“…the line between public and private markets continues to blur.”
Frontrunning Bloomberg
// A week after I wrote about Michael Mauboussin, Matt Levine (who also writes often about the shift of public to private) highlighted Mauboussin’s latest research in Public Markets Don’t Matter Like They Used To. Mauboussin’s research explains a lot of what we already know, that “large institutional investors have reduced their portfolio allocation to public securities and have increased their allocation to private equity, where returns have historically been higher.” But, he and his co-author Dan Callahan, get more into the why this shift is occurring. One topic that I’ve seen more of lately, which is relatively new, is how the mix of tangible to intangible investments has changed. One implication being, “companies simply do not require as much capital as they once did. This, along with freer access to private capital, allows private companies to remain private longer.”
Like I said before, Mauboussin is a must follow. His Morgan Stanley research report with Callahan can be found here, Public to Private Equity in the United States: A Long-Term Look. There is too much to go over for this newsletter but a few quotes that stood out:
“Virtually none of the $1.3T in value that Amazon built was in the private market. Three percent of the value created by Alphabet, which controls Google, was in the private market, and that percentage was about 17% for Facebook. And the implied value of Uber in the private market was more than 100% of the total value created, as the company’s market capitalization is below what its IPO price implied.”
“Companies have raised more money in private markets than in public markets in each year since 2009. For example, companies raised $3T in private markets and $1.5T in public markets in 2017.”
Big Fish Swimming Downstream
// Turning to the private markets isn’t a new concept as explained in the above research… “When David Swensen took the helm (of Yale’s University endowment) in the mid-1980s, about 65% of the portfolio was allocated to U.S. equities, 15% to U.S. bonds, and none to private equity. Today, U.S. equities, bonds, and cash are less than 10% of the endowment’s target asset allocation.”
But, as the public market continues to be unexplainable, hedge funds and large institutions are going to dedicate the majority of their resources and attention to the private markets. Mauboussin uses Two Sigma Investments and Vanguard as two examples trying to take advantage of these trends.
In the same vein, this week Fortune highlighted how one of the biggest fish in the private markets has its eyes set on Silicon Valley. The article, Blackstone is Hunting Heads and Cutting Checks as it Doubles Down on Tech, opines how “Blackstone’s poised to throw its considerable weight around in private equity tech investing in the years to come.” In early 2019 the Blackstone Group launched its growth equity platform starting by hiring Jon Korngold away from General Atlantic. The article talks about how Blackstone is now scaling up its operations on the tech side, staffing up with new hires who are well-versed in the TMT sector and pursuing an array of tech-related investments. Last Monday, Blackstone announced it had lured former Amazon executive Christine Feng to the firm, just a few months after poaching former KKR managing director Vini Letteri, who played a leading role in guiding KKR’s investments in growth-stage tech companies.
Listen
// Speaking of big fish swimming downstream, Steve Cohen has always made personal private investments but has made it more of a priority and a bigger part of his investing strategy when he formed Point72 Ventures.
Cohen’s right-hand, Matthew Granade, the Chief Market Intelligence Officer at Point72 and Managing Partner of Point72 Ventures, was interviewed on Capital Allocators this week.
In the discussion, Granade talks about Point72’s perspective on model-driven businesses and other investment theses, discretionary vs. systematic investing, as well as what he thinks the hedge fund and VC landscape will look like in five years.
Talking about how Cohen’s hedge fund has endured…“What is today, is not what is going to be profitable tomorrow and you have to be constantly changing the business.”
Where the competitive advantage in data comes from…“has very little to do with the data sources itself or the information, the competitive advantage you’re looking for is the ability to integrate across your investors with your data scientists, with the people who are sourcing the data and get that whole chain of people to work well together and communicate well together because they come from different worlds.”
Company to Know
‘Smart Loans on Your Pre-IPO Shares’
// Quid is a new kind of lending business that partners with company employees and shareholders to give them money for their shares today, while they retain the upside tomorrow, with no fees taken out of pocket. The money is repaid when the company has an IPO for sale. The company was spun out of and is backed by Troy Capital and Oaktree Capital. Troy Capital, out of Santa Monica, CA, was co-founded by Josh Berman who also co-founded MySpace.
~ Quid is interesting because they are going after the same companies as Forge and EquityZen, but they are positioning themselves as more entrepreneurial friendly.
Analysis
// Similar to last week with Dragoneer, I looked over Ribbit Capital’s portfolio in search of possible candidates the company could acquire for its new $600M SPAC. Using the same rationale, here are three companies that I think are potential targets:
Root Insurance is a car insurance startup that uses smartphone technology to understand individual driver behavior. The company has raised $527.5M to date with the last raise in August of 2019 when it raised $350M at a $3.75B valuation. Ribbit led the company’s Series B round.
Brex, which sells credit cards tailored for startups, currently sits at a Series C and has raised a total of $732.1M. Its last raise of $150M was in May of 2020 which valued the company around $2.6B. The company has hit a rocky patch with the recent turmoil but said the recent raise was more offensive than defensive. Ribbit led the company’s Series A and has participated in all its following rounds.
Next Insurance is an online-based insurance company for entrepreneurs and small businesses. The company has raised $381M, with its last raise, a Series C of $250M in October 2019. The company is now valued above $1B. Ribbit led the company’s seed round in 2016.
If You’d Like to Know
// Private
Dream Exchange, First Minority-Owned Stock Market, Now Looking for Companies (Cheddar)
SEC Director Calls for Private Markets to Open Up for Retail Investors (FT)
10 Key Considerations for Going Public with a SPAC (Cooley)
GCM Grosvenor to Merge With Cantor Fitzgerald SPAC (WSJ)
It’s a Good and Bad Time for IPOs (Bloomberg)
Indigo Agriculture Raises Another $360M (CNBC)
Rippling Raises $145M at a $1.35B Valuation (TechCrunch)
Intercom Hires a CFO as it Ramps Toward an IPO (TechCrunch)
// Public
China’s Star Board Among World’s Top Three IPO Venues (Bloomberg)
Nikola’s Entire Second-Quarter Revenue of $36,000 Was for Solar Panels for Executive Chairman (CNBC)
Small Investors Embrace Fractional-Share Trading (WSJ)
ICONIQ Growth: Q2 2020 Cloud Commentary Report (Medium)
Data
// From the FT, Hedge Funds Scour Alternative Data for Edge on Covid and Economy
“Even before coronavirus struck, total annual spending on such information by fund managers alone was predicted to reach more than $1.7B this year, up from $400M three years ago."
// Thanks.
This newsletter is created and authored by Bryce Tolman and is published and provided for informational purposes only. The information in the newsletter constitutes the Author’s own opinions. None of the information contained in the newsletter constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You understand that the Author is not advising, and will not advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the information contained in the newsletter may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.