Tech sell-off: Regal Funds Management's Ben McCallum, Square Peg Capital's Paul Bassat and Potentia Capital's Tim Reed say sell-off will continue but see long-term opportunities – The Australian Financial Review

Tech investors across the spectrum are tipping the sell-off to continue and begin to affect private market valuations, but say they are “looking beyond the noise” in their portfolios.
The S&P/ASX All Tech Index is down more than 19 per cent for the year to date, trading at its lowest point in more than a year. The market turmoil caused it to lose 9.4 per cent last week alone.
Paul Bassat says the fall in tech valuations is nothing to be alarmed by. Arsineh Houspian
The $14 billion logistics software company WiseTech Global led the losses last week, down 16 per cent, alongside the newly ASX-listed Square, which was down almost 15 per cent, and communications software company Whispir, which slipped 14 per cent.
Regal Funds Management portfolio manager Ben McCallum said the market could keep falling, but some prices were now at a level where investors would step back in.
“It’s not dissimilar to the March 2020 sell-off – it’s been quick, but not as brutal so far,” he said.
“It’s a stock-pickers’ market. Trying to pick the bottom is a mug’s game, the market will do what it wants to do, but it creates a great opportunity to gradually start buying the companies you have a strong long-term view on.
Potentia’s Tim Reed said the current tech market declines would not make him walk away from any investments. Janie Barrett
“The market is delineating between loss making tech and profitable tech. If you’re a leader in the space, and you have a strong balance sheet, you’re probably OK. But if you’re loss-making and not taking significant share in your sector, it will be tougher.”
In the private market, the year has started with a bang, with capital raisings worth hundreds of millions of dollars already announced by Aussie founders.
But with some of these likely having closed in the last week or two of 2021, any valuation pressures will only start being felt in the venture capital ecosystem now.
“Inevitably you see some sort of price correlation between listed company values and private company values, but with a lag,” Square Peg Capital’s Paul Bassat said.
“Series E and F raises will respond most quickly because you have a fair overlap in the investor base. They often do both public and private and if they see more value in one market than another, they’ll shift capital.
“Over time, that flows through to the entire market.”
 
Mr Bassat said the listed tech sell-off was unsurprising, but now there was a mismatch between public and private valuations that would probably be unsustainable.
“There’s been a very strong run up in stock prices of high-growth tech companies for a number of years, particularly starting from March 2020, when the COVID-19 winners performed very well,” he said.
“On an apples with apples basis, public market values in the early part of 2021 were higher than they were for private. Then the public companies came down, but private went up, and the two have gotten out of whack.
“That’s why the most likely outcome is the private market values compress.”
Despite this, he tipped the slip would be temporary and was no cause for alarm. He also said founders had taken advantage of the high prices in 2021, and many were now sufficiently cashed up.
“If I’m in the shoes of a founder and use real estate prices as an analogy, they’ve gone up dramatically. Everyone wants to sell their house at the top of the market, but if you sell two months later and the market has fallen 5 per cent, you’ve still got the 40 per cent run up in prices in the preceding two years.
“It’s the same with tech. It’s moved in a really healthy direction. It might come off a bit, but I don’t think it’ll be a dramatic change.”
Former MYOB CEO and Potentia Capital co-managing director Tim Reed, who is also Business Council of Australia president, said over a decade, tech valuations were a squiggly line, but they trended upwards.
“We’re always cognisant of where multiples are, but it wouldn’t make us walk away from a great opportunity,” he said.
“We invest for a three to five year time horizon, we’re not investing to sell in 90 days.”
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