Veteran John Wylie has just established a new $100 million venture capital fund in conjunction with the University of Melbourne. Later this year, The Australian Financial Review can reveal, Wylie’s firm, Tanarra Capital, will raise a private equity fund focused on helping Australian and New Zealand companies target rebounding Asia economies. But Wylie is not […]
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Veteran John Wylie has just established a new $100 million venture capital fund in conjunction with the University of Melbourne. Later this year, The Australian Financial Review can reveal, Wylie’s firm, Tanarra Capital, will raise a private equity fund focused on helping Australian and New Zealand companies target rebounding Asia economies.
But Wylie is not afraid to acknowledge both sectors face a prolonged period of pain, as what he calls the era of “costless capital” comes to an end.
In his annual letter to Tanarra investors, Wylie says the pressure on VC valuations “has further to go, and that deflating venture capital asset valuations are in some respects the canary in the coalmine for unlisted asset valuations more broadly”.
“For the most part, these continue to be held at cost or higher by asset managers, despite businesses having been bought at record multiples in recent years with cheap capital,” he says.
Private equity, Wylie says, faces “the prospect in the years ahead of being sold in an environment of valuation multiple compression, not expansion”.
“The days of easy wins fuelled by multiple expansion and high leverage are probably over in PE, and asset managers are going to have to work harder for their returns,” he writes.
Debate about how large asset owners such as superannuation funds value unlisted private assets, has become a key focus for the Australian Prudential Regulation Authority.
While the resilience of unlisted assets has been a big selling point for super funds, there are legitimate questions about whether delays in revaluing them in the last 12 months has distorted published super fund returns, and the unit prices at which members trade in and out of their funds.
Wylie makes an important point about the process of revaluation. That is, we need to look beyond the somewhat superficial question of whether private assets have not been marked down to reflect movements in their public equivalents, and instead ask where valuations of unlisted assets – say, a tech company whose valuation was revised upwards based on a tiny capital raising in the FOMO period in 2021 – should sit in a new era of higher interest rates and more volatile inflation?
Wylie argues the reckoning in valuations answering this question will be good for his private equity and venture capital funds, which have time horizons of a decade or more.
“Asset price correction is at face value not a great thing for investors in venture capital, but in the long run, we believe it’s healthy. Saner valuations and stronger pre-investment due diligence processes will in the long run attract capital into this vital asset class on a more sustainable basis.”
Wylie, who says he is bullish on Australia thanks to its outlook for strong population growth, proximity to Asia, critical minerals resources, low national debt and mammoth super system, will also look to ramp up his activities in the credit sector this year, both through the provision of debt to distressed companies – an area where he says deal flow is increasing – and by lending to local companies that have tended to raise equity capital at exactly the wrong time, diluting mum and dad investors in the process.
And while Wylie has concerns about the path of inflation, increasing government intervention and supply chain disruptions and “clear protectionist overtones” in the Biden administration’s Inflation Reduction Act, he sees a chance that US Federal Reserve chairman Jerome Powell might pull off a miracle.
If US interest rates do settle below 5 per cent (they sat at 4.5 per cent on Wednesday ahead of a widely anticipated rate rise on Thursday morning) Wylie says Powell and his predecessors, Ben Bernanke and Janet Yellen, “deserve to be elevated to the stature of Paul Volcker as all-time great Fed governors” for their management of the global economy since the global financial crisis.
“Navigating the world through the most dangerous financial blow-up since the 1920s, plus a pandemic triggering the epic amount of money printing those events unleashed, and have rates settle at less than a third of their peak in the late 1970s with no depression or even sustained substantial recession, will be an achievement for the ages.
“It looks within reach.”
But Wylie’s not ready to cast Powell in bronze just yet. If there’s one lesson from 2022, it’s that consensus forecasts should be treated with caution.
“The consensus estimate for the increase in Fed Funds rate at the start of 2022 was 100 basis points to 125 basis points. The Fed beat that by a factor of three. So, be careful with consensus views and conventional wisdom – I was too anchored myself by consensus predictions this time last year,” he says in his letter.
“Markets are generally pricing inflation and rates to ease materially in the second half of 2023, leading to a quasi-Goldilocks soft landing environment.
“It’s easy to see how that could be over-optimistic, much harder to see how it could be excessively pessimistic. So, risk is probably to the downside.
“A key tenet of investing is not trying to be the person with the infallible crystal ball; that person doesn’t exist. It’s scenario imagination and risk management that count.”