The divergence in valuations between listed companies and private VC-funded companies in emerging sectors is a telltale sign of what liquidity can do. In high growth sectors like QSR, solar, EV and digital commerce, listed entities are trading at a significant premium to their unlisted peers trading in private markets. While there are no takers for many companies even at lower valuations in the private market, institutional investors in public markets are bidding valuations up, buying huge blocks at higher valuations and taking on deals that failed to find VC backers.
Clearly, liquidity is making people do crazy things. But, this raises serious concerns about the fate of these bets. The best case scenario could be extended time corrections. The worst case could be exiting at a significant loss two years later. The truth is these companies are probably worth investing at significantly lower valuations.
Investors in mutual funds are misallocating capital at a high velocity into smallcap and midcap space which currently have limited capacity to absorb capital. Deployment compulsions are forcing managers to buy large, liquid parcels in businesses that have visibility and pass the smell test filters. Ironically, nobody is thinking of what returns these big bets will generate or when they will materialise. For now, they want to simply collect more money and deploy. Nobody wants to think beyond that.
