During last three FOMC meetings, Alan Greenspan raised interest rates by a quarter point in order to bring short term interest rates to a more neutral level. The rate hikes took short term rates to 175 basis points. Despite higher short term rates, throughout summer long term rates have unexpectedly move downward. This surprising movement in long term rates contributed to Morgan Stanley missing estimates during their latest quarterly earnings report, and has puzzled many Wall Street analysts. While some analysts may indicate recent economic slowdown as reason for this abnormality, a more practical explanation lies in United States large economic imbalances.

Over past year United States has experienced a troubling climb in trade deficit, with nearly every monthly reading reaching a new record. The most pronounced rise occurred early in summer and more recent reports have reinforced notion our trade with foreign nations is growing more unbalanced. Earlier this year economists cited an unbalanced world recovery, with Europe in particular, failing to reach their maximum growth potential for growing trade deficit but more recently as world economy slowed down economic imbalances have further expanded.

International banks acting on behalf of their national governments have been snapping up U.S. government securities since Asian economic crisis in late 1990’s to keep their exchange rates artificially low. A strong U.S. dollar, despite economic fundamentals indicating dollar is overvalued, has allowed Asian nations to stimulate their economy through a trade surplus with United States. A strong dollar is fueling a drive by U.S. companies to outsource jobs overseas in order to remain competitive. Despite argument outsourcing helps to lower prices for American consumers, which is true, flow of American money to foreign nations help explain why this recovery has not led to a boom in employment opportunities.

In 2003, private equity investments in India totaled over one billion U. S. Dollars. Over eighty investors risked their money in over ninety Indian companies. However, private investment worldwide has been on decline for past three years. It’s expected to continue to decline and Indian companies shouldn’t expect to be exempt from this trend. The increasingly popular alternative to traditional investment options is Private Investment in Public Equities (PIPEs).

During 1990s, American Venture Capitalists financed about one private company out of every two thousand five hundred reviewed-business plans. After one trillion-dollar Dot Com Meltdown, odds of a private company receiving money from a Venture Capitalist declined to less than one financing in every ten thousand reviewed-business plans. The American Venture Capitalist’s initial investment package has declined from fifty million dollars to less than one million dollars.

The mutual fund industry mushroomed through boom of ‘90s and mutual funds became a staple for US (and increasingly international) investors. Currently, they hold seven trillion dollars in assets from some ninety one million American public investors. In past two years, a series of scandals have plagued industry. Last year, four hundred and sixty four Mutual Funds were liquidated. Eight hundred and seventy firms were merged into larger and stronger companies. And, there were about fifty percent fewer new Mutual Funds formed. The creation of American Mutual Funds for overseas investment has declined and may eventually disappear.

Hedge Funds manage about six hundred billion dollars. Because their investors are wealthy Americans, they have not been subject to rigorous U.S. Securities and Exchange Commission regulation. Recent Hedge Fund Scandals have created political pressure for Hedge Fund accountability. The regulatory inclination will probably limit scope of Hedge Fund investment and operation in future.

Access to these three traditional sources of business risk capital is likely to continue to contract. Their investment strategies are riskier than PIPEs. And, it’s loss of investor capital that creates scandals. It’s scandals that motivate regulatory investigations. And it’s investigations that create media problems and risk of civil or criminal charges. For fund managers, it’s safer and more profitable to reduce risk.

The American investment community is moving toward PIPEs. That is Private Investment in Public Equities (PIPE). They offer investor liquidity, which reduces risk. PIPEs offer investors and company greater leverage potential, which increases potentially greater profits.

Investment in a private company is difficult to recover. The company must be sold or investors must wait until private company’s profits repay risk capital. In a public company, subject to regulatory requirements, investors can quickly sell their shares and hopefully recover their risk capital and even make a profit on a bad investment. Public company stock is a guarantee against complete loss of a risk capital investment. As in Venture Capital Models, investors need not assume a percentage of loses in their profit calculations.

The Market Capitalization (issued shares multiplied by company’s share price) is usually a multiple of balance sheet value of most public companies. The greater value of shares means that investor leverages his investment by taking stock for his money. Equally, public company can leverage its balance sheet by using its shares to acquire cash-producing assets and building company. The axiom is West in that Stock is Money.

Merchant banks are traditional source of PIPE financing. However, in past three years, major Venture Capitalists and Mutual Funds have entered PIPE Market. Currently, there is more money available for PIPE financing than sound potential investments in U.S. Public companies. U.S. regulatory policy makes PIPE investing outside United States more attractive, less risky and more profitable than doing PIPE financings of U.S. Domestic companies.