Understanding Should Not Be Used Only Once

Founders often ask us: since you also watch the public markets, why still take on the hard labour of the private ones? Private markets produce understanding; public markets test it.

We think the most valuable by-product of these years of doing deals is not the fee. It is understanding. Getting to know a company well enough to form a judgement costs a great deal. Most institutions pay that cost, conclude they will not invest, and the cost sinks. We pay the same cost. We simply do not let it sink.

Why? Because understanding has a second outlet.

The loop is not arbitrage

The same piece of industry research prices one way in the private market and another way in the public market. The loop means letting understanding cross that pricing gap instead of being filed away along with the closing.

One thing has to be clear here. Arbitrage between the private and public markets is a good story, but it does not get through an investment committee. A spread is the state of the market at that moment, not the company's capability; diligence cannot verify it and nobody can guarantee it. The person handling it can be persuaded, but when he goes back to defend it he has no card to put on the table. Any logic that runs on consensus rather than evidence gets stuck at the decision layer, not the execution layer. We do not buy the story.

So what do we buy? Logic the market has already tested. The public market opens every day; it is a high-frequency feedback machine. A judgement only earns the right to be told in the private market if it also stands inside public-market volatility and goes several quarters without being broken.

A public-market view brings the private-market lesson half a course earlier

Someone who has invested in the private market for many years, looking back, usually regrets not the wrong sector but the correction that came too slowly. Walk in one market only and it is easy to sink deeper into a single narrative with no outside ruler to hand. Public prices and global comparables are that ruler. It is not polite, but it is punctual.

We keep that ruler on the desk. Looking at a domestic company, we first find its counterpart on a global public market: gross-margin structure, capacity cycle, what multiple the market will pay for the same thing. If it does not reconcile, a step has been miscounted somewhere, and that step is the first thing to find. It is a plain habit. What it saves is measured in years.

Does this approach have a cost? It does. It is slow.

There are only two rules of discipline

First, only touch what we understand. A spread we do not understand should not be our money, however wide it is. Second, never do a deal for the sake of doing a deal; hold an investor's mindset throughout. If the window has not come, wait.

The second deserves a line more. In a pure fee model the incentive sits on closing, not on deal quality. Without your own money at risk, the eye you bring to a project loosens. Once the money is in, people look properly. We are fairly sure of this one, because we did it to ourselves first.

Since 2018 we have served and accompanied more than eighty portfolio companies, and the understanding grew out of those companies a little at a time. It should not expire on closing day. (None of the above constitutes investment advice.)

We do not make money on information gaps; information gaps close. We make money on understanding, on accompanying, on building. Information is single-use. Understanding compounds.

Private and public are two markets to other people. To us they are two ends of one chain.