20 year treasury is now at >5.5% and fed fund rates at 3.75-4%. The latter is possibly on the way up more after inflation refuses to dip and economy is overall strong in the USA.
High rates are generally negative for equity investors but especially negative for growth stocks that are loss making or just making a small bit of profit. I remember the peak fed funds rate in 2023 at 5.5% and what that did to growth stocks and startup valuations in 2022.
Investors are already adjusting to this new normal of K shaped economy, 3% inflation and possibly higher IR. And i think it’s showing up in our local market valuations for listings and acquisitions.
Two big signs to watch lately with lots of smaller signs. First grab acquisition of atome at about 2.5x revenue. What we hear is at Atome is not very profitable yet. So this is a play on 1+1 is way beyond 2. This kind of deal usually buyer has to pay a premium esp since target is the only multi-regional strong player in town. Yet 2.5x revenue has been framed as overpaying and stock market punished grab for it initially.
Second big sign to watch is the gcash ipo. If it ends up pricing at 20-25x ttm PE instead of the promoter desired 30-40x, then we know for sure market is cold eyed on startup valuations and current numbers vs believing in future story.
The smaller stories? All the sub 1b ipo on Sgx by tech and software and coworking/coliving stories. Many are below water significantly ranging from 10% to 50%! Only infotech systems which is hr saas and solidly profitable is flat. This post ipo performance will inform future listings for sure. Catalist sponsors and fund managers are not blind.
The latest batch of EQDP will
help to add more liquidity to both pre and post ipo scene but I believe they too will recalibrate based on earlier batch ipo and post ipo performance.
So what does this mean as an investor or as a startup founder?
As a startup founder,it’s becoming more and more like every business will be viewed the same except for those in AI space.
AI can have 1m revenue and be worth $50m or more. All other startups, pls either have a market leading regional/global story that makes you attractive to a strategic buyer and/or show growing profits so that your valuation at 20-30x PE is sizable. Some revenue growth would be the sweetener.
Investor side is easy. Be discerning, don’t rush to buy pre ipo or ipo. Look at actual and discount future potential. There may be discounts coming up if there is a rerating due to rising IR ala 2022. This time may not be that painful as there is AI to mitigate the dip, but heaven forbid AI revenue and spending falls short!
We’ve did small adjustment so that hold a bit more cash 10+% and also closed out options so that have dry powder. Eyeing some good priced ig bonds. Equity side, we’ve reverted to our 2022 stand of being mostly in mature large compounders with only sea and grab positions as growth phase companies. This is deliberate as we already have very large exposure to small cap growth and some AI via our vc/pe/angel space.
