Weekend Reads for Investors: The S&P 500 and IPOs Sputter, Private Markets Pick Up the Slack
A casual observer of financial markets might look at the modest 0.4% increase in the S&P 500 during the first quarter of 2015 and wonder if investors’ enthusiasm for US stocks was finally cooling. Over the same period, major stock indices in Europe and Asia posted double-digit gains. With the US bull market long in the tooth and central banks around the world borrowing from the US Federal Reserve’s playbook and implementing their own versions of quantitative easing just as Fed Chair Janet Yellen may be losing her patience, it should be no surprise that investors are seeking greener pastures.
Notwithstanding this week’s successful initial public offering from GoDaddy (GDDY), the market for IPOs, traditionally a useful barometer of the collective appetite of investors, also suggests a slowdown is at hand in the United States. Renaissance Capital reports that deal activity has slowed considerably in 2015. Even the celebrated technology sector, usually a reliable driver of new offerings, saw only four deals completed in the first quarter, down from 14 in the same quarter a year ago.
But a look at private market activity makes it clear that there is no shortage of demand. Venture capital-backed companies are finding that there’s more than adequate funding in the private markets, not to mention far less scrutiny from regulators and quarterly earnings-obsessed shareholders. As a result, companies are staying private longer. According to the National Venture Capital Association (NVCA), VC-backed firms took 7.4 years to get to their IPO in 2013 versus just 3.1 years in 2000. The flood of money has led to some eye-popping valuations that only the most imaginative investment bankers will be able to justify in a sale to the public.
The Wall Street Journal recently reported that the demand for private stock is so great that it has led to the formation of shadowy ad hoc markets for unregulated derivatives of closely held tech stocks. The article included a financial adviser’s troubling explanation for how he came to purchase shares in Palantir Technologies:
“We were playing cards one night, and my friend said he could get me some Palantir stock, so I put money in,” says Mr. Dhawan, who never saw any in-depth financial data about the company. “Do I care about valuations? I’m not following it as much as I should,” he says. “I’m hoping it’s a double.”
Acting on stock tips from the weekly poker game? Hopefully Mr. Dhawan exercises more care in managing his clients’ finances.
Sam Altman, president of Y Combinator, which provides seed financing for start-ups, takes exception to any suggestions of froth in the technology sector. In “Bubble Talk,” Altman dismisses the naysayers, offers them a wager, and says, “Eventually, the market will find its clearing price.” Can’t argue with that.
Private equity has been one of the best-performing asset classes over the past 10 years, but Andy Kessler thinks it’s peaked. “Stick a fork in it,” he says. There are simply too many funds chasing too few profitable opportunities, and capital would be better spent “creating companies rather than squeezing the last life out of old ones.”
Below are some other stories that caught my eye in recent weeks.
- Felix Zulauf thinks “financial markets are more distorted than ever.” (Acting Man)
- Howard Marks, CFA, reminds us that “liquidity isn’t free.” (Oaktree Capital Management)
- “Technology has reached a tipping point in finance.” (Institutional Investor)
- “A New-and-Improved Shiller CAPE: Solving the Dividend Payout Ratio Pro” (Philosophical Economics)
- Value investing “works best when things look terrific — or terrifying.” (Financial Times)
- Ben Bernanke says blame low interest rates on the economy, not the Fed. (Brookings Institution)
The Active vs. Passive Debate
- Is it possible that indexing is being overdone? (Forbes)
- The case for a comeback for active management. (Neuberger Berman)
- “What Happens When Vanguard Owns Everything?” (Morningstar)
- How do stock buybacks stack up as a use of shareholders’ capital? (Institutional Investor)
- Aswath Damodaran in defense of the $5 billion GM stock buyback. (Musings on Markets)
Blasts from the Past
- William D. Cohan checks in with Wall Street CEOs from the 2008 financial crisis and finds few willing to talk. (Vanity Fair)
- Remembering Drexel Burnham Lambert 25 years later. (Bloomberg)
The Future of Finance
- “The High Cost of the Gender Imbalance in Finance” (Enterprising Investor)
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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