FT PE and WeWork
Wework pricing
After the dotcom bust, Dan Chung, chief investment officer for Alger, a tech-focused fund manager based in New York, was desperate for hot stocks to fire up his portfolios. In 2003, he spotted a small-cap stock that had dropped 65 per cent in the five months after going public. The company — a specialist in mail-order DVD rentals — was increasing its revenues, but investors had soured on it, worrying that it was precisely the type of risky business that had contributed to the big crash. Mr Chung snapped up stock in the company, Netflix, for $1.20 and within a year the price had climbed fivefold. The gain was a lifeline for Alger, which had suffered outflows after being hit hard by the 9/11 attacks. The holding boosted the asset manager’s small and mid-cap funds, helping stem a wave of withdrawals. Netflix stock would climb further, breaching $200 in 2017, the year Alger sold its stake, to more than $300 today. “After 2001 we lost a lot of clients,” Mr Chung said. “We were trying to prove we could stay in business.” Mr Chung’s big bet on a beaten-up newcomer is worth considering, as a chill descends on some of this year’s newly-listed companies. The five largest US deals of the year, which all fall into the “unicorn” category of private companies worth more than $1bn, have lost an average of 24 per cent of their value since going public. Three of the five remain lower than their IPO price, including Uber, the year’s biggest newcomer, which has lost 37 per cent since its debut in May. SmileDirectClub, the teeth straightening start-up, is down 60 per cent since listing in September, wiping out about $5bn of equity value. “The large unicorns were mispriced and performed very poorly,” said Kathleen Smith, principal of Renaissance Capital. The large unicorns were mispriced and performed very poorly Kathleen Smith,Renaissance Capital WeWork, which scrapped its own listing in September after investors balked at a combination of a high price and dubious governance, has dominated cocktail party chatter. But the downfall of its former chief executive Adam Neumann goes beyond schadenfreude — it has triggered a rethink on valuations. So far in the fourth quarter, three of four listings have priced below the midpoint of their expected ranges set by underwriters, compared to less than one in three over the first three quarters of the year. The numbers suggest that the likes of Goldman Sachs, JPMorgan and Morgan Stanley have responded to investors’ demands for a better deal. The shift in sentiment was probably long overdue, said Mr Chung, given that companies losing billions of dollars a year were being handed very high pricetags. “In hindsight it felt like it was getting out of hand and it has been brewing for years,” he said. The unease coursing through the market for new listings has not completely sapped demand for untested growth companies. Stock in Peloton, the exercise bike start-up, for example, dropped 12 per cent on day one in September, after its bankers priced the deal at the upper limit of its price range, but this week it edged above its listing price for the first time. The company’s market capitalisation is now about eight times its sales over the past 12 months, a significantly higher ratio than the average 3.6 times in the year Mr Chung bought Netflix. (Netflix is now at about seven times). However, the recent weakness in new listings has injected a dose of reality — and has presented growth-focused investors like Alger with a set of new opportunities. Many of them recall what happened to Facebook, which was the largest tech IPO in history when it rang the opening bell in May 2012. The social media group’s shares rose on their first day of trading to close at $45, from $38 at the open, but fell to $21 in the following months. Today, the stock trades at $197. “I think the recent correction is super healthy,” Mr Chung said. “The risk is being taken out of [new listings] as we speak.” Ms Smith of Renaissance calls it “a buyers’ strike” on the part of fund managers who normally pile in to IPOs. Ms Smith added that a lull in new listings could easily be followed by a snap back. “I anticipate we will see an awful lot of private companies that are getting their act together, and they will probably be more cautious in how they price their IPO,” she said. But, for now, the whiff of WeWork’s failure still hangs over the market. “When something like that happens it’s usually an inflection point,” said Stephen Blitz, chief US economist for TS Lombard. “It tells you smart money is no longer doing stupid things.”
