Thoughtful Thursdays – Round 5 (Unicorns)

Hey team,

So just as a reminder, we’re currently talking about all the different kinds of investments your superannuation fund is making on your behalf. We’ve already established that these investments fall into one of two “types”. The first type being Defensive Assets, which are things which tend to do “ok” when times are bad. The second is Growth Assets, which like we said last week tend to do well if the economy is doing well. So let’s talk about them. One at a time.

Now remember that superannuation funds generally outsource the management of your money to specific specialists known as Investment Managers. This goes for the Defensive asset classes we talked about a few weeks ago and it goes for Growth Asset classes we’re going to talk about now. So what are they:

Private Equity / Venture Capital
The whole reason a company lists itself on the stock market is so it can raise money from investors. The thing is, by the time a company is ready to go public, it has already likely been through a number of rounds of “pre-IPO” capital raisings….

Wow, even I felt like a knob writing that.

  • An IPO is an Initial Public Offering.
  • Pre-IPO means “before a company has gone public”
  • Going public is another way of saying “listing shares of the company on the stock exchange”
  • And capital raising translates to “raising new money from investors”

So finance knobs say “pre-IPO capital raising”. Humans say “raising money from investors while the company is still private and not listed on the stock market”

Anyway….

Superfunds give money to a number of different investment managers who’s main job it is to invest “private equity” money in companies who are yet to list on the stock market. There are very many different types of private equity investments, but for the purposes of 5 Minute, just know that it exists.

Unicorn Specialists
The key skillset of a Private Equity Investment Manager, and what superannuation funds are looking for when appointing them is twofold. First they want Investment Managers who have a strong network and get to look at and review a number of different investment opportunities. After all, the more you get to see, the greater your opportunity to make good investments. This “network” is especially important for Private Equity investments because there is no central market place you can go to, like there is for public equity investments (aka the stock market), to see what companies are for sale.

Second, they want Investment Managers who have a good track record of identifying the good from the bad investments. The biggest problem when investing in private equity is that it is REALLY HARD TO GET YOUR MONEY OUT. Like I said above, there is no central market place to go to, to buy and sell your investments. As such once you’re in, it is really hard to get out. Therefore, you better want your investments to be good ones.

What are the Good Ones?
If the Private Equity investment managers do a good job, a really good job, they’ll hopefully invest in a Unicorn or two. Unicorns are the dream of any private equity investor. They are companies which have a value of OVER ONE BILLION DOLLARS before they have been taken public.

Uber is the best example to date of a Unicorn investment. Best estimates put the value of the company at, or around 70 billion US dollars. But there are many others. Have a look at this. It shows all the Unicorns currently in existence. Interestingly too, if you have a look at the “Select Investors” column on the far right, you can also see some of the Private Equity Investment Managers who were lucky/skilled/fortunate enough, to have invested money into them early on.

Are any of these Investment Managers managing money for your Super fund?

Anyway, that’s 5 Minutes. Hope it helped. 



Categories: General Finance, Investing, Superannuation

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