Private Equity vs. Public StocksDid you follow the WeWork drama this fall? The company, a darling for private equity investors, fell flat on its face when it tried to list its stock on the public markets. The path to profitability was questionable, but also there were a number of eyebrow-raising self-dealing transactions involving the founder of the company. This behavior reinforced the biggest reason I prefer to invest in public stocks over private equity – the ability to sell.
There are many ways that company executives can choose to legally enrich themselves at the expense of company owners. Look at WeWork as an example. The CEO was paid $6 million in licensing fees because he held the trademark to the company name. I didn’t hear any mention of this being illegal. It’s unethical, but private investors would have little recourse to fix this. I would argue the only reason the licensing fees were returned is because WeWork desperately needed capital. If not, that kind of behavior may have gone unnoticed.
What would happen if a public company CEO behaving in the same unethical way? People would sell their stock immediately. That’s key investor protection, and a deterrent to such behavior. Public markets aren’t perfect, but they get a lot of things right. Remember that the next time you considering investing in a private business. Can you get it out if things go sour?