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The Private Market Overvalues Yet Another Investment

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The private equity markets are under questioning as they have ostensibly misvalued many of the largest IPOs in 2019 and appear to be continuing to do so. Casper Sleep CSPR went public yesterday, and public investors valued it at half its valuation from the last round of private funding.

I am starting to think that the next asset bubble is going to come from the private market’s “unicorn” craze. With venture capitalists unable to properly value start-ups in fields that are new to the markets, such as Uber and Lyft, whose business model had never been seen before. These private equity professionals are supposed to be the kings of the financial world. They are expected to have the insight and judgment to value unlisted start-ups correctly, but it appears that these charismatic CEOs have been able to persuade these financiers that their company’s value is far beyond what the rest of the world is willing to pay.

2019 IPOs

2019 IPOs like Chewy (CHWY - Free Report) , Lyft (LYFT - Free Report) , Uber (UBER - Free Report) , and Slack (WORK - Free Report) have all seen a substantial price drop since they entered the markets. These investments may have a bright future, but the unprofitable nature of these businesses has brought their valuation down from the sky to eye level. Uber just released its Q4 earnings, and investors are excited that this company is on track sending the stock up over 5% in morning trading.

WeWork’s was the apex of 2019 IPO disasters, with the initial underwriting valuing the company at less than half of its most recent private valuation. This IPO failed, and investors wrote this investment down as a significant loss. SoftBank alone had operational losses of $6.5 billion from WeWork’s failed IPO and wrote the investment down by $9.2 billion.

Final Thoughts

Another explanation for these IPOs ostensibly “failing” is that the public markets are being too conservative in their estimates, and too scrupulous on their valuations. If this is the case, these unprofitable unicorns may be ripe for a buy. UBER is already beginning to see a reversal in its share price, and so are a lot of the other losing 2019 IPOs.

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