FT journalist Satyajit Das writes that the next crisis may center around booming private markets. Investors have allocated $9.9 trillion to unlisted equity, private credit and early stage or new venture funding. Rationale for concern follows:
First: Private investments are illiquid, which makes it difficult to exit quickly.
Second: The lack of market prices means valuation exercises can be misleading. For example:
After being valued in 2021 at $46bn, a 2022 $800mn funding round valued Klarna at $6.7bn (an 85 per cent fall). As the disappointing initial public offerings of Uber and WeWork highlight, the case is not isolated.
Third: Private equity has shifted to SaaS / asset-light technology focused investment opportunities, which lack the hard assets required by more traditional industries. Das argues that this shift makes valuation more difficult and that investments supported by “intellectual property such as internet platforms or software” are more exposed to economic cycles.
Fourth: Capital is no longer abundant. Whereas non-profitable enterprises could previously raise incremental rounds, this will be more difficult moving forward.
Fifth: Private investments are securitized / packaged sometimes with leverage applied, which allows risk to spread.
To crib from US actor and humourist Will Rogers, it seems that financial markets advance by finding new ways to lose money, which is surprising given that the old ways continue to work just as well.