3 Reasons Money is Leaving the Market... and Where it's Headed
Could we be witnessing the end of the stock market?
Could its ability to drive wealth be over?
Based on the recent actions of several top-tier hedge funds, the answer to both of these questions is a resounding yes.
In just one example from last week, a $7 billion fund called Coatue Management waved the white flag…
They’re pulling billions out of the market and putting their capital elsewhere.
Where are they putting it?
I’ll tell you exactly where:
Private companies. Start-ups.
Coatue is one of the smartest investors on the globe.
Of the 100 largest venture capital rounds ever raised, 88 happened within the past five years.
If they’re pulling out of the stock market to bet big on start-ups, should we be doing the same?
Let’s look at how the investing world is changing – and what it means for you.
Evidence points to a simple fact:
We’re at the beginning of a massive trend.
Less value is being created in the public stock market…
And more value is being created while companies are still private.
There are several reasons for this shift:
1. Huge Financing Rounds for Private Companies
Historically, to access large amounts of capital, companies needed to go public.
Now they can tap into that capital from the private markets – for example, from venture capitalists.
Due to increased institutional interest in “alternative assets,” and attractive economics for managers who run mega-funds, venture capitalists and hedge fund managers are sitting on heaps of money.
With deep pools of capital to allocate, these fund managers are doing huge financing rounds for private companies. Of the 100 largest venture capital rounds ever raised, 88 happened within the past five years. Each round was north of $50 million.
And these huge rounds dramatically increase the value of the private company.
As an example, look at the valuation of Quora, a question-and-answer start-up. It hasn’t made a dime in revenue yet, but its latest $80 million venture capital infusion puts its value at $900 million.
Airbnb, a hospitality company founded in 2008, has raised more than $300 million. It’s already worth an estimated $10 billion.
Future growth has already been priced into these valuations. If these companies IPO, their already sky-high valuations will limit public market price appreciation.
By then, the profits will already have been made by private investors!
2. Companies Going Public Later
The second reason for this shift is that companies are going public later in their life cycle. According to Jay R. Ritter, a professor at the University of Florida, the average age of companies going public today is 10 years. In 2000, it was just six years.
Those 4 extra years allow the company to scale its business to new heights and modulate its ups and downs.
This creates a vast amount of additional enterprise value.
The result is that much of a company’s gain in value is happening before it goes public.
As Scott Kupor, a top VC at Andreessen Horowitz, noted: “This is why we see T. Rowe, Fidelity and JPMorgan investing [in private start-ups]. They’re saying, ‘There’s not a lot of growth for us in the public market.’ ”
3. Companies Not Going Public At All
Other companies choose not to go public at all, partially because of the hassle and expense. CFO Magazine pegs the average cost at $2.5 million.
Instead, when shareholders need capital to grow, or are ready to turn their shares into cash, they sell shares to private investors, or sell the whole company.
And again, all of that value creation occurs outside of the public equity markets.
We’re not saying the stock market is done for.
We’re just saying that, due to the factors we outlined above, it won’t provide the types of returns investors have come to rely on.
Combine those factors with the historical changes of the JOBS Act and equity crowdfunding, and it’s clear that there’s a massive shift underway in the global financial markets.
Capital is already fleeing the public markets in favor of private equity…
You should take a look at joining the exodus.
Ed. Note: Matt Milner covers just one of the big shifts in the economy you can expect in the future. Every day, Tomorrow in Review readers are given a “review of the future” so that they can anticipate and earn more money and save more time by living smarter. That’s just one small benefit of being a subscriber to the FREE Tomorrow in Review email edition. Sign up for FREE, right here, and never miss another great opportunity like this.