What It Means for Investors When Private Equity Markets Get Frothy

In this segment from MarketFoolery, host Chris Hill and senior analyst Matt Argersinger reflect on a trend recently pointed out by the The New York Times.

The number of so-called "megarounds" -- private funding rounds to the tune of $100 million or more -- is shooting higher at a torrid pace. Is this ability to dodge the public markets a good thing for companies or retail investors?

A full transcript follows the video.

This video was recorded on Aug. 15, 2018.

Chris Hill: Shout-out to Sam Muffley, longtime listener in Queens, New York. Sent a story through Twitter. Interesting story in The New York Times about the private markets. They're getting a little frothy. The benchmark of, boy, if you could raise $100 million in the private markets, that was seen as such a big deal. Now, it's kind of commonplace.

Matt Argersinger: Yeah. I think Sam is definitely onto something. I read the article, and I was astounded by the number. You mentioned the $100 million deal, which they call "megarounds" in venture capital speak. There were 273 of those last year. This year, through the first seven months, there have already been 268. 268 companies have raised $100 million rounds in the private markets. That's astounding to me. And it does beg the question, if there's that much money slugging around in the private markets, why would I ever go public? If there's that much money available to me? It's astounding.

Hill: I think, for people who are looking to the private markets, anticipating the prospect of companies going public, one, if they do, they're less likely to go public at a cheap valuation. And, to your point, I think they're just less likely to go public.

Argersinger: To the larger point, it makes me think -- and I think it's what Sam's alluding to -- there's a lot of money out there in general. There's obviously a lot of great opportunities in the private markets, but I can guarantee you, many of those megarounds have gone to companies that will never reach any kind of sustainable profitability. We probably won't even ever hear from them. That's money lost.

The point is, being a public company is costly, it's time-consuming, it's resource-intensive. But it provides a healthy amount of scrutiny to a lot of companies, in terms of transparency, do you have a plan to be profitable, we're keeping tabs on you, we want to hear from management, we want to hear what's going on with the company. A lot of these companies can just avoid that right now. And it stinks for us as individual investors in public equities, because the inventory of stocks, as we've talked about, is declining.

Hill: This ties into a thought that I had last week when I saw the story about Jeffrey Katzenberg and Meg Whitman teaming up to unveil a new video streaming service. The headline was, "Jeffrey Katzenberg and Meg Whitman video streaming service, and they've raised $1 billion for this!" I saw that, and I thought, "I would think, given the success that Meg Whitman and Jeffrey Katzenberg have had in their respective careers, they could raise $1 billion for just about anything." I'm not going to get excited about a video streaming service that's brand-new because $1 billion was raised by those two people.

Argersinger: Yeah. It's amazing. It's like, "You had me at Katzenberg, so here's my check." It's amazing what's happening.