The Private Equity for Families Blog

You May Miss The Middleman

My generation’s interaction with money, wealth, art, music, communication, commercial real estate, credit, finance, personal real estate, insurance and social interaction has mostly been through trusted third parties like Chase Bank, Goldman Sachs, Fidelity, Sotheby, National Title, Experian, Moody’s, Berkshire Hathaway, Depositary Trust Clearing Corp, ASCAP, Facebook, Apple and Google. These middlemen often have well established oligopolies based on controlling information, resources, capital, authentication, licensing or titling rights.

For the most part, my generation is hooked on middlemen. We would prefer calling someone at one of these brand name organizations rather than dealing with the issue ourselves. We like the idea of someone being in charge who can adjudicate disputes and resolve conflicts. We also have a whole set of industries devoted to influencing people in charge from lobbyists to PR firms.

In a recent article by Tyler Cowen, an economist at George Mason University, writing for “Bloomberg Opinion” on February 7, 2021 entitled “The Future Will Be Decentralized”, Mr. Cowen identifies the first decentralized organizations as the internet and blockchain. He may have forgotten “word of mouth”, but I get his point that no one person or entity owns or controls. For him centralized organizations are Facebook, Twitter, Amazon, Google and Apple. As public companies they are all built on a hierarchy where someone is in charge.

Forget Your BTC Password?

Decentralized organizations are peer to peer like Bitcoin and Ethereum. There is no final appeal to a higher power when you forget your password for Bitcoin. This may be one reason why Fidelity has been exploring custody of Bitcoin? A whole generation of its clients will never trust themselves to procure, store, use and dispose of Bitcoin. The margin of error is too high, and once a mistake is made, the BTC could be lost forever. Speaking about the transformations from centralized to decentralized models, Mr. Cowen comforts me when he admits he would rather put coins in the parking meter than download the parking app:

Having grown up in an analog world, I find these ambitious visions both unsurprising and bewildering. On one hand, I have seen the transition of so much activity to the digital world that another major revolution should not shock me. On the other hand, (a possibly atavistic) part of me likes knowing that someone or something is in control, whether it’s a government, a bunch of people in Mountain View, or even just my dean.

“Life on the blockchain” feels alienating in a way that goes beyond old-style Marxist concerns. (Remember, I am the kind of guy who prefers to slip coins into the parking meter rather than download the app.) When I ask myself what services I am really missing, I find I’m far more interested in a new Chinese restaurant in my town than new open-source platforms to enable innovations I will never quite understand.”

Creators May Have A Different View

If you are an artist, a song writer, an author, an investor, a collector, a home owner, or a small business owner, you are completely reliant on a centralized authority to help you monetize your intellectual or physical capital. If you want to sell art you have to go through a dealer to sell. The economics favor the dealer, not the creator. If you want to sell your home, you need a realtor. The economics favor the realtor who profits from the flow without any capital at risk. If you are a song writer, ASCAP charges you for monitoring usage of your songs. If you are a collector, you have to sell through a dealer under terms favorable to the dealer who has no capital at risk. If you want to sell your business, a similar mismatch of risk and upside exists.

Economics Favor Creators

New digital platforms are being created to sell digital art. Take a look at SuperRare https://superrare.co/ which is a market place for creators. The economics favor the creator. If digital art is sold its authenticity is supported by an Ethereum based blockchain, with an immutable identifier so your art cannot be forged. SuperRare is paid 15 – 20 % of the original sale price and the creator keeps ownership of the rest. Thereafter, SuperRare creates a market for the previously owned art and awards 10% of each subsequent sale proceeds to the artist. Two problems are solved for the artist. She gets most of the original economics for the first sale, and a tail percentage of each successive sale. It is now an income producing asset and it can never be duplicated.

Can You Put Digital Art On Your Wall?

My only question about digital art is how do you hang it on your wall? We go to museums to view great art for a human connection captured by the painter or sculptor. I do not yet see it duplicated by the SuperRare business model.

The Pieta on my iPhone is not the same as viewing it in person. Michelangelo’s masterpiece captures in stone the universality of a mother’s grief at the death of her son in a way SuperRare cannot duplicate.  The analog world still has a place, albeit with poor economics and risk of theft or forgery. However, the digital world is accelerating and there will be conflict as it challenges the analog world built on well-paid and trusted middlemen. Get ready for viewing your digital art in a virtual reality gallery!

The above commentary is for informational purposes only.  Not intended as legal or investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments based on conditions at the time of writing and are subject to change without notice.

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Rob McCreary

Rob McCreary has more than 40 years of transactional experience as an attorney, investment banker and private equity fund manager, and has spent his career in building entrepreneurial organizations with successful track records Founder and chairman of CapitalWorks, he is responsible for developing and maintaining senior relationships with investors and portfolio governance.

This blog represents the views of Rob McCreary and do not reflect those of CapitalWorks or its employees. This blog is not intended as investment advice. Any discussion of a specific security is for illustrative purposes only and should not be relied upon as indicative of such security’s current or future value. Readers should consult with their own financial advisors before making an investment decision.

Private Equity for Families Blog | CapitalWorks Private Equity Cleveland Ohio

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