Wednesday, May 16, 2012

Leading on the Money Trail

Follow the money.

That's what we do in a capitalist society, isn't it?  Following the money makes sense.  Of course, money just doesn't appear, or grow on trees.  Somebody has to make it.  But one of the best ways to make money is figuring out the best places to do so.  And one of the best ways to do that is look at the places where other people invest their money.

The Private Equity Growth Capital Council (PEGCC), an advocacy group for America's private equity industry, has released its second annual report on where private equity is concentrated around the United States, as well as the world.  Basically, it's a summary of locations that are home to companies where private investors believe returns on their capital make the most sense.  Perhaps not surprisingly, here in America, the state with the companies which received the most private equity last year was Texas, which has already been lauded as the most business-friendly state for ten years by Chief Executive magazine.

What's more surprising, however, is the state claiming the Number Two spot as the second most popular place to invest in American businesses.  That prize goes to my home state, New York, which clipped Texas' total by only a couple of billion dollars.

You'll recall that according to Chief Executive magazine's ranking of the best states in which to do business, New York wasn't second from the top.  It was second from the bottom.  Number 49.  Right before the worst state in which to do business:  California.

But guess which state comes in third in terms of private equity investment?  Yup:  the Golden State.  Deemed the worst state in which to do business by Chief Executive magazine.  Ten years in a row.

On the one hand, it doesn't entirely make sense.  Wouldn't you think that the most capital investment would take place in the states business leaders consider to be the most promising?  Sure, North Carolina, Florida, and Georgia made the top ten in PEGCC's list, but their peers include miserable business states like Illinois and Massachusetts, as well as the perennial worsts, California and New York.

Tennessee and Minnesota, other darlings of chief executives, ranked among the lowest in terms of private investments.  Odd.

Maybe part of the explanation lies in the very cost of doing business that makes states like California and New York so reviled among business leaders.  Maybe simply because it costs so much to do anything in these states, the amount of private equity necessary to accomplish even modest goals needs to be extraordinarily high.  That wouldn't explain Texas' top spot in this ranking, since generally, the Lone Star State is considered a cheap place for doing business.  However, the PEGCC breaks out their numbers by Congressional District as well as by state, and the district that attracted the most investment, regardless of state, was New York City's 14th Congressional District, which includes a huge chunk of Manhattan and some thriving neighborhoods in western Queens.  That geography alone helps explain a lot right there.

Of all the things New York City is, inexpensive isn't one of them.

In addition, although New York and California have bad reputations as places to do business, they are home to many international corporations, large population centers, and prestigious universities.  They are places where competitive business types build off of each others' ambitions and successes, where the sheer numbers of residents demanding services help provide quick roads to profits, and where innovation from entrepreneurial college graduates helps attract optimists.  They're also states where, if you've got the money, you can carve out appealing lifestyles that aren't as readily matched in other parts of the country.  Los Angeles, San Francisco, and Manhattan aren't home to the world's most celebrated people because they're awful places for rich people to live.

Globally speaking, it's also interesting to note that 55% of all equity investing took place here in the United States, with Europe following at 29%.  With so much news touting China's explosive economic growth, it's a bit surprising to see that Asia received only 9% of the investment activity.  Perhaps that's partly because even most of the "private" economic growth in China has taken place with the Chinese government's own money, which must have its old Communist leaders spinning in their graves.

And again, perhaps the United States and Europe command the most cash investment infusions because of the comparatively higher costs for doing business in our post-modern countries.

Nevertheless, following the money investors have freely and deliberately channeled to financial opportunities leads us, at least as far as the dollar amounts are concerned, to Texas, New York, and California.  Our three most populous states, and three of our most politically important ones.

That may be some sort of good news for New York and California, which have come to expect more bad news that good when it comes to economic data.  And it's certainly not bad news for Texas, which has come to expect nothing but good economic news about itself.

Except, is it all good news for Texas?  If these numbers really mean anything, Texas might want to hold off on writing-off its two coastal competitors just yet.  Considering the popular notion that these two states are terrible places to do business, the fact that private equity investors still value them so much should mean something.

Texas is the leader right now.  But its competition is still following close behind.  Might that say more about them, than about the Lone Star State?

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