Yves Bonzon (Julius Baer) | One of the unintended consequences of zero / negative interest rates is the fuelling of a broad-based start-up / venture capital (vC) boom. This carries the seeds of a huge capital misallocation. Investors are relentlessly funding non-profitable companies on the hope of surfing the next disruptive business model. Yet, venture capital is a game of capital scarcity not of capital abundance.
Recently, the IPO window for non-profitable businesses has almost closed. In many ways, the current start-up frenzy mirrors the 1998- 2000 dot.com bubble, but this time within a private con- text where price discovery is delayed. It is unlikely to be any less painful though.
Meanwhile “de-equitisation” is being superbly ignored. As the cost of equity remains significantly above the cost of debt, outstanding public equities (the share count) are relentlessly shrinking. S&P 500 dividends and share buy-backs combined amount to approximately USD 1.4 trillion. This is a cash yield of more than 5%. US large cap banks (as defined by a market cap in excess of USD 50 bn) currently have an average such cash yield of 12%. It has been a long-standing investment theme of ours that public equity markets have transformed from a cash-raising to a cash- returning mechanism.
