Bloomberg Businessweek - USA (2019-10-07)

14

◼ REMARKS Bloomberg Businessweek

disconnectbetweenprivatemarkets,

where unicorns feasted on a seemingly

endless supply of cash and valuations

were starting to look bubblelike, and

public markets, where scrutiny of busi-

ness models is more robust.

Where did all this private market

cash come from? One theory can be

found in a recent paper by Michael

Ewens of the California Institute of

Technology and Joan Farre-Mensa of

the University of Illinois at Chicago.

They point to deregulation efforts in the

investing industry in the 1990s, partic-

ularly the National Securities Markets

Improvement Act of 1996. That law

made it easier for startups to raise funds

by reducing some disclosure require-

ments. It also increased the number

of investors allowed in a fund before

it was required to register under the

Investment Company Act. The result,

according to the authors, is that the

spigots of private equity and venture

capital were opened wide, allowing

companies to stay private much longer

and grow much larger without needing

to raise money via an IPO.

Of course, the stock market is often

the ultimate destination for venture cap-

ital and private equity investors looking

to cash in. Why so many of them rode

unicorns in that direction this year is

open for debate. Perhaps it was partly

coincidence, though more cynical folks

will argue that it was because the busi-

ness cycle was growing old, and the

window to cash in on a buoyant stock

market looked like it was closing.

Regardless, what we have now

is a herd of unicorns with inflated

valuationstryingto sellthemselves

in a stock market where investors are

in the mood to play defense. They’d

rather not place risky bets on compa-

nies that are long on ambition but, in

many cases, short on profit. “We’ve

had a delayed feedback loop between

publicinvestorsandprivateinvestors,

becausetherewassomuchprivatecap-

italchasingtheseventure-stage com-

panies,” says Jennifer Foster, co-chief

investment officer of equities at Chilton

Trust. While there’s also a lot of money

chasing investmentsinpublic mar-

kets,shesays, therearea lotmore

decision-makersanalyzingsecurities.

“Thescrutinyonthebusinessmodels—

it’s a healthy dynamic for a vibrant

equity market to have those kinds of

dialogues and questions.”

Some are looking at We Co. as more

than just a quirky company witha

quirkyfounderandanIPOprospectus

fullofredflags.MorganStanleystrat-

egist Michael Wilson views its failure to

launch onto public markets as a major

turningpoint—thewaythefailedlever-

agebuyoutofUnitedAirlinesin 1989

markedtheendofthejunk-bond-fueled

LBO craze of that decade; the way the

AOL-Time Warner merger signaled the

end of the dot-com bubble; and how

JPMorgan Chase & Co.’s takeover of a

collapsed Bear Stearns in 2008 marked

the end of the financial excesses that

followed the turn of the century. “So if

this is the event, what are we ending?”

Wilson asks. “In our view, the days of

generous capital for unprofitable busi-

nesses is over.” <BW> �With Vildana Hajric

and Sarah Ponczek

MoneyRaisedin IPOs

◼Profitablecompanies ◼Unprofitablecompanies

$60b

30

0

1999 2019

YEAR TO DATE

2004 2009 2014

PREVIOUS SPREAD: GETTY IMAGES (5). DATA: COMPILED BY BLOOMBERG

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