For over a year, risk assets have de-rated as participants priced in the implications of contractionary monetary policies and waning stimulus.
Moreover, despite slower growth, some authorities claim the expansion in risk premiums has played its course. For that reason, there may be heightened opportunities in some hard-hit baskets, as well as the more stable and fast-growing private markets.
Benzinga caught up with Jeff Parks, the CEO and director of Toronto-based Stack Capital Group Inc (TSE: STCK), to learn more about pockets of opportunity across markets and how investors can get exposure to cocktail hour names like SpaceX, Varo, Hopper and more.
Background: After four years in business school at the University of Western Ontario, Parks went straight into the hedge fund business.
Nearly 10 or so years later, Parks, alongside CIO Jason Meiers, CFO Jimmy Vaiopoulos, and VP of corporate development and investor relations Brian Viveiros, opened Stack Capital, a permanent capital structure for everybody.
“What we wanted to do was have that pool of capital where [the investor] can go on the exchange, buy shares in stock, and get exposure to our underlying [private] companies.”
The firm’s investments include Varo Bank, Bolt, Prove, Hopper, SpaceX among others.
Why The Buy-Side: Oftentimes after graduating, young professionals opt for the sell-side experience and join investment banks.
The edge and opportunity are asymmetric on the buy-side as was explained to Benzinga. “People go from school into the investment banker route, or trading desk and sales capacities,” Parks explained on young talents being rewarded of their idea generation.
“As you cut your teeth in those roles, … you’re going to gravitate towards that buy-side because you want to start putting capital at risk,” he added. “You get the carry and the performance of the underlying capital.”
Exchange-Listed: In an offering book run by Toronto-Dominion Bank (NYSE:TD), Royal Bank of Canada (NYSE:RY), and Bank of Nova Scotia (NYSE:BNS), Stack Capital completed its initial public offering mid-last year, providing public markets with access to the hottest opportunities in private growth-to-late stage businesses.
The firm’s main objective is to maximize long-term capital appreciation with active management.
“When we came out on our IPO, we wanted to focus in on those market disruptors and cocktail hour names,” Parks said. “Those growth- and lead-stage businesses that obviously have proven product-market fit, versus like the seed- and early-stage companies.”
In a conversation on how businesses raise capital and where Stack Capital falls in that process, Parks said, “There are two routes. You’re going to do your primary investments and secondary investments. With primary investment, companies want capital on their balance sheet and so investors will go directly in on their cap table.”
That process is run via the company, themselves, or a banking syndicate. “On the secondary market, you have funds that could be in their seventh or eighth years and now, they’re a forced seller,” he said. Adding that, they look to lock in those gains and provide liquidity to shareholders.
“Because we have capital, we can opportunistically buy those underlying shares from them … and capitalize on that trading inefficiency,” Parks noted.
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Cutting Volatility: Because private markets aren't subject to the emotions and whims of public market participants, they can trade in a more stable manner.
“You definitely see a lot of volatility in the public markets on how stocks could be up 10% one day, down 10% the next day versus the private market,” Parks said. “All of our positions are audited by accountants, … and that smoothes those underlying positions.”
Valuations Compress: Public markets, beyond emotion, are subject to the implications of mechanical buying and selling, as a result of leveraging, forced hedging, and the like.
In part, prevailing monetary frameworks, the provision of liquidity, promoted large divergences in price from fundamentals, and that fed into the growth in passive investing – the effect of increased moneyness among nonmonetary assets – and derivatives trading.
When public markets turn, so do flows; action can often feed into privates. Stack Capital, for that reason, in addition to the compression of valuations as a result of monetary tightening, among other factors, sat on its hands.
“You see some valuation differences in the public markets,” Parks explained on recent multiple compression presenting an opportunity.
“You see the corrections and forced selling of underlying opportunities in the private markets, [also], which is fantastic for us because we’re more than 70% cash right now.”
Growth Is Still In: Parks is optimistic that many companies will end up growing into their multiples, so long as they have a path to profitability. That’s where Stack’s analysis helps.
“I think a lot of companies have reset,” he noted. However, “we want to make sure, especially in the private markets, [businesses] have strong balance sheets.”
“You’re going to see a reset in the privates and … there’s going to be some liquidation over the next two, three, four, and five months. We think we’ll have shots at unbelievable companies that we’ll be able to put in our portfolio.”
Final Thoughts: Stack Capital is democratizing access to generational buying opportunities for all investors, whether or not accredited, on platforms like Robinhood Markets Inc (NASDAQ:HOOD) and Charles Schwab Corporation (NYSE:SCHW).
“Our end game is that we want to compound the book value over time. If we grow, our underlying shareholders win, and we get exposure to other deals.”
