Understanding Private Equity and Market Impacts: Insights from the Resilient Investors Podcast
In this episode, we explore the fundamentals of private equity, its role in portfolio diversification, and recent developments such as the Supreme Court's decision on tariffs. Stay tuned for practical insights on managing investment risks and navigating headline-driven market fluctuations.
Key Topics:
- What is private equity and how does it differ from public markets?
- The trend towards private ownership and decreasing regulatory burdens
- How private equity offers diversification and non-correlation benefits
- The democratization of access to private equity investments
- The importance of liquidity, risk, and expense considerations in private equity
- Impact of the Supreme Court striking down Trump's tariffs
- How tariffs and political news influence market sentiment versus fundamentals
- The role of advisors in focusing on company fundamentals, not headline noise
Full transcript of Episode
Victor Gaxiola: Welcome back to the Resilient Investors Podcast episode three. And today we're looking to have a very lively discussion with focus on two specific areas. One which we mentioned in episode two, which is private equity. So we'll have a little discussion about that. And of course, more recently, the Supreme Court struck down Trump's tariffs. So we'll have a little bit of a discussion on that. And of course, mindful when we record this and by the time it actually gets played out, things could change. But I think it's important for us at least to provide some, initial thoughts on the potential impact that these tariff being struck down could have in the overall picture for the United States over the course of the next year. So why don't we start with private equity? So from a standpoint of definition, Kim, I'll move to you because this is an area that we can focus on. And like I said, we started talking about it in the last podcast, started going down that rabbit hole and said, you know, no, no, let's wait, let's wait. Let's actually do this as its own special podcast. So. What do you like about private equity and how does it fit in someone's portfolio?
Kim Gaxiola: Gosh, there's so much to like about private equity. That is, so let's start with just what we think, what is private equity? Private equity is all of the companies out there that are not publicly traded on the stock market. You know, anyone who opens up a business as an S-Corp or a C-Corp issues shares of stock and that stock is private equity. So I know a lot of people think of private equity as just the tech market here in Silicon Valley, and it's probably very egocentric of us here in Silicon Valley to think that that's the whole world, but it isn't. It's really just a matter of all corporations that are not publicly traded. And the trends there... This is why I think it's so fascinating to talk about is just that the trends there are the fact that number one there are more private equity companies than there are publicly traded stocks. And so we are very limited when we talk about buying stocks in the public market, we were very limited to what's actually available. The trend has been over time that more and more companies have decided to go private. And we know big companies who have done this in the past few years. And quite frankly, it's and and the age at which a startup company will become public is a lot older than it used to be. It used to be about three to four years before a company would go public if they needed a lot of funding. And now that age is on average about 13 years. So it's really interesting what's happened there. And why a company would go from being public to private or from private to public, it's all about financing and how are they going to get the most financing and how important is control to them once they have that financing because if you get financing in the private world, you have a lot more control over your company than if you get it in the public markets. And it's interesting because the trend line of companies becoming more more companies becoming private. As that trend line decreases, the amount of regulation that was required of public companies have also increased. And so, I mean, you know, I think that there's a direct relationship to the fact that the more expensive and the harder it is to abide and comply by all the regulation, the less companies want to go public.
Victor Gaxiola: Yeah, and we've seen the reverse as you mentioned take place where a public company decides to go private and a lot of that is just to have a little bit more control over you how they manage that business without having to answer to shareholder value and the expectations on quarterly results and such. When you look at the makeup of the market just in general I think in the publicly traded markets there's anywhere roughly the estimate roughly is about 8,000 publicly traded stocks in general. You know the S &P 500 being the some of the largest names in the US. Obviously when you look at the private markets, which will blow you away, is just how many companies actually fall within that description. And only about 2 % of the middle market companies are publicly traded. So, I mean, a lot of that has to do with, a lot of the private companies tend to be smaller, maybe even a family-owned business and such. But there are some middle market companies that are of significant size that are still privately owned.
Carolyn Rowland: Hmm.
Victor Gaxiola: I mean, one that comes to mind, which continues to expand, and we get a lot of coverage here in California, is In-N-Out Burger, still privately held. And it's one family. And they continue to expand. think the furthest they've gone east is now Tennessee. And it's just interesting with each new restaurant that they open, for it to be privately owned, it's worth quite a bit. They can make an estimation as to its value.
