Private-equity giant KKR says WeWork’s situation was not a “one-off occurrence,” and expects more venture capital-backed startups to run into funding troubles.
Henry McVey, the firm’s head of global macro and asset allocation, recommends shying away from many similar companies in their early stages of growth because investors will apply more scrutiny to their financials moving forward.
He also provided alternative recommendations for where to invest now.
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We have not heard the last of hot venture capital-backed startups that suddenly struggle to attract additional investor dollars.
That’s according to private-equity firm KKR, which is joining other Wall Street firms like Morgan Stanley in warning that WeWork’s stumble previewed the future for more unicorns.
The shared-workspace provider was on the verge of going public in August. But widespread scrutiny of its financials raised red flags that not only thwarted the IPO process, but tanked its private valuation by more than 80%.
“Our belief is that the WeWork situation was not a ‘one-off’ occurrence,” said Henry McVey, KKR’s head of global macro and asset allocation who is also tasked with managing the firm’s risk-taking limits.
He continued in a note: “Rather, we see a growing number of venture capital/early stage growth investments that we think may have difficulty funding in 2020.” KKR manages $208 billion in assets.
McVey’s outlook comes after an exceedingly profitable year for investors in almost every asset class and in the 11th year of an expansionary cycle — a perfect time for any investor to question how upside is left to take risks.
According to McVey, one course of action is to underweight “many parts” of the universe of companies at their early stages of growth and later stages of VC funding rounds.
That’s because the winners podium for this cycle largely consists of companies that are already richly valued. For example, he considers that companies in the top decile of the S&P 500 are now at their most expensive prices since the 2000 tech bubble.
The implication is that these companies — many of which are in the technology sector — will have a harder time growing at the same rates from their already high starting points. He calls this predicament the winner’s curse.
For the cohort of highly valued companies yet to cross the IPO finish line, McVey anticipates that investors will be more discerning when evaluating their future prospects.
He and other investors certainly noticed that just 23% of the companies that floated IPOs in 2019 were net-income positive in year one — the lowest share in two decades.
Moving forward, the so-called momentum strategy of profiting from the best-performing and most-richly valued companies will lag, in his view.
“Consistent with this view, heady metrics in the private markets like adjusted TAM, or total addressable market, and adjusted EBITDA could all face much more intense investor scrutiny, we believe,” McVey said.
Buy the ‘unloved middle’ instead
The late-stage venture capital space may be too risky to …read more
Source:: Business Insider – Tech