Christian Munafo, Chief Investment Officer for Liberty Street Advisors, Inc., looks back the role SPACs played in the IPO market in 2020 and discusses what could be in store in 2021.
Well, when you have markets at or near all-time highs as we do right now, you think about where we were back in March, it's just an extraordinary turnaround. But when you do get markets there, what you also get is a lot of companies tapping the initial public offering market either by a direct IPO, or now we've got SPACs and direct listings. To get a sense of kind of how 2020 played out and maybe how 2021 is going to look at this point, Christian Munafo, Chief Investment Officer of Liberty Street Advisors, also Portfolio Manager of SharesPost 100 Fund, he joins us on a phone from New York City. Christian, thanks so much for joining us here. Give us just a look back on 2020. It seemed like we had some really, really big deals.
Yes, good afternoon, it's nice to be with you. Yeah, it was certainly an active year in any stretch of the imagination. IPOs, the traditional IPO structure, at least, we've raised somewhere in the neighborhood of about $80 billion, which is almost up 2x from last year. SPACs were over $80 billion, coming off of $13 billion last year. Direct listings, as we know, are becoming more popular. So, it's certainly been an interesting time for private late-stage innovation companies, and it's worth just understanding that the structure that these companies are coming from is, essentially, structurally liquid, right? The private markets are in a structurally liquid asset class, and over the last couple of decades, what we've seen is that these private companies continue staying private for longer. And so as a result of that, you have these companies that are growing into much larger operating businesses, and at the time that they go public or are attracting also potential acquisition-oriented sponsor capital, they're just much larger businesses than what we saw in the past, when we think of companies like Microsoft and Oracle and those types of companies, when they went public. These companies are staying private for much longer, they're scaling into much larger businesses, and we're seeing a lot of demand for this high-growth innovation.
So I'm going to try and tie this conversation into something that we saw in the markets overnight, and that was the big selloff we've seen over the last two days over in Asia, JD.com, Alibaba, etc., all of that really because China's cracking down on Ant, which was supposed to go public, would've been the biggest IPO ever, and then now they're cracking down, and we're seeing something somewhat similar in the US. Obviously, these are very different circumstances, but the idea that these companies are too big, they're doing too many things. What are you noticing in the private market with midsized companies? Are they getting that warning? Are they wanting to stay smaller?
Yeah, no, I think it's a very good question. I think we've been fortunate that we haven't seen this play out at scale as of yet. I mean, we saw, clearly, a debacle last year with WeWork, and there's obviously some other ones out there. You look with [crosstalk] all of these companies--
WeWork feels like a million years ago, by the way, doesn't it?
Yeah, it does. [laughter]. Yeah, yeah, it sure does, except for those who invested into it, I'm sure.
That's true. [laughter] Good point.
Yeah, but look, I think the reality is, from a mainstream standpoint, a lot of the venture capitalists and growth equity investors who back these companies are very much focused on not just executing on the operational plans of the core company but also making sure that they're not overexposing themselves because they've seen what happens. There's been so much capital that's flown into these markets over the last decade alone. Somewhere in the order of six trillion has come into the private markets, of which over a trillion has been allocated just for venture, and so when you can raise that kind of money, it's not difficult to get excited about trying to grow into different areas. But I think what a lot of it comes down to is governance and discipline at the board level to make sure that the company's staying focused on its core competencies and not stretching itself.
So, Christian, what's your outlook for 2021? I guess just the broad market outlook is, "Okay, vaccines are coming, the worst, once we get past the next couple of months, will be behind us, and we can look forward to, maybe in the second half of the year, maybe even beginning in the second quarter, the economy beginning to grow again." What do you think about the capital-raising and the IPO and the going-public market in 2021?
Sure. So look, I think in any market from our experience and from our perspective, we believe that there's always going to be strong public market interest and demand for innovative, differentiated companies that are generating substantial growth and market penetration and that also can turn a profit, right, because we saw that with some of the companies we're mentioning. Even though they have these hypergrowth-type trajectories, they're unable to demonstrate profitability or at least a path to that. So it's our view that in any market cycle, there's going to continue to be strong demand for these types of companies that can show the ability to generate that profit, and again, there's just been a substantial supply buildup of many of these late-stage companies. And so when we look at 2021, we look at our own portfolio, we see activity that's happening, we believe that 2021 should continue to be a very active year for the late-stage private company space. What we saw this year clearly was an acceleration of technology adoption across the board., These are not only technologies that are going to be disruptive, but they're also going to be complementary, and so we think there's a lot of capital out there that's chasing growth, that's chasing innovation. We think it's going to continue for the foreseeable future.
Is it all going to be in tech start-ups?
Well, it depends on what your definition of start-up is, right? And so when you have companies that are generating hundreds of millions to billions in revenue, those are not start-ups from the traditional sense, and that's what many of these companies are. But look, not all these companies are going to be success stories, and not all of these companies are also going to achieve a public market currency. We have to remember that there's hundreds of billions in cash sitting on the balance sheets of the mega tech companies alone that are looking for ways to augment their own reach and capabilities. And so a lot of these companies will also get acquired, but yes, to your point, they're certainly not going to be all success stories.
Hey, Christian, thanks so much for joining. We appreciate it so much. Very interesting talking tech investing and just growth investing in general. Christian Munofo - he is the Chief Investment Officer for Liberty Street Advisors, also Portfolio Manager of SharesPost 100 Fund - joining us on the phone from New York City.
Note: A special purpose acquisition company or SPAC is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company.