Carolyn Rowland: Mm.
Kim Gaxiola: Ha ha.
Victor Gaxiola: That's one that easily could probably go public at some point, but there's probably no need because they're doing pretty good on the private space. Yeah.
Kim Gaxiola: Mars, I remember always, Mars was the one company that I knew for so long that wasn't public. I, you know, don't ask me if they're public or private today, but simply put, because we, a long time ago in a different world, we were managing their 401k plan with a different firm that I was working for. And I just remember, you know, they didn't need public financing.
Carolyn Rowland: Thank
Victor Gaxiola: Hahaha
Kim Gaxiola: They had enough to grow on their own and for that they kept their tightly held family business. I don't know if it's that same case today, but I always remember how big they were. But they played privacy.
Victor Gaxiola: Yeah, well, I mean, the reason why we bring up the whole conversation around private equity is because for a long time now, I mean, when you look at different asset classes or different ways for people to invest, mean, people are very, very familiar, let's say, with the stock market and the availability to purchase individual stocks and companies that are publicly traded. That's pretty easy for people, whether they're doing it themselves or they're working with someone and trading it or buying it through, let's say, within a mutual fund. and having access to equity that way. There's the bond market, which is the easiest way, maybe buying a treasury of some sort, or buying, let's say, a bond fund that has a combination of different fixed income assets. So when you look at private equity, it's kind of a separate section of, let's say, a person's overall investment portfolio. But traditionally, whether private equity provides income, diversification, growth, and all the things that you would expect from other asset classes or investment types, Traditionally, it was actually very limited as to who would have had access. Most of the access was limited to institutional investors or accredited investors or people with very, very deep pockets, but a lot has changed in the last couple of years. So I wanted to talk about how we are using, let's say, private equity in our client portfolios, especially those with high net worth or at least they have a significant assets. What role does it play? So Carol, I if you want to join in the conversation, say, in your exposure as far as private equity, where do you see it fits in someone's portfolio?
Carolyn Rowland: Yeah, I think that's a really great question. Like you said, we're so, everyone's very knowledgeable about stocks and bonds. That's the most talked about topics, but using private equity as a source of alternative investments, an alternative to the stocks, right? To get a different kind of risk exposure. So for me, it's somebody that... does has excess capital beyond their needs, right? I don't want to necessarily recommend it for everybody, but there's a time and a place and I'll let Kim kind of speak to more like, I don't know if we can speak to like, not worth that type of stuff. So Kim, you're a lot more familiar with that than I am. So, I mean, feel free to take it away. No pressure.
Kim Gaxiola: now the pressure's on. Thanks, Carolyn. Yeah. So I would have to go back to a grid to see that. But I mean, the funny thing is the main thing that's changed in being able to invest in private equity is you'll hear the democratization of the asset class.
Carolyn Rowland: Hmm.
Kim Gaxiola: And so by democratization, I mean that it has become more accessible to people with lower net worth as well as more available. I think as regulation has changed there, that's one area where regulation has come down to allow more people to invest in it. And probably also technology has come a long way. in order for us to be able to a way to allow investors into private equity. One of the reasons why it was always only available to institutional investors was because it's not like the stock market. It's more like buying a home. You put it in there and you don't know when you're gonna get that money back. It's not liquid.
Carolyn Rowland: Mm-hmm.
Kim Gaxiola: Which is why we will never recommend putting all of your money in there, is because it isn't liquid. And so certain types of vehicles that will hold private equity in it come with different liquidity issues. And so it's really important that we understand what those are and what the time horizons for our clients are to be able to invest in that, as well as just the whole idea of sophistication of investor. You really wanna make sure that that investor really understands that situation. But having said, and having said that, it's funny that even if you wanted to find, people are excited about the next couple of years, there are some really big unicorns as they call them that have the potential to go public. and people want in them now, which is maybe why some of this conversation is coming up. like anything, when I look at these funds, it seems like there's no golden ticket. These funds have to own everything, the winners and the losers. so while the winners will like create some big home runs overall, really, you know, I was just talking to a rep from one of the private equity funds and they said, we're only really looking for singles and doubles in baseball terms. And so I don't think it ever should be the situation where, you know, that's your hot item, that's your hot ticket. It's it and you look at all of them almost like I think sometimes you can get the same performance in a regular equity mutual fund that's public. The difference is the volatility.
