The IPO failure of office space business WeWork could prove to be a watershed moment for loss-making ‘unicorn’ businesses, according to a leading Scottish investment trust manager.
Alasdair McKinnon of the £761 million Scottish Investment Trust pointed out that WeWork was one of the biggest unicorns of all, valued at some $47 billion - similar to that of BMW. Within weeks of scrapping its flotation plans, WeWork had to secure rescue funding to stay in business.
“Many unicorns present themselves as technology based disrupters but actually operate at vast losses in low margin, cyclical industries with revenue growth only sustained through a subsidised user experience,” said McKinnon.
“In effect, these companies require a constant supply of new capital to sustain their business models. I cannot say with certainty what the ramifications will be of the bursting of this 'disruption' bubble but my view is that this particular investment theme has been one of the more egregious by-products of a cheap money environment. I think, if the mood is starting to turn away from these sorts of investments, that the unloved but cheap areas of the market will find favour.”
McKinnon’s comments came as the independently run trust reported “modest” returns for its investors during the 12 months to 31st October.
The share price total return was just 1% and although the trust does not have a formal benchmark, that was significantly lower than the 11.2% returns from a global index. However, shareholders are in line for a final dividend of 6.9p, meaning the total regular dividend for the year will increase by 7.5% and be the 36th consecutive year of regular dividend increases at the trust.
Chairman James Will admitted it had not been “a fruitful year” for the trust’s contrarian approach. He said cheap money continued to distort investor attitude to risk and reward.
“This situation looks increasingly stretched and we believe that it will correct over time. A key tenet of our philosophy is to invest in the knowledge that cycles still exist and that, when the trends inevitably change, it will prove a source of surprise to markets.”
