The Gamestop effect may attract investors to private markets
B Kinson Lo, CEO & founder of Dot Investing – Volatility has been the watchword in public markets since the turn of the year. The bull market on tech stocks continued in January before a slight correction as market dynamics shifted in response to the vaccine roll out in the US and UK. Fears of inflation and the so-called Gamestop effect, as a new generation of retail investors pile into unlikely stocks, add to the unpredictable nature of public equities in 2021. Private markets can begin to look more appealing to investors in this context. This is accentuated by several notably positive developments in the private and alternative assets sector.
Robin Hood, Freetrade and a number of other Fintech brokers have opened up retail investment to a new generation of investor - typically aged under 34, with a portfolio in the single digits of thousands that they invest and manage on a smartphone. This has had a significant impact on public markets, with Credit Suisse estimating that the new breed of investor has accounted for as much as a third of all US stock market trading at activity peaks in 2021. Gamestop is the standout example of a new type of investment thesis - driven by frenzied social media activity, a fear of missing out and a mission to take the fight to hedge funds and to hell with conventional market wisdom. Initially dismissed as a fad, market analysts and traditional investors now find themselves scrambling to understand the changed landscape.
Historically the opaque nature of private equities has been a barrier to investment in the sector - whether by institutions or individuals. One of the interesting effects of the past twelve months on the PEVC sector has been an increasing frequency and transparency in the communications strategies of GPs. The lack of face-to-face meetings in the work from home era has encouraged GPs to offer investors webinars and virtual office hours sessions alongside enhanced digital reporting and ungated written content. Evolving client service in a digital direction has started to attract a new audience, widening the net for potential investors. It may also give pause for thought to some, although not all, of those who had previously dismissed PEVC due to reporting concerns.
The budget announced on 3 March by the UK Chancellor of the Exchequer gives encouragement to private investors - both in terms of what he omitted as well as the favourable, new policies he did announce. Fears of an increase to Capital Gains Tax were kicked down the road, alongside the launch of schemes to encourage investment into equipment and fast-track immigration of talent. The move towards allowing flexible voting rights in company share structures may have already borne fruit - it was cited as one of the reasons behind Deliveroo’s decision to hold its upcoming IPO in London . Reviews into R&D tax incentives and EMI schemes could provide further carrots to the venture industry at a later date.
The downturn in response to COVID-19 represents a moment in the economic cycle in which private investors can gain a strong hand, negotiating stakes in assets at a discount and with favourable term sheets. In this context it was no surprise that last year ended with reports of a record year for dry powder in PEVC and a positive outlook for alternative assets as a whole, with the exception of real estate. As our lives have moved online the adoption of technology has accelerated, creating new opportunities and opening access for private investors. Simultaneously public market investors are playing catch-up as they cope with the dual challenge presented by a new breed of retail investor and a dicey macro-economic situation.
Gamestop may prove to be a short-lived phenomenon, however it is a succinct example of a period in which changes to technology and attitudes towards investment are leading markets in new and unlikely directions. It will be interesting to see how larger, conventional investors respond and whether private markets stand to benefit.
Kinson Lo is CEO & founder of Dot Investing, an online investment platform, allowing qualified investors to invest in top tier private and alternative asset funds, including PE, VC and real estate.
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