Investors looking to make investments in private versus public companies need to understand why each type of investment is offered to any investor and what the merits are of any strategy of investment.

First, private investor investments with private companies are often made to take advantage of several benefits typically found with new, or small, and private growth companies, which may, or may not be start-up’s.

Management of small companies characteristically can make decisions quickly, and take advantage of opportunities larger companies cannot focus on, or where the opportunities don’t represent enough of a profit margin for a larger company to warrant spending their time. Finding a lucrative niche’ in a market, or business sector is what small companies are all about. Testing new ideas, and implementing new technology can yield some surprising ‘firsts’ or boost, and even ‘explode a small company’s business success & profits’. For example, it is commonly known in the oil & gas industry, that 85% of all oil & gas found in the US has been found by Independents, or independent oil companies.

Major oil companies can make money over the long haul by owning leasehold assets and oil & gas reserves which go up in value over time with the price in the marketplace, and from their down stream operations, like pipelines, refineries, and retail outlets. Most major oil companies don’t make a profit on their production.

One thing I really like about small private companies is the upside can be unlimited, and the interest of production buyers for example in Oil & Gas is always a possibility as they ‘hunt for those businesses’ with positive cash flow, and assets which can be exploited with more capital. Public companies, and pension funds for example have discretionary authority to invest in higher risk investments to boost their portfolio returns. Production buyers will pay much more money for the lower returns they can expect because they are taking less risk; compared to the upside a private investor can realize with an investment in a private deal with a low basis, or ‘where return on investment’ is based on low cost going in, and not too much initial capitalization is needed to fund the company to a profit point.

Bigger companies or reporting public companies must satisfy many regulations in order to be public companies, and most have tremendous overhead, and everyone knows unions, and employee issues such as retirement, and pension plan contributions, and a vast number of costs which get reflected in their company bottom-line. Public growth companies often don’t expect to make a profit, pay dividends, or see their stock rise in price for some time, and this is directly the result of a negative bottom-line, or little profits or having too much money they can tap. The reason is usually because the expansion using public capital takes time, and the marketing plan, and idea has to be a very good one to compete in the marketplace. Another reason is the ready availability of capital in the public marketplace. Put bluntly, with mutual funds for example; it’s not the fund manager’s money. Why should he care, as long as he follows the rules of the exchanges, and the public company regulations, and of course the S.E.C., and securities laws of the land.

Public market fund managers can make millions of dollars per year by getting paid just 1-2% of their fund’s value. There is no incentive to take much risk when managing a public fund. Just play it safe. When the stock market moves broadly down, it tends to drag even good stock prices down. How is the this good for the investor who wants to be in and out in five years, and make some money during this holding period while writing-off his investment? This is where I talk about the part I don’t like when trying to predict the public marketplace. The one thing you have with public companies who stay in business, is liquidity. You can be in for a ride, or waiting period to make money with private companies, and though you can still get excellent tax write-offs which can make a big difference on taking the chance with a small company investment, the truth is, it takes time to establish cash flow and provide the ‘greater returns’ motivating private investors in the first place. Medium & Large public companies can be hard to predict…is the company ready to expand, and use capital to develop new products for example? Or is the company reinvesting in it’s key or core products or services to grow the company to a point where the stock price increases, and dividends are being paid? Worse, is the company dissipating, and unable, or unwilling to adjust to new competition, or upper level management is so saddled with overhead, union, and pension obligations, they simply think why risk it? What is management doing? Are they investing in their own company?

One final note…there is always a market for oil, and you don’t need to spend money to find oil production buyers…finding capital becomes the biggest challenge when involved in private placement offerings, and while working to achieve the aim of the legitimate folks in our business of developing our oil & gas leasehold interests with our private investors to make a profit. There is room in your portfolio for oil investments no matter what niche’ you like best, small private companies, and/or public companies.

More later…Dennis