26/4/21: What Low Corporate Insolvencies Figures Aren't Telling Us

 

One of the key features of the Covid19 pandemic to-date has been a relatively low level of corporate insolvencies. In fact, if anything, we are witnessing virtually dissipation of the insolvencies proceedings in the advanced economies, and a simultaneous investment boom in the IPOs markets. 

The problem, of course, is that official statistics - in this case - lie. And they lie to the tune of at least 50 percent. Consider two charts:

And

The chart from the IMF is pretty scary. 18 percent of companies are expected to experience liquidity-related financial distress and 16 percent are expected to experience insolvency risk. The data covers Europe and Asia-Pacific. Which omits a wide range of economies, including those with more heavily leveraged corporate sectors, and cheaper insolvency procedures e.g. the U.S. The estimates also assume that companies that run into financial distress in 2020 will exit the markets in 2020-2021. In other words, the 16 percentage insolvency risk estimate is not covering firms that run into liquidity problems in 2021. Presumably, they will go to the wall in 2022. 

The second chart puts into perspective the IPO investment boom. Vast majority of IPOs in 2020-2021 have been SPACs (aka, vehicles for swapping ownership of prior investments, as opposed to generating new investments). The remainder of IPOs include DPOs (Direct Public Offerings, e.g. Coinbase) which (1) do not raise any new investment capital and (2) swap founders and insiders equity out and retail investors' equity in. 

The data above isn't giving me a lot of hope, to be honest of a genuine investment boom. 

We are living through the period of fully financialized economy: the U.S. government monetary and fiscal injections in 2020 totaled some $12.3 trillion. That is more than 1/2 of the entire annual GDP. Since then, we've added another $2.2 trillion. Much of these money went either directly (monetary policy) or indirectly (Robinhooders' effect) into the Wall Street and the Crypto Alley. In other words, little of it went to sustain real investment in productive capital. Fewer dollars went to sustain skills upgrading or new development. Less still went to support basic or fundamental research. 

In this environment, it is hard to see how global recovery can support higher productivity growth to bring us back to pre-pandemic growth path. What the recovery will support is and accelerated transfer of wealth:

• From lower income households that saved - so far  - their stimulus cash, and are now eager to throw it at pandemic-deferred consumption; 
• To Wall Street (via corporate earnings and inflation) and the State (via inflation-linked taxes).

In the short run, there will be headlines screaming 'recovery boom'. In the long run, there will be more structural unemployment, less jobs creation and greater financial polarization in the society. Low - to-date - corporate insolvencies figures and booming financial markets are masking all of this in the fog of the pandemic-induced confusion. 

5/4/21: The Entrepreneurship Boom: Forced, Voluntary and Funded

 

My recent article for The Currency covering the ongoing global developments in entrepreneurship: The US is experiencing an entrepreneurship boom. So, what is going wrong in Ireland?: https://thecurrency.news/articles/40790/the-us-is-experiencing-an-entrepreneurship-boom-so-what-is-going-wrong-in-ireland/

4/1/17: In 2016, U.S. IPOs Fell off the Cliff. VCs Barely Hanging on...

The golden VC model of finance is getting hammered by the lack of IPOs. Let’s take it from the top. majority of VCs fund companies on the basis of a visible exit (at least strategic visibility), which in the vast majority of cases implies either a sale (M&A by a bigger fish) or an IPO. Rarely do they explicitly factor into company valuations a possibility of a buy-out (for if they did, their models of funding would involve debt, rather than equity) or even less frequently, a possibility of earning a return through organic growth (for if they did, their models will set RRR closer to 5-10 percent pa over a longer time horizon, not quintuple that over a short run). So VC ‘industry’ by and large depends on IPOs. And these IPOs are now exceedingly rare on the ground and their valuations are exceedingly shallower.

