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2019 was the year that brought us WeWork’s disastrous IPO effort, which ended not with a blockbuster debut, but with a hefty bailout from SoftBank, its top investor. The rescue valued WeWork at $8 billion, a stunning fall from its peak at $47 billion.
The WeWork saga was a kind of reckoning for tech valuations in private markets. But that doesn’t mean venture capitalists are shying away from big deals, according to a recent outlook from analysts at PitchBook.
The research firm thinks mega-deal activity will reach a new record in 2020, when startups are expected to notch more VC-backed investments of over $100 million than ever before. This year saw an all-time high of 222 mega-deals in the United States.
Depending on the industry, “as long as the company has a plausible story for a clear path to profitability, investors are going to fund it,” Jay Ritter, a finance professor at the University of Florida who specializes in valuations and IPOs, told me.
The WeWork effect: The big takeaway from WeWork’s botched IPO, in his view, is that a focus on growth at all costs has given way to a greater emphasis on how startups can starting making money. The humbling of SoftBank, which paired its huge financial clout with a focus on rapid expansion, certainly helps, in his view.
But venture capital firms still have a lot of money to plow into major deals. PitchBook notes that returns and cash flow to VC investors have been “especially positive” in the past two years amid a healthy environment for IPOs and buyouts. And more nontraditional investors — say, asset manager T. Rowe Price or the Qatar Investment Authority — have been more likely to get in on the venture capital action.
The takeaway: In a low-interest rate world, investors are searching for higher returns. That provides more support for venture capital, not less.
Bonus stat: Since 2018, most tech companies have reached unicorn ($1 billion valuation) status before their public debuts, according to CB Insights. The median amount of funding raised by tech startups before their IPOs continues to rise.
The next Bank of England governor is a safe choice
The United Kingdom has picked a safe pair of hands — the country’s top financial regulator — to succeed Mark Carney as Bank of England governor as the economy enters uncharted territory after Brexit.
Andrew Bailey, currently head of the Financial Conduct Authority and a former deputy governor of the UK central bank, will take on the job when Carney steps down in March. Carney’s departure has been delayed three times because of Brexit confusion.
What Bailey inherits: He’ll benefit from a degree of clarity on Brexit following Prime Minister Boris Johnson’s clear victory in the UK election last week.
With a big majority in parliament, Johnson’s government is poised to take Britain out of the European Union by January 31. The UK will then enter into a transitional period that maintains existing trading arrangements while the new terms of its relationship with the bloc get hammered out.
The problem: Economists aren’t sure how the UK economy will fare in the next year as negotiations continue. There’s also concern that the country will run out of time to clinch a deal before the transitional arrangements expire at the end of 2020, raising the prospect of a damaging rupture of trade ties with the bloc. Bailey will have to stand ready to act.
“It’s not the time for a maverick and Bailey will be ready to turn either way on rates depending on how both Brexit and global trade pans out next year,” said Jasper Lawler, head of research at London Capital Group.
Pound note: The pound has shed all of its post-election gains this week. It’s now trading back near $1.30.
Goodbye bond funds, hello stock funds
JPMorgan’s latest outlook for 2020 contains a slew of predictions: global economic growth at 2.5%, the S&P 500 hitting 3,400, a weaker dollar at the start of the year.
Not to be overlooked: the bank’s view that 2020 will usher in a major rotation as retail investors finally get in on the stock market rally, moving away from bond funds and back into stock funds. That would mark a major reversal from 2019, which saw near record high bond fund buying and record stock fund selling.
The data: JPMorgan estimates that net flows into bond funds from retail investors hit $850 billion in 2019, while $360 billion left equity funds. That’s the highest level of outflows since the 2008 financial crisis.
That cautious positioning was a drag on stock markets — but it’s not expected to hold into 2020, as retail investors get on board with the view that global economic uncertainty has lifted. The challenge then becomes predicting when the longest bull market in history will hit its peak.
BlackBerr and CarMa report earnings before US markets open.
- US personal income and spending data for November arrive at 10 a.m. ET.
- The final reading of the University of Michigan’s consumer sentiment survey for December posts at the same time.
Coming next week: It’s a shortened trading week in the United States and Europe, where markets will close early or shut on Tuesday and Wednesday for the Christmas holiday.