WeWork: A warning about private market exuberance

A UBIQUITOUS short-term office group with a paper valuation of close to US$100 billion and a small British brokerage with fewer than 200 staff. At first glance, they have little in common. But within a matter of days, WeWork and Shore Capital illustrated a common truth - public markets are going out of fashion.

When market historians look back on 2019, they might well see WeWork's decision a fortnight ago to pull its planned flotation as something of a moment. The short-term office business had been valued at up to US$96 billion by investment banking advisers at Goldman Sachs. In the end, it failed to list even at a US$15 billion valuation.

The market's skittishness has continued. Although the S&P 500 is only a touch off all-time highs, investors are rebuffing new issues. Last week, entertainment group Endeavor was forced to withdraw its planned listing amid limited investor interest.

Home exercise business Peloton did get its float away - and with a chunky US$8.2 billion valuation - but before the day was out, the stock had tumbled 11 per cent. Ride-hailing businesses Uber and Lyft have bombed, too, and are now trading a third below their flotation prices.

There are many plausible reasons for this - over-optimistic initial valuations, a growing realisation that loss-making companies might not become viable businesses, and nervousness about equity markets being ripe for a correction, perhaps triggered by another dotcom crash.

In WeWork's case, there are some added idiosyncrasies - odd governance and quirky accounting among them. As this column (Inside Business, FT) pointed out two years ago, it also has a core business model that, in arbitraging a "duration mismatch" between its (long) leases and the (short) leases it strikes with clients, is uncannily reminiscent of the precarious funding models used by Northern Rock and Lehman Brothers before they collapsed in 2007-8.

Specifics aside, one truth evidenced by the past couple of weeks is that public companies are just not as popular as they were.

There are now barely half the number of listed companies in the US as there were 20 years ago. IPO numbers are down sharply, too. Back in 1999 (before the dotcom euphoria had turned to dust), there were 486 flotations in the US, according to data consultancy Statista. Last year, that had slumped to 190.

The picture in the UK is even weaker, as Brexit and a downbeat European economy compound the mood. So far this year, just £4.8 billion (S$8.2 billion) has been raised on the London Stock Exchange, a tiny fraction of the US$42 billion raised via IPOs on the New York Stock Exchange.

In a damning indictment of just how bleak things have become - especially for smaller listed companies in the UK - Shore Capital, a broker to smaller British companies, whose business relies substantially on listing them, announced last week that it would itself delist from the London Stock Exchange.

Among the reasons it cited: "a lack of liquidity underpins what the board believes to be a mispricing of the company's equity" as well as "the considerable cost and management time".

These are both generally applicable explanations for the trend towards companies staying or going private. Frank company bosses admit to a third reason - a private structure allows them to avoid the growing scrutiny of executive pay that shareholders of public companies increasingly demand.

There are downsides, too, linked to this lesser accountability - for a company to be seen to be choosing a private structure for reasons of obscurity is not a good look at a time of reflection about the sustainability of unbridled capitalism. Even from the point of view of hard-headed shareholder value, less scrutiny can lead to overexuberance in repeated rounds of private capital fundraisings, especially for high-growth but persistently loss-making companies.

It is one of the most obvious distortions of ultra-loose monetary policies that in an era of low bond yields, there is so much investor enthusiasm for new whizz-bang company equity. Hence the stock market highs and Goldman's suggestion that it might float WeWork for US$96 billion.

But private capital, it seems, is even more excitable than listed company shareholders. Just ask SoftBank, the key private backer of WeWork, which now faces a potential 70 per cent writedown on the US$47 billion valuation its last fundraising put on the company. Even the biggest bears on the public markets weren't expecting that scale of downturn. FT

READ MORE: WeWork IPO withdrawn as investors grow wary