The Wall Street Journal just did a story about a remarkable real estate investment…
If you’d gotten in on this deal, in just eight years, you’d have turned every $1,000 you invested into $4 million.
That’s an annual profit of about 182% per year.
That would be an amazing return for any investment, but for a real estate deal, it’s off the charts. To put it in perspective, according to research firm MPF Research, the average annual return for commercial real estate is about 22% per year.
So how were this deal’s profits 8x larger than average?
As you’ll see in a moment, it all comes down to a simple but powerful investing secret…
Real Estate Gets “Silicon Valley’d”
The investment I’m referring to was in a real estate company called WeWork.
Basically, WeWork provides a low-cost and hassle-free way to rent beautiful office space.
Instead of forcing tenants to sign a multi-year commitment, WeWork offers leases that are month-to-month. In addition, it provides tenants with furniture, Internet and IT support, and it tosses in perks like free morning coffee and cold beer on tap for happy hours.
Some of WeWork’s tenants are fast-growing start-ups (for example, Crowdability is a WeWork tenant), but others are established corporations like IBM that are setting up offices in new cities.
WeWork’s modern approach to real estate has helped it explode to nearly $1 billion in annual sales — and has caught the attention of major investors…
The Private Market Is Attracting Capital
From T. Rowe Price to SoftBank, some of the globe’s biggest investors have fallen in love with WeWork. And because they’re desperate for alternatives to the over-priced stock market, they’ve been happy to invest nearly $10 billion into it.
Meanwhile, all these billions in funding have led WeWork’s value to go higher and higher. In fact, at $40 billion, it’s now more valuable than many of its publicly-traded competitors. For example, look at Boston Properties (NYSE: BXP):
BXP is one of the largest owners and managers of office properties in the U.S. It generated $2.6 billion in revenue last year. But it’s worth $21 billion less than WeWork.
Historically speaking, it’s unusual for a private start-up to be more valuable than its public counterpart. But nowadays, as private start-ups leverage technology or new business models to “disrupt” legacy industries, this phenomenon is becoming more common.
Private transportation start-up Uber, for example, is valued at $72 billion. That makes it more valuable than publicly-traded General Motors (NYSE: GM), which is worth $52 billion, or Ford (NYSE: F), which is worth $40 billion.
And hospitality start-up Airbnb is valued at about $31 billion, making it more valuable than $23 billion Hilton (NYSE: HLT).
The thing is, start-ups like WeWork will eventually go public — and while that might sound like good news, it actually presents a major problem for most investors. Let me explain…
Profits Have Found a “New Home”
Take a look at this chart…
Each bar represents the profits investors earned after each company IPO’d…
The grey part of each bar reflects the profits captured by public stock market investors — in other words, the investors who backed the company either at, or after, its IPO.
And the orange part shows the profits captured by private investors — the folks who got in before the IPO.
As you can see, for many years, public investors reaped the lion’s share of a company’s returns. That meant individual investors like you could make a fortune simply by buying stocks like Apple and Microsoft after they went public.
For example, when Microsoft (NASDAQ: MSFT) went public in 1986, the company’s earliest private investors made about 200x their money. Not bad. But after it IPO’d, public market investors made even more — they earned close to 600x their money.
But starting around 2004, things started to change:
Starting with Google’s IPO in 2004, private investors have captured most of the investment profits.
In fact, as you can see in the chart with Yelp, Twitter and Facebook, private investors started capturing 90% or more of the profits.
What’s going on here?
Private Market Profits
As it turns out, two recent trends are making it less profitable to invest in the stock market… and more desirable to invest in the private market.
Trend #1: Staying Private Longer – In the year 2000, the average amount of time between a company being founded and going IPO was 6 years. Today, that number is closer to 10 years.
Those four extra years allow a company to build its business (and its value) dramatically.
Airbnb is a great example. At nine-years-old, it’s already worth $31 billion.
In markets of old, Airbnb would have gone public years ago, back when its value was far lower. This would have given public market investors plenty of time and opportunity to profit from it.
But in today’s world, it might not IPO for years — so private investors will capture the spoils.
Trend #2: Raising Money Privately – Start-ups can stay private longer nowadays because big investors (like hedge funds and mutual funds) have piled into the private markets.
With nearly unlimited capital from these deep-pocketed investors, a start-up can delay its IPO for years — and as it does so, it just keeps getting more and more valuable.
That’s why most of the investment profits nowadays go to investors who get in before the IPO.
“The Stock Market” — R.I.P.
So now you know why you can’t rely on the stock market to grow your nest-egg anymore:
By the time a company goes public, private investors have already sucked out all the big gains.
That explains why it’s essential that you have at least a small part of your portfolio in the private markets…
And that’s why Wayne and I decided to launch Crowdability: we help guide individual investors in this new market.
We offer a number of premium research services that can help you identify, invest in, and profit from private market opportunities.
But we’ve also created a number of free resources for you:
Here’s a 6-part video series that explain the basics of private market investing...
And here’s a series of special reports that detail the tools and processes we use to evaluate private market deals quickly...
You can find these free resources in the Resources section of our website »