Readings: Collusion, Coupling, Crime, etc.

Everyone’s a capital markets expert until they invest in something. Or, more accurately, until they invest in something and it doesn’t do what they thought it would do.

WeWork has been a Rorschach test for the punderati, letting people infer whatever they want to from capital markets. A bubble! Excess! Poor corporate governance! Not important! A one-off! Not a tech company! And so on. An expensive real estate company with an unusual structure and seemingly-serving CEO has become something onto which everyone gets to project their hopes, fears, and delusions of capital markets omniscience.

The following weekend tweet from one market resesearcher is instructive. The argument here is that WeWork’s performance will be irrelevant if it comes public and tanks. Recall: The company has been threatening to go public for weeks now, and it keeps cutting the valuation — $45b! $40b! $30b $10b — in a kind of weird one-man auction with itself. At the same time, it keep introduction new management wrinkles to make it less like a private company pretending to be public, and more like a company almost doing its best to pretend it almost wants the things that go along with being public, like oversight, independent boards, limited self-dealing, and nuisances like that.

Will a bad WeWork IPO have zero impact? Well, there are at least three ways it could have an impact, so let’s see if we can strike those off, one at a time:

  1. Investors see other companies just like WeWork in public or private markets, so it they used its problem to revalue those companies, which makes their investors and sad and less rich.
  2. WeWork’s backers need the money from this investment going public, so a lower valuation makes them cut back on some things or sell other things, which hurts public or private markets.
  3.  WeWork’s backers’ backers decide not to back WeWork’s backers in future, which means less money flowing into private and public markets.

The first argument is eminently plausible, as annoying it might seem. But that should come as no surprise. After all, the whole reason why the WeWork silliness is at least mildly entertaining is because of how anomalous and weird it is. If there were lots of WeWork-alikes it wouldn’t be nearly as much fun to talk about WeWork, so saying it isn’t like other companies is the whole point. So, yes, it’s unlikely a bombed WeWork IPO hurts other company’s IPO prospects — unless, of course, they are expensive, money-losing, venture-backed, real estate companies run by CEOs not entirely convinced they want to be fully and completely public.

More interesting arguments flow from 2) and 3) above. And these are what most people who haven’t had the crap beaten out of them by capital markets doing ridiculous things miss. Like I like to say here, Everything causes everything. This is true2 in tightly coupled systems, like markets.

Here’s a “for instance”. Many professional investors leverage up: they borrow money to use for one purpose, using as collateral money they expect to receive from prior investing. If that collateral turns out to be less than expected, or later coming than expected, unhappy things happen. Said investor might have to sell other holdings to raise money, they may have to slow their pace of investing in other things. None of these are obvious and headline-making, like market crashes, IPO windows slamming shut, and all the things that makes for nice headlines. It’s more mysterious, a sort of, in physics terms, spooky action at a distance that turns out to be neither spooky nor at much of a distance.

So, are there signs that of WeWork-related spooky action at a distance given how much money the company’s major investors have tied up in it, and what’s happening to its valuation? Of course, as the following snippet shows. This is just one example, but SoftBank is is seeing less appetite from future investors, which will trickle through to its own investing activities, potentially driving down valuations in non-WeWork companies, and in its pace and size of investing.

Everything causes everything, especially in capital markets, even — and perhaps especially — if it doesn’t look like it.


Here are some articles and papers worth reading: