I must confess I was very jealous. My son met Mike Bloomberg on his visit to Dublin this week, not me. Bloomberg and his eponymous data/media company have always fascinated me as a former customer, and as a financial markets observer. The Bloomberg business is still the gold standard for data analytics, trading communications and news for circa 350,000 financial market professionals who each pay $27,000 per year for the service. The company has been around since 1982 and it has made Bloomberg the owner incredibly wealthy. Uniquely so, perhaps, because it was done in private. If you check the ranks of the wealthiest people on the planet the top 10 features the usual names like Musk, Arnault, Gates, Zuckerberg, Ballmer and Ellison. However, all those names are attached to publicly listed companies which underpin their wealth. Bloomberg is still a private company, and still 88% owned by its founder.
Think about a SaaS-type business doing circa $12 billion of revenues a year and 88% of the profits (probably 30% + margins) accruing to one person…..since 1982. Officially, Forbes Magazine ranks Mike Bloomberg in 18th place on the world’s richest list with a $105 billion fortune. I’m guessing it’s WAY more than that. But, the bigger reveal is how a private company was able to create wealth over decades without a fluctuating public share price and short-term institutional shareholders demanding it respond to dotcom revolutions, search engines, mobile internet, big data, cloud-based SaaS, credit crises and AI. Privacy gave Bloomberg time and strategic room to act in a different way to the Wall Street ‘crowd’ and its emotional baggage. Indeed, there were a few other reminders this week of how the “crowd” can miss important truths when analysis is dominated by a volatile public share price and human emotions. Remember Cisco?
If you invested in Cisco this month 25 years ago you would have caught its peak dotcom bubble valuation before boom turned to bust. This week is the first time in 25 years you could sell those Cisco shares at a profit. Ouch. Patience and time is not just the preserve of investors in private illiquid assets. In fact, lack of liquidity can be an investor’s friend when markets are volatile. Fast forward to today and think about how many people sold stocks and bought oil on the weekend news that the US had bombed Iran’s hidden nuclear facilities. Well, the oil price is 15% off its peak price through the Iran-Israel conflict period (or “12 Day War” as named by the bomber-in-chief and Nobel Peace Prize wannabe) and actually below the trading price before hostilities even began. Oh, and the Nasdaq 100 just hit an all-time-high yesterday. For the faint-hearted, that’s a 36% gain for the largest tech stocks over two months of toddler tariffs, broken bromances, Gaza abandonment, WW3 fears, a Russian drone drubbing of its airforce and Love Island shocks. Rather than dodging a “risk-off” bullet, investors have been rewarded for not selling with strong stock market performances this week. It might not sound rational but there’s a very powerful lesson about the importance of “staying in the market”. For investors in publicly listed assets, there is an option every minute to sell and exit the market. But, there’s a cost.
A piece of research from JP Morgan, studying the returns of the S&P 500 between 2002 and 2022, shows annualized performance(returns) of 9.4%. That’s pretty good. But…..if you missed the 10 best days your return would almost halve to 5.21%. More strikingly, 7 of those 10 best days happened within two weeks of the 10 WORST days. So, if you opt out during the bad periods of volatility you tend to lose out on the big bounces which have a huge impact on longer term performance. The uncomfortable truth is that the best days and worst days tend to occur within weeks of each other. Further angst for many, is that human emotions take over and investors flee for the exits after market turbulence. However, for investors in private assets that emotional self-destruct button is not available given there is no natural daily exit option. There is also another public market reality which leads to misleading comparisons with private asset investing.
The accepted wisdom or orthodoxy in finance is that investing in early-stage companies has a high failure rate. The text books would suggest that failure rate is in the 70-90% range. That rightly implies that the vast majority of returns for investors in a portfolio of early-stage risky investments is delivered by a small number of investments. However, what is not mentioned in those texts or in plenty of fund investor information sheets is that portfolios of publicly listed companies have a similar story. A study conducted by Professor Hendrik Bessembinder at the Arizona State University Business School shows that just 4% of companies in the US stock markets have accounted for all of the wealth gains since 1926. Amazingly, the average cumulative return of the 29,078 common stocks listed since 1926 was a hefty 23,000% but….the median stock in that time experienced a cumulative return of NEGATIVE 7.4%. Given that’s a median number, that means more than half of all stocks have experienced negative returns. Fund manager, Bailie Gifford, has done further research on this data to identify the key performance drivers of the small number of genuine wealth creating companies. Interestingly, R&D investment was a critical driver. Now, let’s think private and different.
Clearly, public and private markets are not so different. It’s better to be in the market ALL the time and only a small number of companies in a portfolio deliver the majority of returns. However, in order to capture that opportunity one needs to build a portfolio. It also looks like R&D is important to create a big enough competitive advantage to grow rapidly. We don’t know how much money Bloomberg invested in its famous desktop terminal over the years to effectively “own” the market but we do know he didn’t have to report profit numbers like Cisco to the market on a quarterly basis. So, if we think differently, how can we act differently?
Well, you don’t need a Bloomberg terminal to tell you that high net worth investors are increasingly investing in private assets. Global giant private equity house, Blackstone, this week stated their belief that “Europe is in a unique position to capture more investment”. Blackstone themselves are going to invest $500 billion in Europe over the next decade. The other data point worth considering is that JP Morgan reckon the mass affluent investor market has just 2% of their portfolios allocated to alternative/private investments. So, this is not a dotcom/Cisco rush into peak investment cycles. There is real early opportunity in private assets and Spark Private can actually help kick start a portfolio very quickly. This summer Spark Private investors will be able to invest in a selection of up to seven R&D-rich medtechs, a few SaaS/software high-growth options, an exciting AI play and some really interesting infrastructure franchises.
We now know the phrase “timing is everything” doesn’t work when trading public markets. However, we also know if you’re not in, and you’re not diversified, you can’t win. So, think different and think private. Now is an excellent time to combine private opportunity with portfolio-building deal flow.
** For further information on Ostoform, SymPhysis Medical, Social Voice, Digital Gait Labs, Tympany Medical, Liltoda, Array Patch or Quadrant Scientific contact us on www.sparkprivate.com
