The Most Important Fed Meeting in Recent History

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The Most Important Fed Meeting in Recent History

The image above blew my mind - there are 725 private tech companies with “unicorn” valuations of $1 billion or more. This compares to about 550 public tech companies trading at over $1 billion today.

Reader Diego O. shared some compelling insights about the potential thawing of the IPO market:

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“I was doing some digging on the IPO market and what it would take to thaw it for sub-500m companies, and my conclusion (and bias/hope) is that this upcoming FED meeting might tilt this curve even further and open the floodgates. And would be curious to see if it takes us all the way back to 2018-2019 financial profile, or somewhere in between.”

As he points out, many of the private companies waiting in the wings for the IPO market to improve are in the sub $500 million revenue range. And, according to SVB’s report, perhaps a quarter will need to raise capital within the next 12 months or face running out of cash. And the recent jobs data below may have been the push the fed needed to cut rates more drastically, making the IPO market a more hospitable place.

Why the potential change in rates (and investor sentiment)?

The TL;DR is July jobs data didn’t score well - unemployment grew and the number of new jobs created was half of what was targeted. It usually takes 6 months for Fed changes to reverberate through the economy, and they are now getting signal that they didn’t cut rates aggressively enough.

Mark Zandi, chief economist at Moody’s, voiced a sentiment shared by many:

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“They made a mistake. They should have been cutting rates months ago. It feels like a quarter-point cut in September isn’t going to be enough. It’s got to be a half-point with a clear signal that they are going to be much more aggressive in normalizing rates than they have been indicating.”

With the benchmark interest rate at a 23-year high, there's growing anticipation that the Fed will now cut rates by 50 basis points in the coming months, twice as much as the 25 basis point scalpel usually employed. In fact, they may make a larger cut twice before year end to move their rate down by a full percentage point. That would be a game changer in the DCF models of investors.

Taking a step back - Lower interest rates typically lead to higher tech multiples because they reduce the cost of borrowing and increase the present value of future cash flows. In a low-rate environment, investors are more willing to pay higher prices for growth stocks, like tech companies, as the discounted value of their expected future earnings increases. This, in turn, drives up valuation multiples, making it an attractive time for companies to go public or raise additional capital. Additionally, lower rates can stimulate economic activity, which benefits tech companies with scalable business models that thrive in expanding markets.

That’s why this next Fed meeting is so important - it could be the straw that breaks the camels back, triggering a wave of IPOs and allowing LPs to finally receive distributions.