An investment market that most people can’t access

Author: Joy Liu

Today I want to demystify an investment market that most people think is mysterious—also the market I work in: the private equity market. We’ll use the logic of buying Chinese cabbage to explain exactly how it operates. Finally, from a somewhat different angle, I’ll talk about what I believe is the most essential difference between public markets and the private equity market.

Why use the logic of buying cabbage

The operating logic in any field is actually the same—only the field differs, and the terminology is different. All products, in essence, need to be passed along layer by layer. Different industries wear different “faces,” which makes them feel like worlds that don’t connect with each other. But once you peel off the outer layer, the core logic is pretty much the same.

Also, my grandparents farmed in rural Northeast China. When I was a child, I lived in the countryside too—there was truly no such thing as sewer systems back then, and there still isn’t. Before 8 a.m., there was running tap water; at other times, you had to go pump well water; and at mealtimes, you had to go out to the fields to pick vegetables. So when it comes to vegetables, nature, and this most primitive way of life, I have a special sense of closeness.

What the private equity market is

The private equity market is a rather opaque one. Basically, almost all the wealthy people you’ve heard of, to one degree or another, are in this industry. Each country has different thresholds, and it sounds like a completely different world.

But logically, this isn’t that complicated—specialized terms make it sound far more complex than it really is. It’s human labeling that makes it seem complicated.

In truth, the private equity market is a very old market. “Private equity market”—put plainly, it’s people trading with other people. Two thousand years ago, barter was also private dealing. It’s not a new invention; it’s the oldest trading method in human history.

You have a basket of cabbage and want to trade for a basket of bread, but you can’t find the person who has bread and also wants cabbage. So you need to find someone to inquire on your behalf. Someone says, “I know a person who’s willing to trade bread for cabbage—I can ask.” You ask, and it really works. You, the intermediary, and the other party connect one after another, and once the trade succeeds, you share some cabbage with the intermediary as thanks.

Depending on the complexity, the number of people involved, and the quantity traded, different markets emerge: for transactions with very large volume (50,000 cabbages for 40,000 loaves of bread), this is what the private equity market does; for transactions with very small volume (3 cabbages for 2 loaves of bread), that’s the public market—the stock market.

How cabbage gets into your hands

Using the logic of selling cabbage, let’s see what happens from the farm to you buying it at the market to cook at home.

· Farmers: grow 50,000 cabbages, but they can’t sell directly to 50,000 individuals, so they need to find a large buyer to take them all at once.

· Large distributors (large buyers): purchase large quantities of cabbages in a single go. This corresponds to the Venture Capital layer in the private equity market—closest to the farmers, lowest price, largest profit potential, but also the greatest risk.

· Mid-sized buyers (wholesalers): buy 300 to 1,000 cabbages at a time, corresponding to the Private Equity or M&A (mergers and acquisitions) layer in the private equity market. The cabbages have already been grown, so the risk is relatively lower, but the contracts are still complex.

· Small vendors: buy 50 cabbages at a time, then sell them onward to consumers.

· Consumers: you go to the market and buy one cabbage—you don’t even need to sign a contract; you just get a receipt. This is the public market—retail, not wholesale.

At each layer: purchasing power differs, information asymmetry differs, the possible profit differs, and the risk you must take differs. The closer you are to the farmers, the more complex the contract is, the lower the price is, and the greater the chances and room to make money—but the risk is also higher.

There’s another scenario: a company packages an entire farm’s cabbage, then cuts one cabbage into four pieces and sells them—that’s the concept behind stocks after they go public. The company that packages the farm is the securities firm, and the quarter of a cabbage you buy is a “stock” in the public market.

Cabbage goes up in price, and stocks go up too

Buying cabbage from small vendors follows the logic of public markets’ stocks: you’ve just bought cabbage when—boom—an unexpected snowstorm hits, and in the whole building, it’s only you who got cabbage. Your neighbor might be willing to pay a higher price to buy it from you. But if that doesn’t happen, if you want to resell, you might have to lower the price.

Over the long term, will cabbage prices rise? Yes, absolutely. I remember more than twenty years ago, when winter just started and I got taken by my grandmother to buy cabbage. Back then, families across Northeast China loved to store pickled sauerkraut—cabbage was in high demand. At that time, cabbage was only 0.10 yuan per piece. Where is there cabbage for 0.10 yuan per piece now?

With inflation and continuous money issuance, all that money has to go somewhere. The stock market naturally becomes one of the places it flows into. So overall market value will certainly rise long term. But this doesn’t mean every company’s stock will rise—some varieties become much more expensive, while others are weeded out by the market. The logic is the same.

The two markets’ most essential difference

Many people think the main difference between the public market and the private equity market is a matter of channels—if you don’t know how to participate, everything feels like highly sophisticated information. Channel access is indeed a problem, but channels or qualifications are only later rules created by law. They are not the core difference between the two markets.