Victor Gaxiola: Well, I mean, I think it goes back to the general question about asset class. mean, typically, how much is placed in equity versus how much is placed in fixed income if we were only looking at, know, some places, how much is placed in cash is going to depend obviously on the individual, their potential risk profile, and their time horizon. You'd mentioned liquidity, and that is one of the things that when you look at private equity, it is not for the short-term hold. I mean, it does...
Carolyn Rowland: Mm-hmm.
Victor Gaxiola: The fact that it is not liquid, which means that you can't turn it around and let's say buy it one month and then sell it the next month. It is more for that long-term and long-term oriented investor. going back to the fact that before it was only really for accredited investors or large institutions, there was a reason for that because those people could weigh it out and wait it out and give it five, 10, 20 years for that. private equity investment to pay out. And even within private equity, whether you're buying directly into it or buying into a fund where they themselves are using a lot of the money that they're pulling together to purchase companies, there's a screening process for them as well and ensuring that, we're only gonna screen for the types of companies that we feel confident can provide, like you said in baseball terms, those singles and doubles. And so the selection and the criteria that's used for that selection really matters. Just like picking any portfolio But one of the primary benefits and I and I kind of want to end on on this when you look at you know Why it would be suitable in someone's portfolio is that one of the benefits of private equity is that there's this non correlation to the financial markets especially if you have gone through or the company you're working with has gone through a very thorough selection process and Identified companies that are going to be able to produce either a product or service in any kind of market cycle, whether the market's up, the market's down, whether the economic cycle's in an expansion or a depression or a recession. A lot of these companies that they choose are producing products and services that people are gonna buy, regardless of what's happening. And so with that, if they're producing this product or they're providing a service and there's those revenue that is being generated, the singles and doubles, that even if the market is down, like it was in 2022, There could be a sliver of a person's portfolio that's actually dedicated to private equity that's actually showing positive returns.
Carolyn Rowland: Really great point.
Victor Gaxiola: Yeah, so I think that that's one of the main reasons why we so, you know, when you think about wanting to develop a diversified portfolio, it's more than just diversification within an asset class, it's the entirety of the whole pie, you know, and how much is actually allocated towards stocks, bonds, cash, real estate, private equity. So the good news is that there are now and when this is I think the takeaway opportunities for investors that are not institutionalism that are may not necessarily have.
Kim Gaxiola:Yeah.
Victor Gaxiola: As deep pockets that can participate in private equity and add that to their portfolio mix.
Carolyn Rowland: So if you have already well diversified portfolio, but you want to maybe enhance it just a little bit, that's where private equity would come in. And you're willing to give up some liquidity. Like I think that is the big trade off and the biggest thing to remember, the liquidity give or take rate. And then yes, the higher potential for returns, but that does sometimes mean greater risk. Most of time that means greater risk, right?
Kim Gaxiola: And something we don't really talk about that much is just it is a higher expense fund. If somebody is a index fund and like really mindful of a basis point, you know, the expense of this fund, they're not going to get it. They're not going to get a cheap private equity fund. It's just not possible because it is a lot more expensive to manage and do research on it.
Victor Gaxiola: Mm-hmm. Yeah. So before we move into the tariff talk, I just want to say, if you're curious and interested about learning a little bit more about private equity and how it might fit in your portfolio, feel free to reach out to us. Obviously, in the show notes, we usually have an opportunity for you to schedule some time with our team. So that's the commercial aspect of talking about private equity. So let's shift gears now. So as I mentioned at the beginning of the podcast, just recently, the US Supreme Court struck down Trump's tariffs, they basically came back and said that as a result of trade policy and such that many of the Trump tariffs exceeded the powers that Congress had delegated to the President and as a result the market is reacting to that as it typically does to the news and news cycle. So I wanted to bring it up just because it is topical to have a little bit of a discussion on the potential impact that a move like this could have to client portfolios. and what the outlook looks like for the rest of the year. again, I'll turn to Kim. What are your initial thoughts when you heard about the Supreme Court striking down the terrace?
