Well, that wasn’t so bad. Said no US general summoned to Quantico this week by their spray-tanned hardened bosses. I actually was thinking more about September and its data-earned reputation as historically the worst month for stock markets. Scratch that. The key benchmarks for equities, the S&P 500(up 4.25% in the month) and the Nasdaq(up 5.6%), blew the hinges off investor expectations amid lots of ugly headlines. Public markets are on an absolute tear, but investors playing catch up and wondering how to get involved could be understandably wary. I’d be wary too, but in a more nuanced way. My sense is the out-sized influence and weight of big tech in public markets is troubling. Try these statistics for size…
*AI chip superstar, Nvidia, at $4.6 trillion is now worth more than Apple, Saudi Aramco and the entire German stock market…combined.
*The “Buffett Indicator” is a trusted temperature check on US stock market euphoria which tracks the ratio of total US stock market value to US GDP. Currently that metric is touching 217%, or about 70% above trend.
*Another long-run measure of ‘value’ is the Shiller PE Ratio (CAPE) which divides the current value of US markets (S&P 500) by the earnings of its constituent companies over the previous 10 years. That metric is over 40x for the first time since the dotcom bubble of 2000.
*Options markets are not for the faint-hearted. So, it was striking to see the September 19th expiry date attract over $5 trillion of notional option exposure. More striking was that the majority of options players (62% of S&P 500 volume) in August were seeking ultra-high risk “Zero Day” instrument exposure (expiry within 24 hours). That is seat-of-pants stuff.
*Intel’s share price has rocketed 50% since September, Google is up 68% since April, and Tesla’s stock has doubled in the same period while making the DOGE-whisperer, Elon Musk, the world’s first half trillionaire. Yep, $500 billion.
*Nvidia’s stock market value is now bigger than the GDP of 180 countries, including India and its 1.4 billion people.
You get the ‘big tech’ picture. Now for some historical context. Remember Palm Inc and its PalmPilot? When Palm listed as an IPO 25 years ago, it was worth more than Apple, Amazon, Google and Nvidia combined. There is a cautionary tale there, but not the key point of today’s article. The sheer intensity and speed of capital flows in the listed large cap arena is telling us there is a massive investment shift happening. However, it is possibly too late to ‘pick’ the winners in the public markets, and one could end up picking today’s Palm Inc. However, private equity and venture capital markets have been left behind by public markets. Private investment flows and deals have slowed (with the exception of AI deals) due to subdued exit, M&A, and IPO activity, further hampered by levels of geopolitical uncertainty we haven’t seen in 50 years. The critical point is that private markets are likely to ultimately benefit from the trickle-down impact of public markets hitting all-time-high valuations. I would highlight four interesting developments:
- The leveraged buy-out (LBO) of gaming giant, Electronic Arts(EA), at $55 billion is the biggest ever and beats the $45 billion KKR deal to buy TXU way back in 2007. This time the buyer consortium is led by the Saudi PIF and Silver Lake. The EA buy-out adds to a wave of M&A in Q3 which will have topped $1 trillion in total global deal volume for only the second time in history.
- The latest funding round of OpenAI was a sale of $6.5 billion of employee stock putting the valuation of the ChatGPT owner at $500 billion. That makes it possibly the most valuable private company in the world. For those thinking it’s just AI giddiness, it’s not the only $500 billion private opportunity…
- We have written before about the fast-approaching age of stablecoins. So, we were intrigued to see stablecoin platform, Tether, launch a funding round of $15-20 billion which would value the financial services player at $500 billion, overtaking the value of Bank of America(!).
- These are all big beasts in the private markets. What about the small guys? Well, if you thought tech(+11.6%) and the Nasdaq (+9.7%) had a great last 3 months, you might be surprised that smaller companies in the Russell 2000 index did even better (+13.5%). Note 50% of the constituent companies in that index LOSE money.
Arguably, the smaller company index is the best proxy for the Spark Private world of start-up tech and smaller private equity deals. So, evidence of small company catch-up is a positive indicator. Furthermore, Spark Private investors have a real opportunity to gain exposure to the digital currency infrastructure, AI and private equity themes above in our upcoming deal pipeline. Note we are also entering EIIS ‘season’ so investors fearing they’ve missed out on public/pension opportunities will be able to use the private markets to balance out their risk budgets at highly attractive tax-assisted valuations.
The public markets are clearly telling investors to think BIG, but valuation risks are rising rapidly. Our message is BIG too, but private as valuations (not risk) resume an upward trajectory. Watch closely, those BIG theme deals are coming very soon.