The most essential difference between the two markets is that the participants have very large gaps in their ways of thinking and their understanding of the rules governing how the world operates.

Those who do well in the private equity market can still do pretty well in the public market, because their thinking and approach are transferable. But the opposite leads to major problems: people who participate in the public market for a long time may not be able to accept the mindset of the private equity market.

Here are the differences I consider especially important:

【Decision-making power, no overthinking】

Make a decision—right or wrong—accept it as it is. Behind this decision-making power is strong confidence and an understanding of natural laws: the end result of events is positive. Even if the outcome isn’t ideal, you have the ability to repair or try again. If you use the same style of judgment to make many decisions, the results will form a normal distribution: some are ideal, some aren’t, but the positives and negatives offset each other, and the overall ending is positive. That’s a natural phenomenon.

【Patience, and awareness of delayed gratification】

Unlike the public market, in the private equity market you don’t have the opportunity to exit at any time. In the private equity market, you have to wait—wait for things to happen, wait for the company to develop. Even though you can exit early through a Tender Offer (equity transfer transactions in the primary market, also called secondary-market trading within the primary market), doing so may very likely cause you to miss the new value growth that appears during the company’s later development.

You must understand this: in the short term, a company’s development is always on the path of “issues keep arising—issues keep being solved.” You can’t think about leaving every time a problem appears. To put it plainly, it’s a kind of micro-level desire for control. This desire for control is common in the public market, but in the private equity market you must let it go. The process of things unfolding is inherently an ever-changing form—this is natural reality that needs to be accepted.

【Integrity】

In the private equity market, personal integrity matters a great deal. This issue is not something the public market involves at all; in the private equity market, it is a core gate.

All laws are designed to prevent “good people” from being harmed but not to guard against “bad people” as the final arbiter. Ultimately, the final interpretation is most likely to belong to whoever has the means to explain. All morality can only be used to restrain yourself, not others. But to achieve any goal, the process must take place between people. Because the private equity market requires more human interaction, it sits on the edge of social constraints and enters the realm of human nature philosophy.

Who you partner with, whether that person truly wants what’s best for you, and whether they’re willing to speak the honest truth that may be unpleasant—these are the most important parts of investment judgment. Even if you participate in private equity investment through online platforms, behind the scenes there are people drafting legal documents and building investment structures; the platform just hides that part.

What this world is short on

The scarcest thing in this world is not money—money keeps being issued. Something that can be supplied infinitely has very low intrinsic value. The scarcest thing is good integrity.

People with good integrity, without exception, are forged and refined through grinding life’s mire. You can’t talk someone into good integrity. Only when a person has been worn down by life until they give up struggling, fully abandon the survival pattern they used to live by, and develop genuine resentment toward their past behaviors—then their malleability is at its strongest. That’s also why we often hear: before someone undergoes a major transformation, they must have experienced a great deal of pain.

In daily life, if the close people around you interact with you with a mindset of resistance, defense, scheming, and games, rather than communication, understanding, sincerity, guidance, and win-win cooperation, the future will only become more and more chaotic. To judge where someone is headed now and in the future, look at what kind of people they have been spending time with for a long time. A person’s integrity and life storyline will inevitably become more and more similar to the people around them.

Money has never been “earned.” Money is brought. If you make the person right, you can make things right; if you make things right, money will naturally come. The most fundamental foundation is how you做人. If you haven’t handled being a person well, even if you accumulate wealth, it will eventually flow away in other ways—sooner or later.

The private market is a philosophical problem; the public market is a calculation problem

These qualities in the private equity market—patience, judgment, integrity—are very difficult to quantify. There’s no way to accurately describe what “good” and “bad” are, what is right and what is wrong. It’s a kind of uncertain chaos.

In this world, “uncertainty” is the norm. If there are a few things that are certain, then: all of us will leave this world, and that has been decided since the day we were born. We don’t know when we’ll leave, so it’s better to do less overthinking, do what you want to do sooner rather than later, and say what you want to say sooner rather than later. This world is chaotic and unpredictable—that is certain.

My personal view is: what the private equity market tests isn’t just how much money you have. More often, it’s your depth of understanding of the world—how much you refine your thinking and cognition, your ability to distinguish people and see through them, your sensitivity to macro trends, and how you respond to uncertainty, negative outcomes, and different opinions, as well as how quickly you update yourself. These are the biggest dividing lines between participants in the private equity market and those in the public market.

The private equity market is a philosophical problem; the public market is more of a calculation problem. If you figure out the philosophical problem, you may very well get good results in the public market too.

In the private equity market, if you spend enough time “swimming around,” you will definitely accumulate a form of intangible reputation points. Buffett once said that building reputation takes a very long time, but destroying it is very easy. You can’t sustain it for that long through performance—performance is self-inflicted harm. It requires constantly acting out an image that doesn’t match your true self, which causes massive mental wear and tear.

We are all works in progress. Before the day we leave the world, we are constantly repairing ourselves and repairing our lives in the process.