Appetite for profit-oriented unicorns on the rise in public markets

A unicorn decorations hangs from New York's Chinatown. Photo by Liam Macleod on Unsplash

Public investors are increasingly showing interest to invest in unicorns that show a path towards profitability, say executives from Qiming Ventures, JP Morgan and Matrix Partners China.

“There’s a lot of appetite for companies seeking growth,” said JPMorgan Chase’s Vice Chairman, Global Banking and Asia Pacific, Jing Ulrich at the RISE Conference in Hong Kong on Tuesday.

“Some of these companies will not be profitable in the near term, but investors are willing to invest for future growth,” added Ulrich.

While 2019 has been a blockbuster year for IPOs, market performance has been less than rosy for a number of loss-making unicorns.

For instance, even as two ride-hailing giants Uber and Lyft burn obscene sums of cash, their public issues continue to draw lukewarm response from US investors.

As of 8 July, Lyft’s shares traded over 23 per cent lower at $59.79 compared to its first day’s close. Uber is faring just slightly better – its stocks being a little over 4.7 per cent higher from its underwhelming first day close of $43.53 in May.

Nisa Leung, Managing Partner at Qiming Venture Partners pointed out that two large “mega unicorns” – Bytedance at $75 billion and Didi Chuxing at $56 billion – are yet to enter the public market.

The proposed entry of a slew of unicorns is further shifting investor attitude towards such loss-making unicorns.

Leung said: “What we see in the US market is that maybe, investors are looking for companies that can turn profitable sometime soon. So the (next) question is whether or not companies like Didi can ever turn profitable. People may (eventually) look for companies that can turn profitable faster than it requires less capital in,” said Leung.

Harry Man, Partner at Matrix Partners China echoed the same sentiment, adding that investors and founders eventually need to “face reality” about how public markets are going to value these companies.

“Ultimately, I think as we move further, what we need to do is face reality. One day you’ve been marked up at a multibillion-dollar valuation to prove to investors and everyone else that you are actually producing results…They are all proving to themselves that they are very good at raising capital but then, what next?” said Man.

Ulrich further noted that Chinese and Hong Kong stock markets have done very well, despite the ongoing Sino-US trade spat and macroeconomic uncertainties.

The Osaka meeting between US President Trump and Chinese President Xi Jinping have led investors to “feel a bit more confident” due to a near-term aversion of escalating tensions between the two countries.

The current climate of ultra-low interest rates also means that it is conducive for companies to issue shares and raise capital. Investors, on their part, are also seeking new avenues to invest their money.

“If you’re investing in fixed income securities around the world, many of the countries with fixed income securities are yielding negative returns. So, we do have investors who are seeking growth. They want to invest in high growth companies,” said Ulrich.

She continued: “Of course, everyone’s aware of the risks that are still here, but that doesn’t mean you stop from investing.”

Qiming Venture Partners, one of China’s leading venture capital firms, also expects its trajectory of exits to keep pace.

According to Leung, Qiming has conducted about 17 IPOs and “multiple” M&As over the last 20 months. It expects the same number of potential IPOs for the next 20 months.

“I think what Jing said is absolutely correct,” said Leung. “We’ve seen the market really picking up again, and we’ve already had a few companies file for IPO in Hong Kong and in the US.”