Generals of Motors. The NYSE was the place to be. A public offering was your lifetime achievement trophy. Staying public meant you had staying power.
The world has changed a lot in a hundred years. And, the structure of money has too.
The early public companies carried the names of the people who started them. John Pierpont Morgan’s bank (founded 1799, public later). John Wiley’s books company (1807). John McKesson’s drug import business (1833). John Deere’s farm equipment (1837). Huh. That’s a lot of Johns. The Johns and their small circle of friends invested enough money to get these companies to selfsustaining profitability. As public companies, they existed to pay dividends to risk-adverse banks and heirs of wealthy people.
In the 1960s, fifty nifty stocks caught the eye of a new class of investors. The working class. They started to invest in public stocks. From there, it was a hop, skip, and a jump to wanting more than just staid scheduled payouts. They were willing to trade more risk for higher returns. Companies with scant revenue raised public money to help make their big dreams come true. And smart risk-takers made money.
Seeing this democratization, wealthy folks roped off a new VIP sandbox. The rich put their money into institutional (only) funds that would take earlier stage risks. Which, of course, meant they would skim the best returns off the cream of the young crop and harvest big dollars selling slightly older companies to the public.
By 1975, modern venture capital was up and running. Today, venture funds in the U.S. manage over one trillion dollars. The top 25% of venture funds return about 3x more than public stocks. The Securities and Exchange Commission bars unwealthy investors from investing in them. Too risky.
The catalyst for this column came from this LinkedIn post by Michael Hutchens. He analyzed mergers at Citibank. Five years ago, he started a business that makes financial models for all sorts of businesses.
He noted that Netflix announced record revenue and profits — and the stock dropped 12%. That’s the opposite of what should happen. Investors worried that the Netflix service had reached everyone they could easily reach. It’s as it if the market for the best companies is atrophying.
A lot of this comes down to something investors call TAM. A slang for total addressable market. Someone starts a company with an idea for a product. They convince investors to fork over dollars on the promise the market for their product is this ← big →.
Startups build a product and fine tune it with venture dollars. Once they can show that there’s a viable business they go public. It’s like the five stages of booster rockets that took astronauts to the Moon. One takes you this far. Then, it drops off and the next rocket takes you farther. The VCs drop off. And take their cash.
For decades now there were three stages of rockets. VCs are at one end of the capital spectrum. Private equity is all the way over on the other end. Private equity funds buy companies. Like venture funds, they don’t plan to hold stock in them forever. So, a private equity fund buys Company X. A few years later, they have to sell it. A lot of the time that’s to another PE fund. The rest of the time it’s back to the public. If you step back, the entire funding process is pretty stupid and highly inefficient. A silly game of hot potato where there not meant to pick winners or losers; just meant to measure the spud’s relative temperature.
Imagine being the spud. It’s awful. Bouncing around from one owner to the next just to be in the game. Companies like ConEd reached their TAM a long time ago. The staid stay public because they have nowhere else to go.
But a new class of money is emerging. Trophy class. The wealthy found some velvet and used it to rope off boring money. Money that will own the best public assets. Forever. Companies that can pay handsome dividends until the cows come home. Safely hidden away from working class investors.
The class is so new the name is still evolving. Right now, it’s called secondaries. Those funds bought assets from private equity. I think it needs a name with more sizzle. Either way, this end-game class of money is nearing a trillion dollars.
Some people will tell us we’ve entered a new era. That VCs fund the start. Public money is the growth. PE buys the matured assets. Maybe companies that don’t need perpetual funding don’t need the public markets the way they used to. And, don’t want to be in the PE game.
The best companies — like Netflix — will be a lot like some of the best art. Hung on a wall in a castle for private viewing.
Most of us will play in the sandbox with shards of glass. The really wealthy investors will play on a very safe, very private, very pristine white sand beach.
Market atrophy leads to market trophies.