I was reading some IPO stuff for newbies, and it said "Public money is usually the cheapest and much less expensive than venture capital, private equity or borrowing money."
I don't undersatnd why the public money is cheaper than all of those mentioned in that line. Can someone explain a bit?
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This is a difficult question to answer without knowing your level of financial education, but here's a simple answer:
The required return from investors in public equities is lower than the required return for VC or PE investors.
If a public stock returns 12% over a period and outperforms its index, its owners (mutual funds/other institutional investors and retail investors) are probably satisfied with the company.
VC and PE firms have a return hurdle (often 8-12%) that they need to exceed in order to share in the profits from their investments. Realistically they target much higher returns because that means they make more money for their investors and themselves. We'll say they need to expect a 20% return in order to invest.
Because they have different return targets, the price they are willing to pay will be lower (assuming the private investors don't expect to be able to make significant changes in performance by owning the company privately.)
We can get into "why" different investors have different return targets and "how" PE and VC gets higher returns than public equities but those are more complex issues.
Nice rundown! +1SB.
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