SEC Thinks Its Valuations Are Better than Private Equity Professionals’

If you pay fairly close attention to financial regulation news, one topic showed up frequently last week.  The topic – private equity and venture capital valuations and the SEC’s chair Mary Joe White’s belief that valuations may be approaching bubble territory.

Her comment, while speaking at Stanford University: “In the unicorn context, there is a worry that the tail may wag the horn, so to speak, on valuation disclosures. The concern is whether the prestige associated with reaching a sky-high valuation fast drives companies to try to appear more valuable than they actually are.”

Justification for her views stemmed from an article in Vanity Fair on perceived sky-high private equity and venture capital valuations.

So, the Securities and Exchange Commission Thinks It Knows Better than Private Equity and Venture Capital Professionals about What Companies Are Worth
Does anyone find this funny?

Here’s what Ms. White is looking at, at least partially. The first chart is Series A valuations by the median. Unsurprisingly given the state of the market economy, valuations are generally higher. Typically, one would think such high valuations would be a positive signal; instead Ms. White and the SEC thinks such valuations are misguided.

(Side note: Does anyone ever wish regulators were required to put their own money where their mouth is. It’d be nice to see Ms. White have an avenue to short the market and see if she made money that way. In all likelihood, it’d just be a way for financial professionals to take her money.)

The next three charts are of similar value, simply showing later stage valuations. As with Series A, pre-money valuations are generally stronger right now.

Of course, Ms. White isn’t just talking about smaller size, early stage venture capital companies. She specifically mentioned unicorns. Unicorns are companies worth $1 billion, on paper.

She is under the impression, apparently, that there might be some sort of fraud going on with such companies’ valuations.

Which Companies, In Particular, Is She Talking About?

Here’s some of the biggest companies on the list (above $4 billion), courtesy of CB Insights.

• Uber ($51 billion)
• Xiaomi ($46 billion)
• Airbnb ($26 billion)
• Palantir Technologies ($20 billion)
• China Internet Plus Holding ($18 billion)
• Snapchat ($16 billion)
• WeWork ($16 billion)
• Flipkart ($15 billion)
• Didi Kuaidi ($15 billion)
• SpaceX ($12 billion)
• Pinterest ($11 billion)
• Dropbox ($10 billion)
• Lufax ($10 billion)
• DJI Innovations ($10 billion)
• Theranos ($9 billion)
• Zhong An Insurance ($8 billion)
• Snapdeal ($7 billion)
• Lyft ($6 billion)
• Intarcia Therapeutics ($6 billion)
• Stripe ($5 billion)
• Olacabs ($5 billion)
• Coupang ($5 billion)
• Ele.me ($5 billion)
• Magic Leap ($5 billion)
• Zenefits ($5 billion)
• Cloudera ($4 billion)
• Yello Mobile ($4 billion)
• Vice Media ($4 billion)
• Social Finance ($4 billion)

Act Like They’re Public?

In her Stanford University speech, Ms. White even went so far as to encourage such richly valued private firms to behave more like public companies. Public companies have more stringent checks and balances to guard against misleading investors about their value or performance.

Her calling out of unicorns, though, makes one wonder which investors she thinks are getting misled and whether she really thought through the idea that privately held companies act more like they’re public.

There are very specific advantages to being private and avoiding such scrutiny is one of them.

Summing Up

The SEC’s chair, Ms. White, gave every indication that she thinks the SEC knows better than private investors on company valuations.

Whether you find it amusing…or not…that she thinks she knows better than the market as a whole, action on some of her biases would have far-reaching consequences in the functioning of American capitalism.