Abnormal Returns is on hiatus this week. However that does not mean that we are content-free. As we have done in previous years we asked a panel of highly respected independent finance bloggers a series of (hopefully) provocative questions. Yesterday’s edition focused on the rise of smart beta ETFs. Below you can see the blogger’s name, blog name and Twitter/StockTwits handle. We hope you enjoy these posts as we do.
Question: Uber just raised VC monies at a $17 billion valuation. Are the private markets the new public markets? Is the average investor missing out on his/her inability to meaningfully participate in the private/pre-public stages? (Answers in no particular order.)
I don’t know, but I don’t think that individuals are missing out. Did they miss out on the dot-com boom? No, they mistimed their moves, over-allocated to the apparent opportunities, and for the most part picked losers rather than winners. Pretty much the same thing that happens every time around. As with that era, the “touch” of the products feeds the desire. Now you can hold the promise in your hand and see its power (and think, “I can do that”). A lot of capital will be chewed up on lottery picks.
Unclear. The evidence I’ve seen on PE suggests that it is simply expensive leveraged beta with a lot of fees, illiquidity, and brain damage. That said, some more recent evidence suggests it might be marginally better than once thought. Harris, Jenkinson and Kaplan (2013) suggests the outperformance is 3%/year over the S&P 500 over the past 30 years. Well, guess what…an equal-weight S&P 500 index also outperforms by almost 3%/year…
Simply put, no. We learn about the success stories in the pre-public investments, but it is very difficult. There are many special issues – management, estimating future needs, valuation, attracting the right people, building partnerships. This makes the companies difficult to value and volatile in performance.
Sure they’re missing out to the extent that they can’t participate, but given the general underperformance of IPOs and private equity, that isn’t necessarily a bad thing.
The investor is better off using these services than trying to buy into them pre-IPO. Also, it’s hard to tell which of these new, admittedly awesome companies is going to be able to fend off competition. And you can’t tell me Uber’s going to keep their business to themselves forever.
The private markets are where I always like to say “real investment” occurs. That said, real investment is incredibly risky and studies show that 50% of start-ups fail in their first 5 years. It’s probably a good thing that most people are not able to access the primary markets.
Of course the average investor is missing out because private equity by its very nature is design specifically to exclude them. Though they wrap themselves in a cloak of altruistically pursuing technology and innovation designed to create a better world, VC’s and angel investors are the new investment bankers, the hipster robber barons, this generation’s financial rock stars. Meet the new boss, same as the old boss.
While I’m sympathetic to those brave souls who might invest in an earlier stage Uber in public markets, we’ve seen tech IPO’s in the “LinkedIn/Facebook” era have such a rough go of it that maybe it’s better if private markets vet them longer. Again, the days of individual investors buying growth stocks and making 1000% in them appears to be over for now.
Average investors have a hard enough time dealing with periodic losses in the stock market. Venture capital investors are often looking for 1-2 home runs in a portfolio of 20 or so private investments. Roughly 75% of all start-up companies fail and seeing an investment go to zero would be far too difficult for the majority of individuals to handle for the slight possibility of finding one or two big winners. We really only hear about the private company success stories and forget about all of the failed ventures it took to get to that one big winner. Average investors are better off sticking to the public markets.
Average investors are not missing out. It takes an incredible amount of work to be a successful startup investor. Even a lot of VCs suck at it. The government ought to liberalize the rules to allow the average investor to allocate some of their money to startup funds, or allow them to invest via syndicates on platforms like AngelList.
No, they aren’t. The advantage of public markets is that you can access (with liquid ease) stocks that are hated/neglected and trading for significant discounts to intrinsic value. It would be extremely hard (especially in a frothy market like the current one) to buy a basket of unloved, underpriced private companies. Until that is possible, public markets will still offer some of the best long-term values for investors.
Thanks to everyone for their participation. Stay tuned for another question tomorrow.