Our current investment culture is dysfunctional. It no longer serves the majority's needs. Yet it has taken a turn for the worse with a huge increase in Private Equity investment. A bad situation has just got worse. 

First, let’s turn our attention to our current dysfunctional investment culture to see just how bad it is before considering how Private Equity (more appropriately referred to as Pirate Equity) has worsened the situation. 

Most of us understand the term ”invest” to mean, among other things, a commitment to the long haul. We invest time, money or both in our education and careers because we know that, over time, the rewards justify the investment. Therefore, it might be strange to learn that we need to call on the “investors” in our economy to return to the basics of investing. For them to understand the businesses they are investing in, to believe in them, and to invest over the long haul, sticking with them through good and bad times. To stop treating shares as commodities, which does not serve the economy well.

Today, shares are nothing more than commodities, where the name of the game is to “buy and sell” and make as much profit from these transactions as possible. They are not investors, as an investment requires thought, understanding, and a willingness to persevere through thick and thin in pursuit of long-term objectives. Trading is about buying low, selling high, and doing it as often as possible. To this end, stockbrokers have developed sophisticated algorithms and have super-fast computers to do the trades for them based on share trading trends. It has nothing to do with the principles of investment whatsoever. 

Just think what a screw-up this is, where the fundamentals of investment are not followed and where the so-called “owners” of business are no more than transient holders of share certificates, interested only in short-term profits and dividends. A system which couldn’t care less about the long-term prospects of the business and its stakeholders, most of whom have substantially more “invested” in the business than its share certificate holders.

This system serves a small, elite group of investors and their stockbrokers. The whole system is a complete screw-up unless you are an investor or stockbroker playing the system. For the rest of us and the economy itself, it's a screw-up. 

Let's face it - despite the illusion created by stockbrokers, where you see offices filled with rows of computers and brightly coloured charts and graphs adorned across their screens, there is very little “investment” going on. All this paraphernalia and their systems are there to support trading, nothing else. They have software using super-fast computers which trade with other computers using sophisticated algorithms based on trading data. They transact billions in minutes without human intervention. The system analyses trading data and predicts future prices. Based on this alone, the system decides to buy or sell. None of the decisions are based on any understanding of the business's underlying ability to create long-term value, the most fundamental investment criteria of all. It's about trading, not investing. Shares are a commodity which they trade in. It's about making small percentage gains on massive transactions; nothing to do with investment. Trading, rather than investing, does not help grow the economy; it hinders it. The two major reasons for this are trading creates market instability and ensures there is no long-term commitment, or drive, by shareholders for the prosperity of their investment. Trading represents an easy and relatively safe profit venture. On the other hand, investment involves long-term commitment and risk, as the future is always uncertain. However, it generally provides far greater long-term rewards. Effort and commitment are eventually rewarded like most other endeavours. Trading represents “take what you can now, don't worry about the future” and Investment means “commitment and hard work to grow something worthwhile.” 

The investment community has a vested interest in maintaining their short-term, manipulative trading practices rather than pursuing long-term growth. Financial capital traded freely in an open market is highly volatile, moving quickly and frequently to achieve the best returns. Fortunes are made through only minor shifts in share prices, which traders continually seek or create. Rumours, quarterly results, trading announcements, dividend announcements, and other minor market activities are all short-term, insignificant events when compared to the business's long-term prospects. These market “blips” allow brokers to profit and ownership to change like the wind. These minor market activities have little or no influence on true investors, who are in it for the long haul. 

We need to go back to basics, where business owners become owners in the true sense. Where they believe in and are committed to its long-term future and are prepared to stick with it when things get tough, and not transient holders of share certificates who can divest themselves in the blink of an eye. True owners take great care and responsibility for the well-being of the many facets of their business’s long-term prospects, not just its financial well-being. 

However, in the absence of long-term owners, share certificate holders have shifted their responsibilities onto “proxy owners” - professional managers. Unfortunately, these proxy owners don’t have the long-term interests of the business at heart (just as their owners don't because they are also on short-term tenure.) Their objective is to optimise short-term profits and maximise dividend payouts, as this is what their transient owners want, and reward them for. The consequences are managers denude the business of its underlying value to generate profit. It's easy to make a profit while stripping value from other stakeholders. Most people will be unaware that managers are “robbing Peter to pay Paul.” If they are, or suspect, managers of it, it doesn’t concern them as they aren’t interested in the long-term either. 

The short-term tenure of share certificate owners and proxy owners encourages the reckless disregard for business’s other primary capitals in favour of financial capital. Predatory proxy owners are driven to extremes through absurd remuneration packages paid to them by transient owners hellbent on short-term financial results as well. All this does is seriously impair the business’s longevity, which owners can divest from at the drop of a hat, leaving others to carry the can. 

This is the sad state of affairs we find ourselves in, but to top it all, in steps another more devious predator – Private Equity. 

Over the past two decades, we have witnessed a big growth in Private Equity. Why is this? Greed. The rich aren’t satisfied; they want even more. Private Equity provides the opportunity that traditional investing channels cannot. 

The key features which Private Equity offers are they face fewer regulations and are far less transparent. This allows them to increase trading risks and trade in the shadows, producing better returns. They leverage businesses but ensure their exposure is limited through careful financial engineering. 

Private Equity has exacerbated an already poor investment culture and made it much worse. They have grown by being more predatory than proxy owners and their transient owners, who are positive angels in comparison. They are ruthless in their pursuit of improved financial results, protected by fewer regulations and a lack of transparency. They ruthlessly pursue short-term practices such as: -

• Job losses
• Reduced employee benefits
• Asset stripping
• Reduced investments
• Excessive debt burden

Their predatory practices conducted from the shadows justifiably earn them the title PIRATE EQUITY. 

To remedy our dysfunctional investment culture, we need to slow the rate at which money flows. To make shareholders act like true owners taking care of all facets of running their business over the long term. No easy out after having stripped other stakeholder value from the business.  To ensure this happens, we need an integrated measurement and management system, which will provide them with an accurate overview of the entire business and its prospects (i.e. the ability to measure and manage the value creation potential of all four primary capitals, not just financial capital.)

You may read other articles by Adrian Dore on Medium at

https://medium.com/@adrianmarkdore/