By Jeff Reeves, MarketWatch
Lack of public scrutiny fuels bad behavior
Aside from the lack of investment opportunity, perhaps more disturbing to the broader financial system is the lack of investment transparency that comes from favoring private markets over public markets.
Consider that many companies that have tried to go public lately, either because they are burning cash way too fast or simply because early investors want an exit that results in a big payday, have proven to be simply jackasses masquerading as unicorns.
The failed IPO of WeWork is the most glaring example of this, with its public market valuation predicted to be tens of billions of dollars lower than its pie-in-the-sky valuation of $47 billion after landing $1 billion in Series H funding back in January 2019. But there’s also the recent troubles with Peloton Interactive /zigman2/quotes/208035743/composite PTON -1.81% with its lackluster IPO and the steady downward spiral of UBER /zigman2/quotes/211348248/composite UBER +0.82% after deep losses and the end of its lockup period.
Public markets aren’t just a way for everyday Americans to share in fast-growing companies, but also a vital way to determine fair value for a company in the cold light of day. And the worst thing of all is that Wall Street is notorious for being peopled with Pollyannas. Every single quarter, the vast majority of stocks “beat” their earnings forecast. For instance, in the third-quarter reporting season that’s under way, data firm FactSet estimates that 75% of S&P 500 companies have topped the mark with a five-year average “beat” rate of 72%.
If three out of four stocks can “surprise” us with better-than-expected earnings, it ain’t like Wall Street is playing hardball. Shying away from even that level of scrutiny is a heck of a red flag.
Repeating the IPO cycle
If all this wasn’t cruel enough, consider the last chapter in the stage of a company: its plateau after it matures. In a few high-profile cases, there are signs that if private markets think they can wring more value out of these companies once more, they’ll pounce — and leave public markets holding the bag just as they do with initial public offerings.
You don’t have to look back to “Barbarians at the Gate” examples from the 1980s for proof, either. Just look at the $50 billion buyout and mega-merger of Kraft Heinz /zigman2/quotes/203625533/composite KHC +0.44% in 2015 that has resulted in an SEC probe and a $15 billion write-down across its once-impressive Kraft and Oscar Mayer brands. Someone surely got paid in the past few years, but it hasn’t been Kraft Heinz shareholders.
Now we’re hearing rumbles of a plan to take drug-store giant Walgreens Boots Alliance /zigman2/quotes/203410933/composite WBA +2.69% private in a $70 billion deal to “unlock value” in an undoubtedly similar way. Do we really expect private equity to care about the long-term health of this company, or just to wring out what they can and then re-enter public markets to leave individual investors with the scraps?
Even if you don’t buy the well-supported arguments that debt-reliant buyouts are terrible for job creation , investors should be concerned that even late-stage investment opportunities are potentially off the table for them as deep-pocketed private-equity firms can take even massive blue-chip stocks off public markets on a whim.
This “rich get richer” mentality is increasingly becoming a feature, not a bug, of American capitalism. But unlikely the public-policy problem of haves versus have-nots in systems ranging from health care to housing to education, this feature is a structural problem for capital markets and, perhaps, for the long-term economic health of the nation.
Jeff Reeves is a MarketWatch columnist.