The following is an excerpt from our recently published Dynamic Growth Opportunities (DGO) portfolio update. For a copy of the full document, please contact us.
Having crossed into “longest bull market in history” territory earlier this year—the exact cross-over point dependent upon one’s definition—the current environment tends to be a powder keg for fearmongers. Any economic data point surfacing with the faintest hint of negative interpretation becomes a smoking gun for the long-overdue downturn. This is not to say we’re declaring “clear skies,” nor is there any shortage of overhangs capable of festering into debilitating wounds that could impair economic growth. However, for various reasons that we’ll explore, it’s possible that the public equity markets might not be the primary victim to a pricing correction. Rather, evidence of a bubble that has yet to pop entirely, but undoubtedly has started to lose pressure, might be on the fringes of the public markets, namely large private companies eyeing to go public or those who recently have listed.
This continual internal reflection of relevance is increasingly imperative when tectonic shifts impact the ground beneath us, and we see a change in the composition of market participants as a major force causing these shifts. We also don’t see this dynamic changing anytime soon.
One downside risk of an entire decade of cheap funding is deep pockets capable of fueling sizable opportunities, causing the universe of venture-backed, privately-held companies to swell to disproportionately large sizes. Instead of having thousands of discerning eyeballs scrutinize aspects such as corporate governance and product safety, these “decacorns” (i.e. unicorns with valuations >$10 billion) are discovering landmines further into their business maturation. The size of this cohort is also noteworthy; today’s decacorns in aggregate rival that of J&J, Walmart, or JPMorgan: at the beginning of this year, decacorns totaled approx. $362 billion in valuation. This is out of a current unicorn total universe of $600 billion across 187 private companies, per PitchBook. Dislocations have occurred over the past few months that have the appearance of idiosyncrasy at first glance: WeWork’s IPO gets shelved and management shake- up ensues, Juul’s CEO steps down amidst product safety concerns, Uber and Lyft go public followed by escalating cash burn concerns. However, in aggregate, the ripple effect causes increased pricing scrutiny to private companies hoping to follow suit in 2020. Today, valuations of the decacorns, as a whole, are roughly 17% lower than they were in the beginning of the year. Those investors with their eyes locked on the public markets, anxiously awaiting a correction, may have missed this private market dislocation or failed to note the 20% peak-to-trough correction in the public markets during Oct-Dec 2018.
To receive a copy of our entire SWS Growth Equity quarterly update, please contact us.