Booming asset owner interest in technology-linked private equity investments have fostered an army of start-ups and aspiring entrepreneurs, with some private companies enjoying record-breaking valuations.

But a growing number of investors believe the upsurge is unsustainable and predict an oncoming collapse in the valuation of many so-called “unicorns”, in a manner reminiscent of the popping of the dot-com bubble in April 2000.

“Thank God Thailand doesn't have unicorns because that's the next big bubble that's going to burst,” said Paul Gambles, director of MBMG Investment Advisory, at AsianInvestor’s third Institutional Investment Forum Thailand on Thursday (October 10).

Paul Gambles
Paul Gambles

Unicorns are defined as privately held companies valued at over $1 billion, according to initial rounds of private equity or pre-IPO funding. To date close to 500 of them have emerged, according to Crunchbase.

Gambles argued that the attempt to define the value of these companies lies at the heart of the risk they embody.

“Price discovery on private assets is difficult anyway; price discovery on a unique private asset that nobody knows it will ever be able to turn a profit is impossible,” he said.

INVENTING VALUE

The rise of unicorns has been bolstered by an expanding array of well-funded private equity funds, which have attracted funds from end-investors eager to benefit from the next wave of valuable tech-linked companies.

Some general partners appear to be stretching the concept of respectable practices to do so. One such example is the Vision Fund, a mega-tech private equity vehicle from Japan’s tech company Softbank, which has gained $100 billion of committed capital since launching in 2017.

On October 2 a Twitter user published what appeared to be an accounting presentation slide from the Vision Fund which purported to show that preferred equity holders in the fund may be paid with the capital of other, less senior shareholders. Silicon Valley venture capitalist Chamath Palihapitiya called the set-up a “Ponzi scheme if this is true”.

UK's The Times reported a source close to SoftBank as saying the fund was designed to cater to the varying risk appetites of its investors, with payouts only coming from shareholder funds if the portfolio failed to deliver sufficient returns.

Notably, investors have increased their efforts to conduct due diligence of their fund managers, indicating a heightened caution over private equity funds’ operation and governance.  

Gambles noted that some companies and the funds investing into them have managed to elevate their valuations because of “pure financialisation”, with the resulting high price tags being disconnected from their underlying businesses.

Sailesh Purswani
Sailesh Purswani

“This isn't just SoftBank, this is a whole industry that's now grown up doing these pure accounting exercises to create fantasy value. So whatever you do, don't take your private equity money to California,” Gambles cautioned asset owners in the audience.

The rest of the panellists provided similar views. Sailesh Purswani, president of single-family office Thai Martin Group, said that SoftBank’s way of valuing its portfolio companies appears confusing, and that the majority of start-ups do not end up becoming unicorns. 

“They might hit the home run; we hear about one or two great success stories. But there are thousands of these companies that we don't hear about,” Purswani said.

Thanavut Pornrojnangkool
Thanavut Pornrojnangkool

Thanavut Pornrojnangkool, the chief investment officer of Bangkok Capital Asset Management, added that the phenomenon reminds him of the dot-com bubble.

“How many dot-com [companies] is left today? They are pretty much gone,” he said.

SOUTHEAST ASIA HOPES

Nonetheless, these panellists remain optimistic about the prospects of the private equity market in Southeast Asia.

“In this region there's a much healthier private equity culture, because people still invest in businesses because of [their] commercial aspects. They are not just some financial monster,” said Gambles.

Some private equity managers in Thailand look for more sustainable returns from private companies, added Pornrojnangkool.

“I think they are not trying to hit the jackpot; their investors would [be happy to] get 10% or 12% returns, which is more sustainable,” he said.

However Purswani was slightly more sceptical about the health of private equity focuses in the region. He noted that many funds have funnelled funds into e-commerce and data-driven companies.

“I think they want to be like Grab or Line, where all the data, all the customers are connected; that's what their end game is,” he said.