Blackberry is likely to go private or be bought. Dell is trying to go private. Vancouver based Hootsuite raises $170 million as a private company not an IPO. Facebook stayed private as long as it could. Even Apple is buying back $100 billion of its own shares (with a little push from Carl Icahn). The tech world is increasingly moving out of the public markets into the private markets.
This is understandable as the public markets often vacillate between hate and exuberant love for the tech sector. Valuations of high flyers like Amazon and Tesla are often head-scratchers while cash machines like Apple and Microsoft trade well below S&P averages. There are a number of reasons for this dichotomy, here are two big ones:
- The average institutional and individual investor doesn’t often understand the highly technical products and rapid industry dynamics. Whether it’s semiconductors, enterprise or cloud software, social networking, patent portfolios or data analytics – it takes a bit of chip-head brain to understand the competitive advantages and product cycles in these sectors.
- Traditional valuation methods often don’t work – especially when dealing with high growth companies. I.e. The traditional CAPM model taught to CFAs and MBA just falls apart when cash flow growth at a company exceeds the discount rate (CAPM would suggest this is worth an infinite amount!) Thus alternative methods of valuation need to be used involving long term forecasting and that ain’t easy in a dynamic sector.
Here at Difference, we can’t complain about these trends – because we are focused on the private tech patch and have hired a team of chip-heads to dig deep into the technology, healthcare and media segments we focus on. Note our recent addition of Tom Liston, CFA, one of Canada’s most respected technology analysts and he joins me and Dr. Cosme Ordonez, our healthcare specialist and other well-known members of the investment team and board of directors.
We also sweat the valuations as well. We have been valuing high growth tech or media names for decades and we have the scars to prove it. We think this helps us identify the good opportunities. All this to say that we think we are in the right place at the right time.
Tom Astle, CFA, P.Eng, Head of Investment Strategy, Difference Capital