Weekly Financial Resources and Capital Markets Roundup: 4/24/2020
Outlined below is a collection of key financial and capital market resources from the week ending 4/24.
More and more headlines of late include the word volatility, which is oft associated with risk. Surprisingly though, investors can’t actually agree whether volatility does in fact imply risk. Michael Burry (of “The Big Short” fame) wrote in a 2001 investor letter (opens PDF): “$1 selling for $0.50 one day, $0.60 the next day, and $0.40 the next day somehow becomes worth less than $1 selling for $0.50 cents all three days… the ability to buy at $0.40 presents opportunity, not risk.” Conversely, in “When Genius Failed”, the partners of infamous hedge fund Long Term Capital Management are noted to have argued that “Risk is a function of volatility.”
Not to spoil the ending of these two stories, but the former (Burry) is renowned for predicting and profiting from the eventual collapse of subprime bonds, the latter (LTCM) nearly caused an entire financial crisis with a few trades in 1998. This isn’t meant to be binary and signal “A is right, B is wrong”—quite the opposite. Both had unique investment strategies and while Burry preferred to minimize any and all capital loss, LTCM was minimizing severe price changes so as to enable the use of significant leverage (avoid the risk of margin calls) to generate outsized returns. What these two stories highlight is that each player in the game has their own motivations, and the prices set by the market reflect the sum knowledge of all participants. Rob Koyfman this week outlined how sometimes technical analysis—just following the chart—is our best bet for understanding for how long and where markets are headed.
Sometimes the markets just… move… defying logic and flying in the face of deteriorating economic data and worsening company earnings. For now the economic impact is still growing and companies haven’t reported earnings yet (but as of mid-April, 55% of the all “tech” companies that reported earnings or updated guidance withdrew or reduced revenue & earnings guidance, per Morgan Stanley). But the institutions buying and selling securities (and the combination of all their strategies / knowledge) are apparently comfortable with current prices all of that taken into account.
So it’s a tough time to be an executive. You need to prepare for a wide range of outcomes—for your business, employees, the economy, customers, and families—and be open to constantly rethinking how to process the rapidly changing environment. But the government has shown it will support the economy and businesses. So while the worst of the data might not be over, we think—and investors seem to agree-wesee a sliver of light at the end of the tunnel for the markets.
Update on PPP loan eligibility
On Thursday morning, in anticipation of Trump signing into law a $484B stimulus package, the Treasury updated guidance related to eligibility for the PPP. Now, “borrowers must make this [necessity] certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business”. We believe this may change the risk profile of these loans for some venture backed companies. If you’ve been approved or received a loan, we recommend you revisit eligibility with your counsel and Board. We’d also note that the eligibility criteria are still opaque—but cynics will note that it is an election year. Access to these loans will likely become politicized by both sides of the aisle and prosecuted only with hindsight down the road. Companies that have already received funds but now believe they’re ineligible will be allowed to return the loan to the Treasury with no penalty before 5/7. Cooley, Goodwin, and Lowenstein have published updated information on their websites, all linked.
Capital market resources
Private & public market update
We’ve chatted with several of our Capital Markets contacts recently who have all repeated PE and strategic M&A processes are largely on ice. Some sources peg M&A volumes as being down 40% since 2/24 vs. the last 5-year average. Software Equity Group has reflected much of this same sentiment as well. With the debt markets closed and revenue forecasts still a moving target, buyers are sitting on the sidelines. While firms may still be engaged where they have relationships, most of our PE contacts are focused on their own portfolios, and strategics on serving their own customers. Our contacts have all signaled that they expect M&A to return in earnest in early Q3, which means that preliminary conversations can likely resume mid-May. On the public side, all key indices closed the week down modestly (SaaS Index +2.50%, Dow -2.01%, NASDAQ -0.50%, S&P 500 -1.24%).
(More) Economic data
A Twitter user said it best, “judging the health of the economy based on the stock market is like judging someone’s life by their Instagram photos.” 26.5M Americans have filed for unemployment benefits since March, or 16.2% of the entire labor force in the United States. In the United States, as we noted above, we are fortunate that the government has taken rapid action to support the economy and workers. To date that has proved to be successful, and we expect it will continue as necessary.
Other financial & capital markets reads (what else we’re reading)
SaaS valuation multiples trended up +0.5x, from 8.3x to 8.8x 2020E revenues at the median to open the week. The Deployment Age by Jerry Neumann and When Tailwinds Vanish by John Luttig. Zapier data on growth in various software categories in the age of COVID.
“The path of least resistance is the path of the loser,” according to author H.G. Wells. Yet time and time again we see that humans are all guilty of opting for the easier path.
Pick a mood, index, direction and percentage and you might have a future as an editor for any major newspaper—this is the “Mad Libs” like template the last few months of news has followed.