It seems like you're using the term "private equity firm" as a synonym for "private firm" here, considering that you contrast and compare it with "public firm." Are you using the term right? To my understanding a private equity firm is a private firm that manages a portfolio of investments in other firms. It's not just any firm that's privately owned.
I'm not so sure about your explanation for why a private firm would have a higher rate of return. If the problem with public firms is that CEOs are getting ousted too quickly, it's not the average uninformed investor doing that - it's large activist investors and board members. Activist investors and board members would be highly informed in what's going on with the company.
Activist investors in public firms are still much less informed that CEOs of private firms. At your suggestion, I took out the word "equity" in "private equity" in the post.
If that's your argument, then the distinction should not be between "public" and "private" but between whether or not the company's CEO has a controlling stake. A company can be private but not CEO-owned. Your hypothesis would then be, "CEO-owned companies grow faster than non CEO-owned companies." Are there numbers to back this up? (and controlling for company size and maturity, of course)
(and note that if a business is bought out by a private equity firm, the CEO of the purchased business is typically not going to have a controlling stake there, the equity firm will. And then the equity firm has the role of an activist investor.)
If you're really thinking about profits by private equity firms (as opposed to private firms in general), what they normally do is buy out companies that aren't publicly listed. So they're taking advantage of inefficiencies where the original owners undervalue their company because the broader market hasn't had the chance to set a price. That would explain higher returns. It means the equity firm only has to have a more accurate valuation than the company's prior owners, not a more accurate valuation than the whole market.
Private equity firms are essentially the Chip and Joanna Gaines of the business world. They specialize in spotting assets with hidden value and rehabilitating them. That's a valuable service but it's hard to draw lessons there about the primary market (i.e. building businesses/houses in the first place).
I hear that, once adjusted for size and leverage, profitability is about the same. That being said, all equity is by nature overvalued and the threat if PE keeps it somewhat sane.
A decision markets based system like futarchy could help public CEOs engage in longer-term bets, traditionally an advantage of private ownership. As it stands there is market feedback but only in the crude form of stock price which can be interpreted in many ways, and there is never a clean signal that "yes we like this long-term bet you're proposing". It also seems more practical to implement futarchy in business than in government.
Idea: The bet you make as a participant in the decision market is of the form: I will buy X shares of the company at $Y/share and (enforceably) commit to holding those shares for 3 years, contingent on the proposed decision being enacted. That way a public CEO could pitch their case, see who bites, and commit when there is confirmed demand.
The example I would love to see right now is: should Intel divest its fab business into a separate company? It's a clean yes/no question and part of Intel's indecision is they don't have a good way of testing market response.
Most private companies are small businesses owned by a single person. Most of them go bankrupt in pretty short order. I don't think that establishes that private companies are better than public companies.
I guess you have in mind large private companies similar in size to public companies. I think you'll need to specify a bit more about the types of organisations you are talking about and what it means to be the best at something if most of the type of companies you think are the best go out of business relatively quickly.
It seems like you're using the term "private equity firm" as a synonym for "private firm" here, considering that you contrast and compare it with "public firm." Are you using the term right? To my understanding a private equity firm is a private firm that manages a portfolio of investments in other firms. It's not just any firm that's privately owned.
I'm not so sure about your explanation for why a private firm would have a higher rate of return. If the problem with public firms is that CEOs are getting ousted too quickly, it's not the average uninformed investor doing that - it's large activist investors and board members. Activist investors and board members would be highly informed in what's going on with the company.
Activist investors in public firms are still much less informed that CEOs of private firms. At your suggestion, I took out the word "equity" in "private equity" in the post.
If that's your argument, then the distinction should not be between "public" and "private" but between whether or not the company's CEO has a controlling stake. A company can be private but not CEO-owned. Your hypothesis would then be, "CEO-owned companies grow faster than non CEO-owned companies." Are there numbers to back this up? (and controlling for company size and maturity, of course)
(and note that if a business is bought out by a private equity firm, the CEO of the purchased business is typically not going to have a controlling stake there, the equity firm will. And then the equity firm has the role of an activist investor.)
If you're really thinking about profits by private equity firms (as opposed to private firms in general), what they normally do is buy out companies that aren't publicly listed. So they're taking advantage of inefficiencies where the original owners undervalue their company because the broader market hasn't had the chance to set a price. That would explain higher returns. It means the equity firm only has to have a more accurate valuation than the company's prior owners, not a more accurate valuation than the whole market.
Private equity firms are essentially the Chip and Joanna Gaines of the business world. They specialize in spotting assets with hidden value and rehabilitating them. That's a valuable service but it's hard to draw lessons there about the primary market (i.e. building businesses/houses in the first place).
I hear that, once adjusted for size and leverage, profitability is about the same. That being said, all equity is by nature overvalued and the threat if PE keeps it somewhat sane.
A decision markets based system like futarchy could help public CEOs engage in longer-term bets, traditionally an advantage of private ownership. As it stands there is market feedback but only in the crude form of stock price which can be interpreted in many ways, and there is never a clean signal that "yes we like this long-term bet you're proposing". It also seems more practical to implement futarchy in business than in government.
Idea: The bet you make as a participant in the decision market is of the form: I will buy X shares of the company at $Y/share and (enforceably) commit to holding those shares for 3 years, contingent on the proposed decision being enacted. That way a public CEO could pitch their case, see who bites, and commit when there is confirmed demand.
The example I would love to see right now is: should Intel divest its fab business into a separate company? It's a clean yes/no question and part of Intel's indecision is they don't have a good way of testing market response.
Most private companies are small businesses owned by a single person. Most of them go bankrupt in pretty short order. I don't think that establishes that private companies are better than public companies.
I guess you have in mind large private companies similar in size to public companies. I think you'll need to specify a bit more about the types of organisations you are talking about and what it means to be the best at something if most of the type of companies you think are the best go out of business relatively quickly.