Tech investors show uncanny degree of consensus

By Paul Mackintosh - 14/04/14

This year was supposed to be the year when Asian private equity exits recovered, as the China Securities Regulatory Commission (CSRC) lifted its moratorium on PRC IPOs and momentum built behind listings in other venues such as Australia. Now that prospect seems to be dimmed with a major – and apparently synchronised – worldwide correction of tech stock valuations that has undercut the whole thesis that venture capitalist (VC) and private equity (PE) investors were hoping to bank on.

As reported in the Financial Times, since early March some of the world’s largest tech stock listings, nine of them in the US and five in Asia, have collectively shed US$275 billion in value. Among the Asian casualties are Tencent in China, Rakuten and Yahoo Japan in Japan, and Naver in South Korea; Facebook, meanwhile, has fallen 22% from its March high, with Twitter and LinkedIn down over 40% from earlier highs. Tech listings in the UK, meanwhile, like Just Eat, have fallen below their IPO valuations.

What’s driving the correction? A pullback from overinflated valuations, according to some. The fever around Twitter and other tech IPOs in the US argued for a retreat in the sector in due course, goes the thesis. If so, the world’s investors show an uncanny degree of consensus across markets and geographies – which of course, happens these days. Others cite a worldwide risk reassessment, partly around geopolitical risk with the developments in Ukraine, but also around US macro recovery and the possibility of higher interest rates. It seems counterintuitive that more buoyant economies should lead to sharp cutbacks in the value of consumer-focused tech stocks, but perhaps that simply suggests how speculative and out of touch with reality the original valuations were.

This development is surely going to check the momentum of some of the year’s most hotly anticipated IPOs. Alibaba, long the darling of successive generations of Asian VC investors, has filed to list in the US some time in 2014 with a valuation forecast by some at around $15 billion, and even – in the wilder realms of speculation – at $200 billion. Expectations at that level may have to be considerably readjusted now. Other Chinese companies originally due to list in US markets include Weibo, China’s Twitter, and PRC e-commerce major VCs and financial advisors who hoped for paydays from those IPOs could be disappointed. Will more listing plans be put on hold now? It would be very surprising to see VCs and entrepreneurs accept sub-par valuations on their assets. So the 2014 exit story, in tech investment at least, could be one of continuing delays.