PE
Private equity firms are lobbying politicians in Washington as their industry’s far-reaching role in the US economy draws fire from constituencies as diverse as unions, prison reform advocates, Hollywood screenwriters — and Taylor Swift. Congressional hearings held this week ended a long period in which “there hasn’t been a substantial degree of political scrutiny of the private equity industry, besides that around [Bain Capital founder] Mitt Romney in 2012,” said Jim Baker, leader of the Private Equity Stakeholder Project, a pressure group targeting the industry. “The fact that you had the chair of the house financial services committee staking out a critical position about private equity is groundbreaking,” he added. The intensifying back-and-forth between politicians and industry figures underscores how private equity firms, once confined to backing medium-sized companies in established industries, have enlarged their scope to become owners of businesses — and political controversies — on an unprecedented scale. “Someone on Wall Street made a series of decisions that turned our lives upside down,” Giovanna De La Rosa told the US House of Representatives committee on financial services on Tuesday. One of five witnesses who appeared on Capitol Hill to discuss private equity’s impact on the economy, Ms De La Rosa lost her job at Toys R Us after the retail chain filed for bankruptcy in 2017. She later joined the campaign that pressed two private equity firms, Bain Capital and KKR, to create a $20m hardship fund for those who lost their jobs when their buyout of the retail chain soured. There are far too many examples of private equity firms destroying companies, preying on hardworking Americans to maximise their profits Maxine Waters, House financial services committee chair © Bloomberg Other activists have targeted the private equity backers of prison-related companies, such as a bail-bond provider financed by private equity firm Endeavour Capital and a prison telephone company owned by Platinum Equity. And in Hollywood, screenwriters have complained about private equity-backed talent agencies which, they say, have placed themselves in conflict with the clients they are supposed to represent, by negotiating with studios to secure lucrative profit-sharing arrangements for themselves. Conscious of the industry’s growing profile, lobbyists are racing to tell their own story. Ahead of a Democratic presidential debate in Atlanta on Wednesday night, the American Investment Council targeted Georgia residents with social media adverts pointing out that private equity-backed companies employ 250,000 workers in the state. For a national audience, too, industry representatives have strained to portray themselves as a force of American dynamism. In a Fox Business opinion piece earlier this month, AIC boss Drew Maloney hailed Popeyes, a fast-food chain owned by 3G Capital, for reintroducing a spicy chicken sandwich it pulled from menus earlier in the year. “This was all possible because of private equity,” Mr Maloney said. 275m Social media followers of Taylor Swift, who asked them to put pressure on Carlyle Group If this week’s hearings in Washington illustrated how political scrutiny of the industry has intensified, they also suggested little appetite for decisive action. Republicans lined up to praise private equity firms for investing in companies in their districts. Some Democrats, too, eschewed the harsh measures proposed by leftwingers such as presidential hopeful Elizabeth Warren, instead expressing a desire to lay their hands on investment firms’ cash. “I have right now . . . an entrepreneur coming to me to say, ‘Can you help find somebody that would invest’,” said Gregory Meeks, a Democratic congressman from New York. “And part of my struggle is to make sure that some private equity firms are investing more in minority-owned firms.” That suggests Ms Warren faces a hard struggle for her Stop Wall Street Looting bill to become law. The measure would so severely curtail limited liability for private equity-backed companies that industry executives privately say it amounts to a ban on leveraged buyouts. Recommended Private equity runs amok Maxine Waters, chair of the financial services committee, opened the hearing by observing “there are far too many examples of private equity firms destroying companies, preying on hardworking Americans to maximise their profits”. She was not the committee’s only sceptic. Her colleague Alexandria Ocasio-Cortez, the liberal firebrand who has nearly 6m Twitter followers of her own, was quick to see a connection between Ms Swift’s battle with her record label and more commonplace economic troubles. The superstar singer has sought to turn her 275m social media followers against Carlyle Group, which bankrolled the $300m takeover of her old record label, a deal she claimed has prevented her from performing her own songs at a televised awards ceremony. “Private equity groups’ predatory practices actively hurt millions of Americans,” Ms Ocasio-Cortez said in a tweet. “Now they’re holding [Ms Swift’s] own music hostage. They need to be reined in.”
