This week, private equity investors at CNBC’s Delivering Alpha conference said that they see a stalemate between investors and tech firms unwilling to accept how much the market assessment of unprofitable growth companies has changed.
One such investor? Bill Ford, CEO of growth equity firm General Atlantic.
The fundamental shift in the public markets has taken place, with investors reconnecting to fundamentals and “getting in touch with what a sustainable growth rate of companies is,” Ford said at the conference. But that reset for companies that are growing without profits hasn’t fully translated to the private markets yet.
“It will take some time for entrepreneurs to accept that growth is priced differently, and we have a stalemate now,” he said of the reset forced by shrinking P/E ratios on the S&P 500. “We’re waiting for that,” Ford said, adding that "it will clear itself in a few years."
Ford cited the average IPO slumping 40% from last year’s level as a reason for private markets to correct more in the near-term, and an obstacle keeping companies from going public for longer than many expect.
“It could be several years before the IPO market is constructive again,” Ford said. Investors need to be able to model long-term growth rates and profitability, and that could take a while, he added. And it’s not as if going public has worked well for many of the high-growth tech names.
“They have not gotten the benefit of going public,” he said, citing a lack of long-term shareholders staying with a company and an inability to raise additional capital.
Ford’s message to his own portfolio companies is to extend their runway for thinking about an exit, and to manage costs and key performance indicators on a path to long-term profitability. “Buy yourself time. That’s what we are preaching to all our portfolio companies,” he said. “Figure out what the growth drivers are, and invest in those areas, and expect a longer runway before you can go public,” he added.
Private equity leaders see consolidation among tech companies as a precondition to going public in the future. “The public markets will want greater scale and some companies that went public last year had not achieved economies of scale,” Ford said. “We will get consolidation.”
There were too many companies in many of the new tech niches where investors backed public offerings in recent years, Ford says. Traditionally, markets will be winnowed down to two or three competitors before the winners become clear to investors, but in the past few years there were as many as eight companies going public in high-growth tech sectors. “We will need that consolidation given how many companies were created during this upcycle,” Ford said.
He added that some of the companies that went public, currently trading at deep discounts, are now missing important growth numbers. They are also no closer to attractive levels of profitability and will likely go private, according to Ford. Still, the jury is out as to whether or not the overall washout has reached its end game.
