Exposure Hunters and 2016 IPOs
We have seen few 2016 IPOs among venture backed US tech firms. Those we have seen, have been – by and large – small and unbelievably well received. In some cases we mean unbelievably well received, both literally and from a valuation perspective. We have been watching closely and patterns are clearly emerging. Clearly, there are a number of factors at work. We strongly suspect that there are folks with mandates, or the need to buy, IPO’s and aggressive growth. Such investors have seen extremely limited supply. It is also clear that the investing public – institutional and individual – has a taste for risk and private tech deals. Private technology companies – led by a very large herd of unicorns – is all the rage. The extreme post-IPO performance of several of this year’s small venture backed crop, strongly suggests a large appetite for these investments.
As we look forward to the largest tech IPO of the year, Nutanix, a look back makes sense. The average of the few tech IPOs we have had in 2016 is up over 100% so far since offering. Risk is in vogue and growth is rare. This has contributed to very robust performance from IPO going forward. To be fair, we have yet to see a real market correction or the expiry of the underwriter’s lock-ups on these names. It seems to us there is a fair amount of exposure-hunting going on. The hunt makes plenty of sense to us. The missing exposure is outperforming most assets you can easily buy exposure to.
The returns of the tech IPO class of 2016 are more effect and less cause, of the exposure hunt. The private markets have been booming. Snap, AirBnB, DiDi, Stripe, Space X, Uber, and Lyft, Spotify boast high and soaring valuations. Every few months news of new rounds of funding are announced. Often these rounds feature leading global companies, sovereign wealth funds and asset managers competing furiously to allocate to the rising valuations of these leading late stage private companies. We have seen more and deeper, pockets open to pre-IPO tech investment. Sure, many are nervous about valuations, however, the more risk folks have taken lately, the better they have done.
As we have seen before, in the 2012 run up to the Facebook IPO, there are fewer investment opportunities in late stage private tech than there are investment dollars. Thus, we see folks left out or cut back. Safe assets yield nothing, if you are lucky enough not to face a negative return. Borrowing is historically cheap and pools of savings and investable capital are unusually deep. Thus, we have a major overhang of risk capital looking for a place to land. Voracious appetites circle the few deals we have seen IPO. First day and subsequent price movements in 2016 speak to the size and intensity of unmet growth exposure demand. We don’t see this ending quite yet. So much money seeking exposure will continue to drive demand and performance until the leading unicorns hit the public markets.
Streaming Music Hits its Stride in India
Subscription music services have entered the mainstream in India in step with the growing penetration of smartphones and improvement in high-speed connectivity. There are more than one billion mobile phone subscribers in India, with the number projected to top 1.4 billion by 2020, according to Ericsson. More than 97 million people in urban India listen to music online, mostly via mobile phones, according to Juxt-Smart Mandate, a market research firm. That number represents nearly two-thirds of India’s suburban Internet users, and 40% of the country’s Internet-connected population.
India is all the more attractive against the backdrop of secular changes in the global recorded music industry. Sales of physical copies, long the mainstay of the industry, have been on a gradual decline. Global recorded music industry revenue fell to $15 billion in 2015 from $20 billion in 2005. Subscription services revenue on the other hand grew to $2.2 billion in 2015 from $204 million in 2008, driven by a subscriber base that has grown to 68 million in 2015 from 20 million in 2012.
Music streaming touches less than 15% of connected Indians today. This is expected to change fast as interest for streaming and on-demand content is growing, and the ability and willingness to pay for music is going up as well.
Not surprising, the competitive landscape is heating up led by the local incumbents Gaana, Saavn, Hungama and Wynk. Foreign companies are few and just getting started. Apple Music entered last year and has built a deep library. Rdio acquired a local company and is moving aggressively to stake a claim. Guvera, an Australian company, also has a presence, but still has a minor one. Spotify, Pandora and Deezer are conspicuous by their absence.
According to publicly available data from Juxt research, in 2015 about 36 million people streamed music on their phones via apps, led by Gaana at 15 million and Saavn at 14 million. Apple, had just 4 million active users.
The Indian market has its own unique challenges and opportunities. For one, localized content in the local languages of the various regions within the country is essential to attract new subscribers. Music curation and discovery algorithms are still in their infancy. Connectivity has improved as 3G and LTE-enabled phones are becoming more prevalent, piracy is declining and streaming is becoming an increasingly mainstream habit.
To the extent the local companies and global players can turn the challenges of this relatively nascent but promising market into opportunities, the Indian streaming music market can provide the next leg up to sustained growth.