What is a Perpetuity?
Nature does not provide for man, so he must use reason to obtain value. Since his task is both survival and pleasure, man must use philosophy and science to determine what is valuable and then to build something to obtain said value. That which he builds should not require the same work continually to operate; this is the basis for the perpetuity. A perpetuity is an asset that generates a benefit stream continuously into the future. Perpetuity is the basis for intrinsic value.
All of mans progress is towards the creation of assets that add value on behalf of the human on a continuous basis into the future without the human having to replicate previous work to receive benefits. This phenomena is referred to as the perpetuity. This speaks to the advancement from the active benefit stream towards the passive benefit stream (perpetuity). The perpetuity is both a philosophical and scientific phenomena which embodies mans progress in both philosophy and science.
Perpetuity can thus be broken down into:
- Perpetuity Philosophy
- Perpetuity Science
For the purposes of this book, we will be focusing on Perpetuity Science.
Standard of Living: Perpetuities
To increase standard of living without sacrificing quality of life.
How to Get the Goal
In order to increase standard of living without sacrificing quality of life, one is to build, sell or buy perpetuities.
Perpetuities increase standard of living without sacrificing quality of life by possessing recurring revenue and automated work processes to achieve the revenue.
- Building Perpetuities
The building of perpetuities is known as being on the build-side; commonly referred to as entrepreneurship or corporations.
- Buying Perpetuities
The buying of perpetuities is known as investment or being on the buy-side. The players here are Private Equity (PE) or Corporate M&A Departments for major corporations.
III. Selling Perpetuities
The selling of perpetuities is known as the sell-side. The players here are investment bankers (Wall Street).
The Lab of Perpetuities
The experimentation and optimization tool of finance is known as Excel.
Is the scientific computational tool of finance to aid us in the modeling and valuation of perpetuities.
Demand for Perpetuities
There is always demand for perpetuities and especially by institutional investors which means that the market for corporate control more closely mirrors the DCF (intrinsic value) of the perpetuity (corporation). Institutional investors can pay higher multiples in order to realize returns over longer periods of time.
Types of Perpetuities
Perpetuities can be created from companies that possess some aspect of recurring revenue and automated work processes associated with product creation.
At a high level, types of perpetuities include:
- Real estate
Business: The Science of the Perpetuity
Introduction to Business
Business is the science of the perpetuity
Perpetuity value = CF / Discount rate
As you can see we can increase value by increasing CF (increasing revenues, decreasing COGS, SG&A) or decreasing the discount rate.
The Corporation’s Goal
- Become a perpetuity – as characterized by recurring revenue as automated work processes.
- Become a growing perpetuity
Value of growing perpetuity = CF / r – g
g decreases the discount rate
One should make the distinction between a perpetuity and a commodity. A commodity is associated with a single benefit (cash flow) or a finite benefit stream, whereas the benefit stream of a perpetuity is continuous into the future.
What is Intrinsic Value?
Something is intrinsically valuable inasmuch as it is a perpetuity. Perpetuity provides certainty that the benefit stream will be recurring in the future and is thus, the basis for intrinsic value. Perpetuities allow us to improve our standard of living while not sacrificing quality of life by continually dealing with a problem/opportunity in nature and yielding passive benefits.
How to Become Wealthy?
The secret that the wealthy know and the middle class is unaware of is the perpetuity. A perpetuity is an asset that generates a benefit stream continuously into the future. This yields passive benefits rather than active benefits of which the middle class works for. The wealthy know Perpetuity Science which is the science of building, selling & buying perpetuities. There are three sides to the perpetuity:
- Build-Side – How to Build a Perpetuity? (entrepreneurs, corporations)
- How to Build a Benefit Stream?
- Case for Value Perpetuity and Financial Perpetuity
- How to Build a Benefit Stream?
- Value Perpetuity
- Financial Perpetuity
- Growing Financial Perpetuity
- How to De-Risk the Benefit Stream?
- Customer Concentration
- Owner Dependence
- Recurring Revenue
- Sell-Side – How to Sell a Perpetuity? (investment bankers, wall street)
- Buy-Side – How to Buy a Perpetuity? (private equity, corporate M&A)
Ultimately, the wealthy teach their children how to be 21st century perpetuity scientists rather than 20th century functional specialists that will remain in the middle class.
In terms of order, the process is usually:
- Begin on the build-side building a perpetuity which will take 3 to 5 years (initiate coverage and syndicate within a vertical & sub-vertical)
- Enter the sell-side and begin in investment banking after university/business school (within existing investment bank or start own boutique investment bank)
From the sell-side, take advantage of strong opportunities and leverage this into a LMM search fund