Here’s data from FactSet:

Per FactSet:

1) “The number of companies going public on United States exchanges amounted to 33 in the fourth quarter, which represented a 6.5% uptick from the year-ago quarter (31 IPOs), but a 5.7% decline from Q3 (35 IPOs).” Aha, you say, a silver lining! Not quite so. “Despite the increase, this number was still well-below the average fourth quarter IPO count going back to 2000 (47 IPOs).“ And worse: “On an annual basis, there were 106 companies that went public on U.S. exchanges in 2016, which was a 35.4% downtick from 2015 (164 IPOs). The number of initial public offerings in 2016 marked the lowest annual count since 2009, when the number was 64.” 2009?! Wasn’t that the year when the world was crumbling to bits around us? Yes. And 2016? wasn’t this the year when Obamanomics celebrated miracles of labour markets recovery and stock markets indices heading for all time highs? Yes. So something is rotten somewhere, right?

2) Yes, things are rotten. “Gross proceeds (including over-allotment) amounted to $7.1 billion in the fourth quarter, which was a 7.3% decrease year-over-year. On an annual basis, gross proceeds in 2016 represented the smallest total since 2003.” 2003? Was that not the year after the dot.com crash when the investors were still shying away from tech and general start ups? Yes. Which means something is really rotten.

3) Scratch deeper: “During 2016, there were only 13 VC-backed initial public offerings in the Technology Services and Electronic Technology sectors. This marked the lowest annual number since 2009 (4 IPOs).” Of the above 13, only one was in electronic technology and 12 were in technology services. Overall, technology services IPOs count in 2016 was the third lowest on record (since 2007). Technology Services IPOs total proceeds in 2016 were USD2.77 billion, down from USD6.6 billion in 2015 and the lowest reading since 2010

4) And for some more rotten tomatoes: “In Q4, the average first day performance of initial public offerings was 6.7%. This marked a decline from the average first day pop of 8.8% in Q4 2015 and a significant drop from the 18.8% in Q3… On an annual basis, the average first day performance of IPOs in 2016 was 11.7%, which represented the smallest price pop since 2011 (9.8%).”


5) Like it or not, VCs are now being forced to wait longer for IPO exits:

So things are looking pretty barren for traditional VCs. Which might be a matter of a cyclical swing or a structural trend. Either way, the glamor of Series A-Z unicorns is not exactly shining on the proverbial hill.

15/4/16: Tech Sector Finance: Gravity of Gravy

Previously, having posted on disconnection between S&P500 market valuations and basic corporate finance (earnings and distributions) - see that post here: http://trueeconomics.blogspot.com/2016/04/15416-corporate-finance-s-and-bubble.html - it is time to remind us all what a popping bubble looks like.

Earlier this month, I was in San Francisco, the epicentre of the corporate finance-free world of tech. Not surprisingly, few smoke breaks and few chats over a glass of wine with some tech folks revealed a very interesting insight: every single one tech CEO/CFO/COO (but not CTO) I spoke to was concerned with evaporating funding in the markets for non-public equity financing around the Silicon Valley.

Need confirmation? Here is a chart through 1Q 2016 on Tech IPOs trends:

Source: https://www.theatlas.com/charts/Nkk4jHLCe

And a note from the WSJ: http://www.wsj.com/articles/startup-investors-hit-the-brakes-1460676478 on same with a handy graph:

And the numbers of deals? Why, off the cliff too:

Source: https://www.theatlas.com/charts/Vk8_bYUAl

There is not panic, yet, but there is panic already in works: techies are retrenching on new hiring and there are rumours of some layoffs in younger companies. Meanwhile, states-sponsored agencies seeking to lock start ups and existent players into relocating to their countries or landing in the countries with regional HQs are still shopping around, as if money will always be there to rent plush offices and the case-styled furniture for those whiz kids who make up apps with little cash flow behind them...

It all might be temporary. Or it might be the beginning of the real thing. But one thing is certain: on a long enough timeline, one can defy gravity of basic corporate finance only as long as the interest rates defy gravity of risk pricing.