General Atlantic Sees Value in Chinese Startups; Coatue Tries to Avoid AI Exuberance
The stock market is near a record high. Six public tech companies are worth more than $1 trillion. Even bitcoin has made a comeback! But the titans of private capital aren’t over the moon with optimism yet. That may be because they’re still working through the hangover of the zero-interest-rate funding boom in their own portfolios.
“Twenty-three was a bit of a wipeout,” said Philippe Laffont, founder of New York investment firm Coatue Management. A five-point increase in the federal funds rate and “the wrong conclusion around how Covid was going to change the world crashed together in 2023,” he told attendees at The Information’s Private Capital Conference Tuesday.
Advances in artificial intelligence have revitalized the market again. Huge investments from public companies such as Microsoft, which has put more than $13 billion into OpenAI, are exciting private investors. But Laffont said he’s trying to avoid overexuberance on AI.
“The magnitude of the numbers are so big,” he noted. He’s expecting a shakeout in the space, just as the first internet wave resulted in a handful of winning internet companies such as Facebook (now Meta Platforms), Google and Amazon.
“After unfortunately having misgauged a little bit [on] Covid, we want to be careful on the AI side about how it plays out,” he said.
Tony Kim, a managing director at BlackRock who runs its global technology funds, put it another way: “Investment bankers, they would tell you that the markets are back and animal spirits are back. Some of them are positively inclined to that, because the environment seems a little bit more conducive, ” Kim said.
“However, from my perspective, I don’t think anything has changed. It’s good companies at the right price.”
China Opportunities
Meanwhile major private investors are grappling with a soured business climate in China, for years a source of reputation-defining returns for private and public investors who backed Alibaba, Tencent and ByteDance.
“Sentiment is really challenged,” said Anton Levy, chair of the global technology group at General Atlantic, about his recent conversations with investors and entrepreneurs in Hong Kong and Shanghai. “The economy is tough” in China, he said, and there’s “a lot of pessimism around the U.S.-China global relationship.”
Levy and Laffont, whose firms are both investors in TikTok owner ByteDance, have a front-row seat on the turbulent relationship between Washington and Beijing. Laffont said, “This is a situation right now for the U.S. and China to give clarity versus for us to decide what to do.” (Read more on their ByteDance remarks.)
It’s not all gloom and doom, though. The drop in Chinese startup valuations has made their prices attractive.
If an investor expects the Chinese economy and geopolitical situation to improve in four or five years, it appears that “you can get really attractive potential opportunities from traditional valuation metrics,” said Levy. Some of these startups are growing revenue at 30% to 50% a year and trading at price-to-earnings multiples of 15.
“If you can buy that kind of growth, at those kinds of multiples, generally you’ve done pretty well,” he added.
Away from China, investors said the threshold for tech initial public offerings has gotten higher in the last few years. If private investors value a startup at $1 billion, it’s a unicorn, but public market investors are no longer interested in companies of that size, said BlackRock’s Kim. “Now you have to build bigger companies [in private] because otherwise you just are too small to be relevant,” he said.
The threshold for going public is increasingly becoming a $5 billion to $10 billion valuation, he believes, although a few companies, such as 19-year-old Reddit and Astera Labs, have gone public at lower valuations. These are likely to be exceptions, however. (Read more on the new IPO threshold.)
“Almost any company that went public [during the last cycle] with less than a $1 billion cap, with…a few exceptions, are probably disappointed they did,” General Atlantic’s Levy said.