Why Equity Investors Should Be Wary Of Unicorns

Why Equity Investors Should Be Wary Of Unicorns
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Killik Explains: Why Equity Investors Should Be Wary Of Unicorns

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Welcome to this Killik explains finance. Video this week a topical turn that's doing the rounds in financial markets unicorns and I'm mean to suggest. That equity investors should be wary of them particularly if their new equity investors. Why. Well first of all what's the background. So what do we got here. Unicorns are private companies with valuations of a billion dollars or more. That's the loose definition. And there are an awful lot of them out there. Why. Thanks to the world of off patent as I call it private equity venture capital. Sovereign Wealth Fund finance. In other words there are places where companies can now grow fast and beg away from public markets. And that's the unicorn space if you like a flood of them are now coming to public markets for different reasons. One of them being they want to raise a really serious amount of capital for further growth and expansion public markets are one way to do it. So you've got a flood of household names I'll mention if you in a moment coming to the market looking to raise capital again from the private space into the public space you'd like the question is are they an investment opportunity for private investors now in some senses you'll have no choice. These things are monsters. They are big companies. So indexes and index funds will pick them up naturally and you'll get an exposure through your pension for example whether you like it or not that's not my question. Jim went much choice about that.

My question is should you be looking at these things as shares to pick off and add to a portfolio. And I think going to be a little bit careful here. Now examples.

See I think you who are the unicorns we all recognize them straight away. I think most people have heard of these names Lyft Uber ride sharing taxi apps. So both of them in the space where basically if you want to get a cab you can book it through an app. You don't have to go to a black cab in London for example this controversy that because obviously de undercutting traditional taxi markets. But most people get the idea and Lyft is the big sort of US competitor to Uber if you like MBNA. Most people come across that one if you're looking to buckaroo. You no longer have to go to programs like a Hilton hotel. You can go onto the website in the app and look around people who've got a homes so room in their home spare even an entire homes bear and book it through the app and the app and they take a cut for arranging that. So that's the kind of letting hotel app if you like hotel competition app and then you've got Pinterest. If you're looking around at peoples literally people's interest there is a pin them on a board a digital board share that information give other people inspiration so it's a community based app product that won. And there are more you might become of course. Zoom is a big name at the moment. Going to the public markets. So there are lots of these unicorns around and there's a kind of flood of them. The reason they're getting the media attention is quite a few of them are coming almost at the same time to public markets. And there are more besides those big names. Those are the ones you probably heard of. And that's problem number one. So a brief summary in a moment of the four or five problems is going to include the fact you've probably heard of them now all of these are being grown in private hands. Most of them have had some sort of private equity venture capital backing. So these are experts if you like who are able to bring capital to firms without going through the mechanism of a public market like the London Stock Exchange or the New York Stock Exchange. And they're all coming to public markets buy something called an IPO initial public offering. So what's the problem. Martin is a real killjoy. These are great names. I've got the apps or more on my phone I use them every day. Why is he saying be careful. As an investor. And that's the point four or five problems coming out. One of them is just because you've heard of something and just because you use it doesn't necessarily make it a good investment. It can sometimes.

But in these cases be careful. They're popular.

Now Warren Buffett always said you want to be greedy when others are fearful. No one's fearful here. Loads of people know about lift let those people know about Uber lose we use a b and b these days. So everyone's heard of these names. Their services are fairly simple or well understood. I need a room for the night Abby and me. Let's hear what's available bang. Off you go can get your credit card job done. They're pretty simple to understand. And those are reasons not necessarily to jump in and buy them as individual investments. That's the point. You're not necessarily getting up get a bargain you are buying something is already popular. Scott So if you like some hot momentum behind it then that's not always a good idea. But it's not just that that's the problem here. Number two most of them lose money and do it impressively. So not in all cases. So zoom makes a bit of money if you come across. Then Pinterest is close ish to making some money from that sort of digital pin board idea that I talked about just now but left Aruba a ways off. They're losing around a billion a year depending on which you look at. So last year. So they're losing colossal amounts of money. And this makes them both a bit of a tough ask from an investment point of view and also tough to value. Now that doesn't stop analysts.

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
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