After the dotcom bust, Dan Chung, chief investment officer for Alger, a tech-focused fund manager based in New York, was desperate for hot stocks to fire up his portfolios. In 2003, he spotted a small-cap stock that had dropped 65 per cent in the five months after going public. The company — a specialist in mail-order DVD rentals — was increasing its revenues, but investors had soured on it, worrying that it was precisely the type of risky business that had contributed to the big crash. Mr Chung snapped up stock in the company, Netflix, for $1.20 and within a year the price had climbed fivefold. The gain was a lifeline for Alger, which had suffered outflows after being hit hard by the 9/11 attacks. The holding boosted the asset manager’s small and mid-cap funds, helping stem a wave of withdrawals. Netflix stock would climb further, breaching $200 in 2017, the year Alger sold its stake, to more than $300 today. “After 2001 we lost a lot of clients,” Mr Chung said. “We were trying to prove we could stay in business.” Mr Chung’s big bet on a beaten-up newcomer is worth considering, as a chill descends on some of this year’s newly-listed companies. The five largest US deals of the year, which all fall into the “unicorn” category of private companies worth more than $1bn, have lost an average of 24 per cent of their value since going public. Three of the five remain lower than their IPO price, including Uber, the year’s biggest newcomer, which has lost 37 per cent since its debut in May. SmileDirectClub, the teeth straightening start-up, is down 60 per cent since listing in September, wiping out about $5bn of equity value. “The large unicorns were mispriced and performed very poorly,” said Kathleen Smith, principal of Renaissance Capital. The large unicorns were mispriced and performed very poorly Kathleen Smith,Renaissance Capital WeWork, which scrapped its own listing in September after investors balked at a combination of a high price and dubious governance, has dominated cocktail party chatter. But the downfall of its former chief executive Adam Neumann goes beyond schadenfreude — it has triggered a rethink on valuations. So far in the fourth quarter, three of four listings have priced below the midpoint of their expected ranges set by underwriters, compared to less than one in three over the first three quarters of the year. The numbers suggest that the likes of Goldman Sachs, JPMorgan and Morgan Stanley have responded to investors’ demands for a better deal. The shift in sentiment was probably long overdue, said Mr Chung, given that companies losing billions of dollars a year were being handed very high pricetags. “In hindsight it felt like it was getting out of hand and it has been brewing for years,” he said. The unease coursing through the market for new listings has not completely sapped demand for untested growth companies. Stock in Peloton, the exercise bike start-up, for example, dropped 12 per cent on day one in September, after its bankers priced the deal at the upper limit of its price range, but this week it edged above its listing price for the first time. The company’s market capitalisation is now about eight times its sales over the past 12 months, a significantly higher ratio than the average 3.6 times in the year Mr Chung bought Netflix. (Netflix is now at about seven times). However, the recent weakness in new listings has injected a dose of reality — and has presented growth-focused investors like Alger with a set of new opportunities. Many of them recall what happened to Facebook, which was the largest tech IPO in history when it rang the opening bell in May 2012. The social media group’s shares rose on their first day of trading to close at $45, from $38 at the open, but fell to $21 in the following months. Today, the stock trades at $197. “I think the recent correction is super healthy,” Mr Chung said. “The risk is being taken out of [new listings] as we speak.” Ms Smith of Renaissance calls it “a buyers’ strike” on the part of fund managers who normally pile in to IPOs. Ms Smith added that a lull in new listings could easily be followed by a snap back. “I anticipate we will see an awful lot of private companies that are getting their act together, and they will probably be more cautious in how they price their IPO,” she said. But, for now, the whiff of WeWork’s failure still hangs over the market. “When something like that happens it’s usually an inflection point,” said Stephen Blitz, chief US economist for TS Lombard. “It tells you smart money is no longer doing stupid things.”