Kim Gaxiola: Can we get some sound effects to make it a little bit more fun? Yeah, that's what I was thinking. I'm laughing about this. I think this is a headline. I don't think.
Victor Gaxiola: The sad trombone.
Carolyn Rowland: I'm not there.
Kim Gaxiola: Serious long-term investors should be paying that much attention to this. This may be interesting if you are a politic person that likes to follow what's going on in politics. The older I get, think the less I want to follow it because it's annoying noise. It doesn't make me a happier person. I go back and as an economist, my school bachelor's degree is in economics. I wanna say this is political. This really isn't economics. If we want to get to the nitty gritty and say roughly 70 % of the GDP here in the US is based on services. not goods. That goes to say that the impact that tariffs have on the GDP is very minor. We invest in companies here in the US and companies are going to find a way to be profitable with or without tariffs. And so I don't really believe that this is something that we should be thinking about when we think about our portfolios.
Victor Gaxiola: Okay, well, I've actually got numbers that that support can invalidate what you did. So looking at the fiscal implications, the tariff rollback is not as maybe as meaningful as people would initially think. According to the Tax Foundation, estimates are that the US tariffs in 2025 raised close to about 142 billion. But that represents just over or under actually half of a percent of GDP or gross domestic product and about just shy of 4 % of the total federal risk tax receipts. you know, given the fact that this struck down, you know, some of these tariffs that were done under emergency powers, it didn't strike down all tariffs. know, they are continue to be these sectional tariffs that are going to exist in particular products or particular types of products that are being brought in. So those will still exist. So a reasonable working assumption, and this is from data that was provided by Franklin Templeton, is something closer to the order of about hundred billion of annual tariff revenue that might be foregone as a result of the Supreme Court ruling. And that actually equates to just roughly three-tenths of a percent when it comes to GDP, or 2.5 % of total receipts of the federal tax receipts received. So minimal impact when you look at it from the percentage basis, obviously. A hundred billion is a big number, but when you look at the overall impact, it's not as great. So it's always relative to what you're comparing it to.
Carolyn Rowland: And I think too, yes, headline news, but the markets definitely don't like uncertainty, right? Like that's, think one of the big things kind of coming out of this. It's like, well, what's next and how are these companies going to get refunds? And it's really interesting. We'll see. It's probably going to take years. Nothing moves like swiftly with things like that. But so I'll be really interested to see just from like the refund side of things, how that shakes out. But again, like let's
Kim Gaxiola: Yeah.
Carolyn Rowland: Let's focus on the facts and fundamentals and what we know. you know, SCOTUS is just doing their job, right? And checks and balances are in place. So we'll be okay.
Kim Gaxiola: Absolutely.
Victor Gaxiola: Yeah, when it comes to the refunds, are some numbers there at least, know, at least some speculation. A lot of this is speculation still as people are trying to figure out. you know, refunds, as they say, they are possible, but they're not necessarily automatic. And then the big question mark is there are refunds. Well, who gets them? You who's actually going to get a refund? Are we going to get a check from buying a good that used to have a tariff and now it doesn't? really the consensus right now is that they're likely to accrue the refund only to the importer of record. So who is the importer of record when it comes to that? They're the ones that are going to be the ones who originally paid customs, you know, for the actual tariff. so they don't expect that it's going to end up getting to the end purchaser. But if refunds do exist, yeah, unfortunately, those of us who bought, you know, products overseas and
Carolyn Rowland: Mm-mm. No.
Victor Gaxiola: Imported them in are not actually going to get a refund or any sort of thing. It's just that maybe those goods and services or those goods will be a lot less expensive going forward.
Kim Gaxiola: Yeah, there were talks about a $2,000 dividend check for, you know, for citizens. And that's gone now. no dividend, no dividend, tariff dividend paycheck, paychecks are going to be cut by the IRS, unfortunately. I, again, it goes back to this obnoxious thing. The uncertainty is the most unfortunate situation, which is what Carolyn said, because it just
Carolyn Rowland: No, no, we're not getting it.
