From the April 2009 issue of Investment Advisor • Subscribe!

April 1, 2009

Venture Populist: The Death of Equities?

The first installment of a new monthly feature

[This is the first installment of a new monthly feature in Investment Advisor. Longtime advisor, deal-maker, and alternative-investments observer Jeff Joseph will explore in the Venture Populist the world of private investment, and where those vehicles fit into an advisor's investments quiver. This month, he nails his private investing thesis to IA's door.]

That stark assessment in the headline above is a prediction from Bill Gross.

Cynics may argue that Gross could have opined about a year ago, while there were still some horses left in the barn, and yes, there is that "conflict of interest" of buying U.S. debt while advising our government as it embarks on the mother of all spending spree, but still, does he have a point?

Yes, according to venture capitalist Peter Cohen of Peter S. Cohen & Associates, who cornered the bond king for an exclusive interview, "the current economic contraction is killing the animal spirits that drive risk taking, and that's contributing to the death of equity capitalism as we've come to know it."

The Gross outlook is very grim for those who expect stocks to ultimately regain their historical performance advantage over bonds. "Things will never be the same. Risk taking has been destroyed...asset classes will be readjusted for that outlook, that is, stocks will be more of a subordinated income vehicle as opposed to a 'stocks for the long run' growth vehicle."

Common shareholders are seeing their values eroding because of their subordinated position relative to debt in the liquidation hierarchy, because when a company files for bankruptcy, all of the other stakeholders--such as bondholders, lenders, and preferred stock holders--get their money before the common shareholders see a dime.

That may be the case for some time to come, but as sure as Truman defeated Dewey, common stock returns will eventually trump bonds. But in the indiscernible interim lies the rub. The inflation, interest rate, and default risk has not been greater in years. Bonds are about as unattractive as stocks for the intermediate-term.

So where will growth-minded investors find compelling asymmetric return opportunities amidst the new world disorder?

Gold is probably the next bubble. Commodities are too correlated to the economic cycle. Managed futures' quant models are a black swan breeding pond, and hedge funds? Well, that brain is drained for now.

Private Investment in Private Ventures

That's right. This may not be intuitive to the remaining fossils that still subscribe to dogmatic asset allocation models or efficient market hypocrisies, but prudent and appropriate allocations to private investments in your own business, start-up and early-stage ventures, mezzanine opportunities, distressed real estate, and other forms of private equity are about the only remaining viable and proven means of wealth creation that is truly non-correlated to whatever remains of your investment portfolio.

Every credible study into the origins of wealth has verified that the vast majority of family fortunes has been generated through business ownership or investment in private enterprise. Affluent investors already know this, because that's how they became affluent. As a former advisor myself, I can certainly attest to that.

The counter-cyclicality of venture investing is counter-intuitive to most investment professionals. Yet the VCs that have experienced the salad days and the soup lines will tell you that many of the most disruptive and most profitable new companies have emerged from the rubble of past downturns (Exxon, Microsoft, Google, eBay, and Skype, to name just a few).

Pending breakthroughs in alternative energy, power distribution, privatized education, medical devices, non-invasive healthcare, genetic disease prediction, processors, nanotech, wireless communication, and cloud computing are agnostic to the vicissitudes of investor psyche and economic cycles.

Ultimately, the job and wealth creation that will restore our economy will emerge from the confluence of investment capital, entrepreneurship and innovation.

This is our debut column for Investment Advisor. Though Venture Populist is an unabashed advocate of private venture investing, we intend to bring you the good, the bad, and the ugly of private investment. From the agonies of angel investors to the victories of venture capitalists, we will examine the sourcing, due diligence, deal terms, risks, returns, liquidity, and exits associated with the various stages, structures and sectors of private investment.

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