PE
Private equity firms are lobbying politicians in Washington as their industry’s far-reaching role in the US economy draws fire from constituencies as diverse as unions, prison reform advocates, Hollywood screenwriters — and Taylor Swift. Congressional hearings held this week ended a long period in which “there hasn’t been a substantial degree of political scrutiny of the private equity industry, besides that around [Bain Capital founder] Mitt Romney in 2012,” said Jim Baker, leader of the Private Equity Stakeholder Project, a pressure group targeting the industry. “The fact that you had the chair of the house financial services committee staking out a critical position about private equity is groundbreaking,” he added. The intensifying back-and-forth between politicians and industry figures underscores how private equity firms, once confined to backing medium-sized companies in established industries, have enlarged their scope to become owners of businesses — and political controversies — on an unprecedented scale. “Someone on Wall Street made a series of decisions that turned our lives upside down,” Giovanna De La Rosa told the US House of Representatives committee on financial services on Tuesday. One of five witnesses who appeared on Capitol Hill to discuss private equity’s impact on the economy, Ms De La Rosa lost her job at Toys R Us after the retail chain filed for bankruptcy in 2017. She later joined the campaign that pressed two private equity firms, Bain Capital and KKR, to create a $20m hardship fund for those who lost their jobs when their buyout of the retail chain soured. There are far too many examples of private equity firms destroying companies, preying on hardworking Americans to maximise their profits Maxine Waters, House financial services committee chair © Bloomberg Other activists have targeted the private equity backers of prison-related companies, such as a bail-bond provider financed by private equity firm Endeavour Capital and a prison telephone company owned by Platinum Equity. And in Hollywood, screenwriters have complained about private equity-backed talent agencies which, they say, have placed themselves in conflict with the clients they are supposed to represent, by negotiating with studios to secure lucrative profit-sharing arrangements for themselves. Conscious of the industry’s growing profile, lobbyists are racing to tell their own story. Ahead of a Democratic presidential debate in Atlanta on Wednesday night, the American Investment Council targeted Georgia residents with social media adverts pointing out that private equity-backed companies employ 250,000 workers in the state. For a national audience, too, industry representatives have strained to portray themselves as a force of American dynamism. In a Fox Business opinion piece earlier this month, AIC boss Drew Maloney hailed Popeyes, a fast-food chain owned by 3G Capital, for reintroducing a spicy chicken sandwich it pulled from menus earlier in the year. “This was all possible because of private equity,” Mr Maloney said. 275m Social media followers of Taylor Swift, who asked them to put pressure on Carlyle Group If this week’s hearings in Washington illustrated how political scrutiny of the industry has intensified, they also suggested little appetite for decisive action. Republicans lined up to praise private equity firms for investing in companies in their districts. Some Democrats, too, eschewed the harsh measures proposed by leftwingers such as presidential hopeful Elizabeth Warren, instead expressing a desire to lay their hands on investment firms’ cash. “I have right now . . . an entrepreneur coming to me to say, ‘Can you help find somebody that would invest’,” said Gregory Meeks, a Democratic congressman from New York. “And part of my struggle is to make sure that some private equity firms are investing more in minority-owned firms.” That suggests Ms Warren faces a hard struggle for her Stop Wall Street Looting bill to become law. The measure would so severely curtail limited liability for private equity-backed companies that industry executives privately say it amounts to a ban on leveraged buyouts. Recommended Private equity runs amok Maxine Waters, chair of the financial services committee, opened the hearing by observing “there are far too many examples of private equity firms destroying companies, preying on hardworking Americans to maximise their profits”. She was not the committee’s only sceptic. Her colleague Alexandria Ocasio-Cortez, the liberal firebrand who has nearly 6m Twitter followers of her own, was quick to see a connection between Ms Swift’s battle with her record label and more commonplace economic troubles. The superstar singer has sought to turn her 275m social media followers against Carlyle Group, which bankrolled the $300m takeover of her old record label, a deal she claimed has prevented her from performing her own songs at a televised awards ceremony. “Private equity groups’ predatory practices actively hurt millions of Americans,” Ms Ocasio-Cortez said in a tweet. “Now they’re holding [Ms Swift’s] own music hostage. They need to be reined in.”
Comments
Post a Comment