The Yin and Yang of Public and Private Markets
There really is just one capital market, it’s a global market and has been for a long time (the french helped to finance the revolutionary war), but it’s become even more global in the post World War II era. Capital markets are where you go for capital for your business, your investment, your project, your building, your home, etc. And though the word is plural, there really is only one capital market at the end of the day. You can see that by looking at the charts of the dow, the ftse, the hang seng, and the nikkei over the past month.
When capital gets more expensive in one sector, geography, or asset class, it generally gets more expensive in all of them. That’s not always true and there are all sorts of lags and caveats, but it’s generally true and getting more so.
In the past couple weeks we’ve been able to witness that happening in the public markets. Pick any stock, market, or sector and you’ve been able to watch asset values getting re-priced in real time reflecting new rates of return and risk premiums that investors are assigning to them.
And that’s how it happens in the public markets, which is what we’ve all been staring at for the past month. But the capital markets are much bigger than the public equity markets and we have not been able to "stare" at the rest of the capital markets so easily.
The markets that everyone has been talking about lately are the credit markets. They are harder to "stare at" but it can still be done if you’ve got a Bloomberg terminal or some other workstation that you can get credit market data on. The chart I’ve seen a bunch is the "TED spread", the spread between treasury bills and three month LIBOR. Thanks to a reader’s comment, here is a chart of it.
The Ted spread has gone way up in the past month as investors have not wanted to own any paper not guaranteed by the US government. That’s in part what the splurge/bailout/nationalization/socialization movement is all about – making a lot more paper guaranteed by the US government or another government, for a while anyway until things calm down.
But the markets that most readers of this blog care about are the private equity markets and in particular the venture capital markets. There is no chart we can stare at to see how the values of our companies are being impacted. That’s good in some ways because if there were a chart, we’d all be staring at it instead of working hard to build the businesses we have invested in, started, or work for.
But make no mistake, the venture capital and related debt markets have been impacted by what has gone on in the past month. I am seeing it every day in our portfolio and in the investment opportunities we look at. Financings are blowing up, terms are being renegotiated, venture lenders are getting more conservative, and existing investors are stepping up to fill the gaps. The good news is that a lot of companies, and many in our portfolios, have raised money recently and have a good amount of cash on hand. Many of those companies who are flush with cash are cutting burn rates and making sure the cash lasts even longer.
But the venture capital markets don’t move in real-time and they don’t report the prices of every transaction to a market system. So it takes time for all of this to happen and it doesn’t happen uniformly. I guarantee that there are some financings happening right now that are getting done at valuations which would have made sense nine months ago but don’t make sense right now, at least to the uninformed observer. I also guarantee that there are some financings happening right now that are getting done at valuations at half or even less of what they would have commanded nine months ago, even though the public markets have only gone down about 33% year to date.
The public markets and private markets are linked and they all participate in that one mega capital market I talked about at the start of this post. But there are all kinds of lags and disconnects between them that cause things to behave differently between the two markets. So you can look to the public markets for some clues, and everyone I know is doing that, but it will only help so much. We are going to have to make up a lot of this as we go along. But I know one thing for sure. Capital has gotten more expensive in the past month (actually it started getting more expensive late last year) and we all had better reflect that in our plans and strategies.