The race to deploy capital runs on the turbo fuel of anxiety. Investors who have too much money to deploy are finding it difficult to identify attractive opportunities. Yet, they are forced to run this race because they keep receiving more money even as they struggle to deploy what they have. This forces them to chase the better opportunities that are likely to be fancied by the market. They want to be early enough so that they don’t miss out. They are willing to pay a better valuation only to ensure that they participate.
The deployment anxiety runs high, and nobody can afford to be caught spectating. When more people grow anxious, the race to deploy capital gets crowded, and investor behaviour turns irrational. The valuations reach a point of absurdity and investors still buy out of desperation.
At this point, another race begins.
When investor appetite cannot be adequately satiated, the race to raise capital begins. At this stage, even managements that don’t need capital come out and raise money. They want to take advantage of the excess liquidity and insatiable appetite to invest at elevated valuations. At this point, the bigger corporations join in to raise big money. The race gains momentum and big money is deployed quickly. Even after the excess liquidity runs down, the market is still hungry for more.
Right now, the race to deploy capital has substantially played out. But the race to raise capital is only gaining momentum. So, corporates are getting hungrier and the big names are warming up to play a big match.
We are heading into a very interesting phase where the two races run into each other. In the aftermath of the collision, one race will crash. The outcome is likely mixed. Money will be deployed easily, early movers will raise their growth capital effectively, and corporates will still be hungry for more.
When the raising of equity begins to outpace the supply of capital, the race to deploy will slow down, and the race to raise capital will gain speed.
This is a perfect setting for a valuation reset. We seem to be heading there.