The Pomp Letter: The Public Market Pivot
For most of the past 15 years, interest rates have hovered near historic lows. That’s punished savers keeping cash in the banks. Or bondholders. But it’s meant a frenzy for borrowers.
Corporate borrowers have been even better off. With investors desperate for yield, issuing debt has allowed a number of companies to expand. In that space, venture capital funds have been able to outperform the stock market.
These companies have been able to acquire companies, whether publicly traded or privately held. Venture capital firms can then leverage up the company, sell off assets, or otherwise create value for them.
However, about half of all venture funds fail to return their original investor’s capital. The high debt levels required may cause issues if a deal doesn’t work out as expected.
And only about 5% of venture capital funds manage to return more than 3X what investors put in. Meanwhile, the number of venture capital funds seeking deals has more than tripled compared to 15 years ago.
This trend may be starting to reverse. With interest rates now at their highest level in 15 years, deals aren’t as attractive with the debt attached.
That could make public companies, with the ability to issue stock, more attractive for reasonable returns going forward.