We Co. and The Fallacy of Private Market ValuationsSubmitted by Trace Wealth Advisors on September 18th, 2019
Earlier this week there was a great article in the Wall Street Journal about We Co. and its founder, Adam Neumann. In case you haven’t been following along for the past month, the public markets basically proclaimed a resounding “no thank you!” when presented with the opportunity to invest in We Co. at its eye-popping valuation of $47 billion. Once the S-1 was filed and disclosures started rolling in on everything from private jet purchases to self-dealing agreements around licensing the company’s name, potential investors started providing a more scrutinous eye to what was going on at the company. Now We Co. finds itself at the center of a PR firestorm, attempting to appease everyone from underwriters to large institutional investors to whom, until recently, they didn’t have to provide nearly as much information. After all of the fallout, the latest talk was of a $10-20 billion valuation, before the IPO was shelved and delayed indefinitely. So what happened? How could a private market darling turn into a public market dud?
Private company and public company investing are two very different things. If you’re going to invest in a private company, you can request all of the information you want, but the company may or may not be willing (nor required) to provide it to you. If you’re presented with the information, you also have fewer ways to prove whether or not the information is even accurate. This brings up a great benefit of investing in public markets…they’re public! Public companies have to provide you with a lot of information on an ongoing basis. Want to know what the CEO of a public company was paid last year? It’s right there in the 10-K filing. Want to know how many shares insiders have bought of a particular company in the past year? It’s right at your fingertips once you pull up Form 4.
The blessing and curse of public company investing is liquidity. On any given day, at any given second during the trading day, you can sell your shares and know exactly what someone is willing to pay for your stake in the company. From a liquidity standpoint, this is wonderful for you: I always know I can get out when I need to at whatever the prevailing price is at that time. On the other hand: I’m constantly reminded of how I’m doing as prices fluctuate. Well from a behavioral standpoint, this is a recipe for disaster: I’m more likely to act on my worst instincts when volatility does rear its head.
Private companies, on the other hand, have to report their prices far less frequently. This “smoothing effect” means that you don’t see the daily ups and downs in prices and, therefore, private investments seem far less volatile. Trust me… the volatility is still there, you just don’t see it since it’s not populated on your computer screen every morning.
A large private company like We Co. would, at a minimum, have to report its valuation when raising a new round of funding. Here is what those funding rounds looked like for We Co.:
So, basically, We Co. was worth $47 billion 8 months ago, and now it’s worth less than half that amount? Huh? The answer is simple… you now have a larger number of potential investors with much greater access to information and different expectations setting the new public company price. Public company disclosures and broad investor scrutiny go a long way towards providing true price discovery, which is an important part of what happened here.
The next time someone extolls the virtues of private markets that offer high returns without the stomach churning volatility of public markets, remember: There is always more than what meets the eye.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Investing in private equity and private debt is subject to significant risks and may not be suitable for all investors.