WeWork a warning for small investors

Do retail investors still want to invest in huge private technology companies after witnessing the humiliation of office rental start-up WeWork? The US Securities and Exchange Commission seems to think so. Chair Jay Clayton has called the lack of investor access to private companies a “growing concern”.

It is true that the only way most investors can access Silicon Valley start-ups is by waiting for an initial public offering (IPO). It is also true that the IPO market is not what it once was. The ease with which private money can be raised means start-ups stay private for longer. In the US, private equity-backed companies doubled in number from 2006 to 2017, according to research by McKinsey, while the number of publicly traded companies fell 16%.

For now, private investment in the US is limited to accredited investors with a net worth of $1m (R14.8m). Opening up private markets might involve tweaking this definition so that more individuals are included. The alternative is to provide access to nonaccredited investors. Clayton has mused on the merits of a fund structure that would aggregate investments.

But just because something can be done does not mean it should. Private companies do not have to meet the disclosure requirements of stock markets. The risks are far higher. Witness the catastrophe of UK star fund manager Neil Woodford’s Woodford Patient Capital Trust, created to invest in early-stage and unlisted companies and is now trading at a vast discount to net asset value.

About 60% of start-ups fail. Those that survive can still be cut down when investors gain access to information on their finances. WeWork imploded when documents submitted ahead of a planned IPO revealed billions of dollars of commitments and no convincing path to profitability. Financial disclosures remain an effective stress test. Retail investors should not be encouraged to dismiss them. /London, November 8

© The Financial Times 2019