Private business valuation is critical, often lost in the exciting conversation about growth. There are many caveats. A new round of capital, no matter how small, fixes the valuation. For example, Canva, a successful Australian startup, was reported to have had its last round of capital raising in September 2021 based on a paltry 0.5 per cent of its capital which (if applied to all holders) attributed a worth $40 billion to the company.
In April, one investor cut his holding value by a third, citing falling tech stocks. It seems that no other investor has followed his example. This does not benefit the sector: how can an incumbent attribute a very different assessment to others?
Leveraged Buyout Debt
If selecting a manager for listed stocks is a challenge, it is even more so for private stocks. There are prolonged blockages as the acquired businesses are not intended to be sold in the short or medium term. Complex finances make high fees difficult to understand without experience.
The most likely path for an average investor is through the debt channels that support these transactions. Leveraged buyout debt is often included in private funds, a generally safer but lower-yielding holding without the bonanza of a big upside. Some may include equity participation to sweeten the deal.
On the other hand, publicly traded markets are losing companies, such as Sydney Airport, Crown and Virtus. Any business with assets that can be sold or with uncompetitive pricing power or dragged down by cyclical declines in revenue and profits is up for grabs.
A portfolio of large publicly traded companies may be left behind in a slow market, while, ironically, those under pressure may be the best investments if private equity remains active. The latter requires astute judgment. Not all broken or interrupted business models will be attractive to private capital.
The party may not last forever. Any listed stock with potential private equity interest deserves additional scrutiny. There must be clear ways in which the PE fund can earn returns.
For many investors, it’s easier, if less exciting, to stick with good-quality mid-caps that replicate private equity methods, like expansion that pays off over the years and is less likely to react to lawsuits. of shareholders who do not match. longer-term strategy. For the patient, the returns can resemble those of private equity.
Private equity investors achieve notable merit in diversifying industry exposure. High-growth unique business services, child care and education, communications, health services and, of course, technology are represented. It is rare to find many similar models on listed markets.
Keeping an open mind about all equity strategies that offer well-informed avenues for selecting underlying investments is critical to long-term capital gains. Retail investors often take too long to appreciate structural changes, retaining faith in traditional investments that are now riskier given the concentration in large-cap public markets. As businesses evolve, so should portfolios.