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From Buzz to Business: Don’t Envy Private Equity

December 12, 2017, 10:59 am

We’ve talked before about investing around the unicorns because you can’t invest in them. I know investors can get frustrated at being locked out of some of the most dynamic names in the U.S. economy during their peak years of growth and shareholder value creation, but I don’t think you need to be.

Sure, it’s great to nurture a speculative story from day one and watch your holdings appreciate. But it’s also miserable when you have to let that money incubate for years before seeing one penny of profit, especially while the public side of Wall Street is making a lot of money. Why wait when you can make good returns in a matter of months?

To give you a better understanding of how difficult investing in the unicorns really is, let’s take a look at Sharespost 100 (PRIVX), an investment fund that tracks what its specialists rank as the fastest-growing and highest-quality private companies. Because it fills the portfolio with shares insiders sell in private transactions, operating costs are high. You don’t need to be a millionaire-accredited investor to buy PRIVX, but the fees are still a significant drag on people hoping to build a future. And even if these are nominally the top names in Silicon Valley, performance hasn’t lived up to the hype around Lyft, Pinterest, SoFi, Spotify and other core holdings. PRIVX is up 5% since January 2016, which only feels good until you compare that return to the S&P 500’s 36% gain over the same period, and the fund is down year-to-date.

That’s not exactly a stratospheric billionaire-making trajectory. If PRIVX accurately reflects the best of the private equity universe, it’s a pretty safe bet that a lot of the venture-backed start-ups that don’t make the list are having an even harder time keeping up with the index funds. Part of the problem is that the companies in the portfolio that do go public are struggling on the open market. Four PRIVX holdings have made it to the IPO stage so far. Apptio (APTI) has been the only breakout, up 36% from its late 2016 offering, while Cloudera (CLDR) is up just 6% since April. Tintri (TNTR) and Sunrun (RUN), on the other hand, have fallen 22% and a harrowing 60%, respectively, leaving this “successful” slice of the private universe down an average 10% per position.

Of course, none of these companies are household names, but the closer these unicorns get to everyday American economic reality, the more pain their shareholders have had to accept in the meantime. As the biggest and highest-profile IPO this year, Snap (SNAP) tells a similar story: while kids know the messaging platform, the adults on Wall Street aren’t impressed with the numbers, taking the shares down 14% from their debut and erasing a whopping $3 billion in shareholder value in the process.

Don’t envy the Silicon Valley fat cats. When the truly breathtaking opportunities hit the market, you’ll be there to catch them – maybe even at lower levels than what the investment bankers say these companies are worth.

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