Rising rates set to kill ‘unicorn investments’

By Cameron Micallef

July 26 2021
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Shifting economic strategy post-COVID-19 will lead to rising interest rates, causing the death of “unicorn investments”, an industry expert predicts.

During a Fidelity international seminar, CIO Asia Pacific Paras Anand pointed to unprecedented levels of economic support to get through the COVID-19 pandemic, which is set to continue during the recovery phase.

“Unicorn” is a term originally used in the venture capital industry to describe a privately held start-up company with a value of over $1 billion, often in biotechnology or software development.

Many of the unicorns of the past have grown into some of the biggest companies in the world, including Google (renamed Alphabet), Facebook, Airbnb and Epic Games.

While these businesses at times can be loss-making, however, record-low rates made them a more attractive investment.

The CIO explained the COVID-19 recovery will be focused on infrastructure spending, with these projects lifting inflation and eventually interest rates.

He said: “The first is what you could describe as basic infrastructure, addressing those areas of historic underspend on public facilities, such as roads, schools and parks.

“The second is the spend on renewable infrastructure as countries transition away from fossil fuels in terms of the energy grid.

“And the third [is] infrastructure required for the creation of smart cities and this spend will be greatest in the Americans and part of Europe, which are arguably starting from a place of many years if not decades of underinvestment.”

According to Mr Anand, the changing economics and rising rates will have a resounding impact on the capital markets.

“It is important to stress across the broader capital markets there will be a number of areas where the party is well and truly over,” he argued.

“And most obviously, this will be the amount of money channelled into what you could describe as wide outcome investment.

“Early-stage loss-making businesses, transformational technologies be that in that software of biotechnology.”

Mr Anand said markets were at that classic stage of that cycle, that valuations imply that many, if not all, of such companies will be very successful, whereas in fact only a few will stand the test of time.

“In other words, the herd of unicorns will effectively thin out. Now, this is much more of a problem for the private market rather than public market investors, but it will be important in the overall backdrop,” he concluded.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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