🎙️ Exit Options

Rest easy, Jim Simons.

Simons, the pioneer of quantitative trading and mathematician who became one of the most successful investors in modern financial history, died Friday at 86.

From 1988 through 2023, his fund posted an average annual return of about 40%, even after hefty fees, making Simons and up to three colleagues billionaires. He was worth about $31.8 billion, making him the 49th-richest person in the world.

“Be guided by beauty,” he once said. “It can be a way a company runs, or the way an experiment comes out, or the way a theorem comes out, but there’s a sense of beauty when something is working well, almost an aesthetic to it.”

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Private equity’s $3 trillion burden

• Apple’s next CEO

This, and more, in just 5 minutes to read.

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In The News

💲 Private Equity’s $3 Trillion Burden Sparks Hunt for Exit Options

The initial public offering (IPO) market is coming back, but the recovery hasn’t exactly been swift. 

See, 2022 and 2023 weren’t all that favorable for companies looking to go public. Even now, investors at private equity firms have a record $3.2 trillion invested in aging, closely held companies. 

• As Bloomberg reports this week, "That’s a problem for private equity, which relies on the cycle of raising money to make acquisitions, exiting via a sale or IPO and then returning money to investors — before ultimately asking for more funds to do it all again."

Exit options: Some firms have explored private share sales, and others have established semi-public exchanges to facilitate company exits. There’s also a trend of startups staying private longer, leaving stakeholders with large investments tied up.

• While improving, the IPO market still faces challenges such as low volumes and external events such as international conflict and the upcoming U.S. presidential election (six months away). 
  

• One private equity CEO noted, "We’re seeing evolutionary forces at work now after a couple of really tough years."
  

• Added another partner: "With the volatility and other concerns that you see around the IPO market, we do feel the need to develop alternatives."

Context, please: Companies must weigh the benefits of staying private to avoid regulatory scrutiny and investor demands. Look at Reddit, which waited nearly two decades before going public. For context, Alphabet’s Google had received just $25 million in private funding in the six years from its founding to its 2004 IPO.

Why it matters:

Traditional institutional investors now actively participate in late-stage funding rounds, blurring the lines between private and public market investors. This shift coincides with the rapid decline in the number of public companies in the U.S. since the late 1990s. 

Getting creative: Private equity firms have explored alternative strategies to traditional IPO exits, such as developing permanent capital structures to retain top-performing assets beyond the typical holding period.

• Partial stake sales to peers and investors are another option for private equity firms to generate liquidity while retaining some control over their portfolio companies. Innovative initiatives like the UK's proposed Pisces exchange provide a flexible platform for companies to transition between private and public status.
  

• As one partner commented, "The idea is that it is a private market with a few public market aspects, rather than the other way round."

A precious commodity: New financial products, such as index funds tracking late-stage venture-backed companies, are gaining traction but raise questions about transparency and regulatory oversight.

• As private markets evolve, concerns about investor protection and market integrity emerge. Regulatory leaders stress the importance of maintaining market integrity: "Public confidence in markets is a precious commodity in its own right."

Read more on the IPO market

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💰 Stock buybacks hit highest level since 2018

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📱 Apple’s Next CEO and the Big Question of Succession

Watching 'Succession' feels like peeking into the boardroom drama of a fictional dynasty. In reality, even tech giants like Apple, under Tim Cook's leadership, are crafting their own succession plans.

Thirteen years ago, there were plenty of questions about whether Apple could continue progressing after Steve Jobs’ death.

Since then, Cook has guided the company to a $2.8 trillion market cap, reshaping it with new product categories like smartwatches and building new businesses like subscription services and streaming. 

Shareholders (including Warren Buffett) have been richly rewarded since Cook inherited the company launched by a young Steve Jobs from his family's garage in the mid-1970s.

The big question: Cook, 63, won’t be in charge forever. Who’s next in line?

• Cook has maintained much of Apple's executive team, mostly composed of close colleagues from the Jobs era, with notable exceptions like the departure of designer Jony Ive. 

At the groomer: Cook has emphasized that he’s grooming several internal candidates for the CEO role but declined specifics. 

• Chief Operating Officer Jeff Williams emerged as a frontrunner for Cook's successor, but his age and potential longevity in the role are questions. According to insiders who spoke with Bloomberg, John Ternus, Apple's hardware engineering chief, might be the most likely internal successor. Ternus, known for his collaborative leadership style, has gradually assumed more prominent roles within the company. He turns 50 this month.
  

• Per Bloomberg, “Tim likes him a lot, because he can give a good presentation, he’s very mild-mannered, never puts anything into an email that is controversial and is a very reticent decision-maker. He has a lot of managerial characteristics like Tim….he’s never failed with any role he’s been elevated to.”
  

• Other potential successors include Craig Federighi, head of software engineering, and Deirdre O'Brien, head of retail, though they are considered less likely candidates.

Why it matters:

The person in charge is always critical, especially when your company’s value is in the trillions.

Apple also faces heightened regulatory scrutiny and declining smartphone sales while seeking the next major product breakthrough. A brilliant leader is necessary if Apple wants to gain ground in the AI arms race.

• Amid potential leadership transitions, Apple is also preparing for broader management changes as veteran executives approach retirement.
  

• While some insiders advocate for an external hire to bring fresh perspectives, Apple's historical struggle with integrating outside talent makes that scenario unlikely.

The bottom line: The decision will not be made lightly, given Apple’s enormous weight (6%) in the S&P 500. And the decision of Cook's successor could shape Apple's direction for the next 10-20 years. 

Read more

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Quick Poll

On Wednesday, we asked: Have you ever invested in leveraged single-stock ETFs?

— Nearly all readers said they haven’t. “Hum... I thought the reason to by ETF's was to diversify risk, not increase it.”

— Said another, “I am meeting my investment and savings goals - why would I risk it with leverage?”

— Explained one reader who has invested in them: “I have traded several leveraged single-stick ETFs from Granitshares and Direxion, such as TSLR, AAPB, BABX. NVDL, NVDU, AMDL, CONL, and FBL. As long as you don't buy them as a buy and hold investment, they could be good tools to leverage your trading. Obviously, there would be more risk as well.”

See you next time!

That's it for today on We Study Markets!

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