(Bloomberg) -- A private equity giant is warning that more untested companies are due for a reckoning in repeats of WeWork’s abrupt fall from grace.
Henry McVey, the head of global macro and asset allocation at KKR & Co., recommends investors stay underweight many high-flying yet unprofitable companies funded by venture-capital firms or in the early stages of growth.
“The WeWork situation was not a ‘one-off’ occurrence,” he added in a 2020 outlook report, which didn’t reference any specific companies. A growing number of the co-working company’s peers “may have difficulty funding in 2020.”
The We Co., more commonly known as WeWork, saw its valuation plummet to less than $8 billion in October from as high as $47 billion earlier in 2019. The company was forced to shelve plans for an initial public offering and required a liquidity lifeline from SoftBank Group Corp. to stay afloat. The yield on its junk bonds spiked from just below 7% at their lows in mid-August to above 16% in mid-November.
The debacle saw WeWork become the poster child for Wall Street concerns about questionable valuations and corporate governance at highly-regarded private companies. But from McVey’s perch, this poster child isn’t an only child, and investors should be more vigilant about the risks of such firms.
“There are still too many companies with high fixed costs and less marginal revenue dollar per purchase that are being funded, and in 2020 we believe that a more skeptical investment community will expose some of these flaws, particularly as unprofitable private growth companies try to access the public markets,” he writes, envisioning an environment in which “cash flow conversion will again become king.”
Early in 2020, however, investors have shown a strong appetite for recent entrants to public markets. The Renaissance IPO exchange-traded fund is up nearly 7% year-to-date and less than 1% off its July 2019 all-time high, buoyed by hefty gains from the likes of Uber Technologies Inc. and Beyond Meat Inc.
Casper Sleep Inc., which submitted a filing on Friday to pave the way for a public listing, reported losses of $67 million in the nine months ending September 2019.
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