KWAP’s yield search ends with taxi wait
By Khoo Hsu Chuang September 30, 2016
- KWAP joins Jeff Bezos, Kleiner Perkins Caufield & Byers, Menlo Ventures investing in Uber
- A US IPO is most-probably endgame, but markets are weak – and Uber expensive
MOST pundits were warm-to-rabidly excited about Kumpulan Wang Persaraan (KWAP)’s recent US$30 million (RM123.8 million) investment in the ride-hailing service Uber – likely for no other reason than its anticipated pop when it finally goes public – but should they have been?
There would have been a time in the past when the staid manager of RM123 billion in civil service pension funds would have avoided high-risk investments like the plague.
But with the world’s central banks pursuing a concerted drive to zero and even negative rates in a last-ditch attempt to massage some growth – any growth – from a moribund global economy, KWAP has had little choice but to pursue this avenue.
Outwardly and initially, it was a good call for KWAP.
In exchange for a mere 0.1% of its assets under management (AUMs), KWAP gets dibs on a hugely disruptive unicorn that has upended transport in ways previously unimaginable.
In so doing, it joins a hallowed Who’s Who of valley investors that include Jeff Bezos, Kapor Capital, Kleiner Perkins Caufield & Byers, Menlo Ventures and Naval Ravikant that have driven Uber’s valuations into the stratosphere.
At last count, Uber is said to be valued somewhere in the region of US$68 billion, and when it does pop, is expected to do so with all the razzmatazz of an AliBaba or Facebook.
When it finally listed in September 2014, Alibaba exploded to a first-day valuation of US$231 billion, more than Facebook or Amazon and eBay combined.
Which was expected, since Alibaba controls 80% of e-commerce in China, not only the world’s fastest-growing major economy, but also soon the world’s biggest (by 2026 in nominal GDP terms, so reckon The Economist Intelligence Unit).
Facebook’s debut was less whizz-bang.
Despite being valued at US$104 billion at the time of its public float in May 2012 and being the poster boy of the Social Media world, its debut fizzled, thanks to a series of snafus and concerns that centred on its ability to make money from mobile ad revenue.
Facebook has largely proven doubters wrong since then, while China’s wider concerns have cast a pall over Alibaba.
But the disparity in performance and wild swings at both firms since their respective IPOs underline the scale of KWAP’s private equity (PE) gamble.
By their very nature, pension funds are conservative creatures, supposed to invest in the safest and most staid of vehicles.
Not for them, historically, the heart-stopping roller coaster rides that private investment can and do take investors on.
Especially now, with Uber already at an eye-popping valuation, the big question is, how much higher can it go?
Many global investors are calling an end to the seven year-long rally in equity markets that have driven share markets to all-time highs.
In fact, it was just last month (Aug 11 to be precise) that the NASDAQ, S&P and Dow Jones Industrial Index (DJIA) all hit record highs on the same day – the first time since 31 Dec 1999.
That was an event which didn’t escape the attention of Palisade Research, who pointed out that the last time it happened, an ensuing tumble happened for each index of -40%, -25% and -75% respectively over the next two-and-a-half years.
Which as anyone knows, is never good for a fresh public offering.
Was KWAP prescient or imprudent?
So was KWAP prescient or imprudent with its investment? Although its RM123 billion might sound small as a percentage of overall AUMS, it remains a huge sum, and roughly a third of last year’s national budget.
Not to mention, one of the few lifelines available to a retired civil servant struggling with low salaries, rising costs and resultantly meagre pension funds.
Oh, one more thing.
KWAP said it might have ‘only’ set aside 4% of its funds for these risky PE investments (versus 2% previously) but such deals are no longer the multi-baggers they once were.
Bankers will say that there are basically three parts to a successful PE investment:
One, originating a good deal, performing a successful due diligence before buying at the ‘right’ price;
Two, ironing out the inefficiencies, shortening the path to profit and basically getting the company ready for a beauty contest to be married off and;
Three, arranging for a successful ‘exit’ whether in the private or public sphere.
Assuming one gives KWAP the benefit of the doubt where (1) and (2) are concerned, where does Uber, with its gargantuan valuation go to get married off?
Not many private companies have the cash to take Uber out.
Apple might, but it’s too busy buying McLaren motorcars and building self-drive cars.
Microsoft and Google have got lots of cash too, but not enough: they’d still have to borrow the shortfall.
And apart from a smattering of pharmaceutical, telco and energy companies, not too many others have the balance sheet for Uber.
So the public markets are clearly the place. But HK/China is out of the question, since Uber said sayonara to that market last month. Which only leaves the US: a marketplace where fears abound that the US share markets are on the cusp of a major reverse.
But KWAP (and Uber’s 75 other investors) are hoping that there is always room for disruptors, especially if they’re globally so.
Fear or no fear (and no doubt galvanised by the recent IPO successes of fellow unicorns Twilio and Line) other tech firms like Dropbox are adamant about their own exits.
Dropbox is said to be mulling a 2017 exit, undeterred by the sluggish stock market performance of its rival Box, which went out last year.
But at a market cap of US$68 billion, Uber trades at between 39 and 45 times sales (an estimate that Business Insider published last year that put revenue at between US$1.5 billion and US$2 billion in 2015) – multiples which are also unheard-of on Wall Street.
In short, it’s game on for KWAP now.
In CEO, Wan Kamaruzaman’s decision to put US$30 million in pension funds on the line, Malaysia’s 1.6 million civil servants have now officially (and unwittingly) joined the legion of sweaty, breathless investors who are now waiting on tenterhooks to exit America’s biggest-ever unicorn.
Welcome to the wait.