Kim Gaxiola: Creates this cloud over the economy and the public markets like to use it as a blame game. no matter what media you read and what publications or what side you fall on, the fact of the matter is this is how everything is played out now. When Biden was in the White House, there was a lot that the opposite side had legally, you know, pursued through lawsuits and through SCOTUS to avoid having those things happen. And now we're seeing it on the Trump side. Nothing's changed. We continue to have everything go through the Supreme Court. That is a very major topic in order to get balance and the final... and there's been a lot of talk is they knew this, they knew that it was gonna be challenged because this is what happens in every administration. And so they did have backup plans too, which are being pursued as well. But at the end of the day, again, it may be interesting to see the back and forth play of this whole thing, but it's like gossip or something. But in the end of the day, it's like, what's most important to get you to where you are going isn't the things that you can't control. It's how much are you saving? How much are you spending? When are you retiring? When do you need this money? And a lot of times we like to blame on things we can't control when really it's more important what we can control. and how we get to our goals.
Victor Gaxiola: Yeah. Well, it's well put. And as we've been doing a series of investment reviews, maybe do talk a little bit about not the distraction that comes with both domestic and international geopolitics, right? And this is exactly that. It's more political theater and not to be drawn into it. At the end of the day, I say that this is actually a good for the Constitution. It goes to show that the checks and balances which Carolyn mentioned are so important. that we have these different executive branch, the executive branch, the legislative and now the Supreme Court on the judicial side, and they're all kind of checking on each other and they test each other, and that's all part of the process. But again, at the end of the day, how does that translate into the stocks or equities and the investments that we're selecting? Very minimal, if any. And so if we, as we say, I think one of the roles that we play as advisors for our clients and for those that we advocate for, is to act as that voice of reason that kind of curates information and data and distills from the narrative the narrative that really matters when it comes to how it impacts client portfolios. And it goes back to the fundamentals of companies having good products and services, meeting their corporate earnings and the fundamentals of investing, which is looking for quality. So when you have tariffs and tariff talk and they're in, they're out, that's all theater at the end of the day. It might drive sentiment, it might drive volatility, and that's why you see the fluctuation in prices as the market digest it. But at the end, the market does take all the data and digest it, and then you get closer to the truth as to what these things are really worth. And so that's part of the experience going through. So don't get distracted by the headlines. But we thought it was important enough to at least address in the podcast. I see that that's one of the roles that this podcast plays when we initiated this new format, which is to take topics and things that are driving some of the headlines and then be able to kind of interpret that for our listeners. So, yeah.
Kim Gaxiola: Yeah. And in the meantime, you know, when you talk about the fundamentals, in the meantime, at the same time the tariff news came out, it's in the heat of earnings season for the fourth quarter. So I don't know. Do I really think that the market was volatile because of the tariffs? Or do I tend to think, no, I think it's an accumulation of all of the earnings announcements that have come out. to be honest, but that would take a lot more digging in deeper to the averages of what's coming out there to really see that play out. But that's my opinion.
Carolyn Rowland:
Okay. You
Victor Gaxiola: Well, in general, mean, an overall great discussion on private equity and now on the tariff talks and such. And we hope people are getting a lot of value from listening to these podcasts. We'll continue to provide them, including the show notes. And I do want to point attention if you're listening to this on Spotify or Apple Podcasts, you can also find all of the podcasts that we record on our YouTube channel. So that's the resilient wealth planning YouTube channel where you can follow along. More than just videos around the podcast, there's videos of other subjects and other areas, including recently I did a state of the markets presentation, which provided our outlook for 2026, which is now available on our YouTube channel as well as our website. And as always, we promote them through our approved social media channels that include Instagram, Facebook, and of course, LinkedIn. So we encourage you to follow us there to get the latest and greatest. We do provide much more content on a more regular basis on those social channels. So if you follow along, you'll find out what we're up to and some of the things that matter to our group. And again, as curators, the types of information we think matter to our clients. So any final thoughts, Kim or Carolyn?
Kim Gaxiola: I got them all out.
Carolyn Rowland: None.
Victor Gaxiola: Got them all out. Okay, good. Good. Well, thanks again for listening to the podcast and we look forward to seeing you again soon.
Carolyn Rowland: Thank you.
Kim Gaxiola: Thank you.
# END OF PODCAST
Show Notes
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- Have a question? Send an email to victor@resilientplanning.com