The head of a $2 billion firm advising pro athletes and the ultrarich isn't hunting for unicorns. Here's why he's looking at smaller companies in an age of glitzy IPOs.
- Wall Street is awash in unicorn cash as household names like Uber and Pinterest go public. But Leo Kelly of Verdence Capital Advisors says he's avoiding those giants altogether.
- Kelly says the rush toward mega-cap companies is creating opportunities elsewhere, and explains that he focuses on the valuation of a potential investment above all else.
- His firm manages $2 billion for professional athletes and the ultra-wealthy.
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It's been a banner year for giant IPOs, but not everyone on Wall Street is saying "go big or go home."
After long runs as private companies, giants including Uber, Slack, Pinterest and Beyond Meat have made big splashes in the market this year. Others such as WeWork are expected to follow. But the huge valuations for new and often money-losing companies, especially in technology, also mean the stakes are high.
"We're not chasing after unicorns because those valuations are so astronomical today," said Leo Kelly, CEO and chief investment officer of Verdence Capital Advisors. It's a $2 billion private wealth advisory firm whose clients include company founders and executives and athletes.
"If you look at the numbers needed to achieve to current valuations, they're absurd. They're staggering," Kelly added. "One in 1,000 will actually execute on that kind of growth outcome."
Kelly says he's built up a team of "valuation fanatics" and doesn't deviate from that approach no matter how tempting a new company might seem. He says applying that approach earlier in his career - at HighTower Advisors and Merrill Lynch - helped him steer clear of the tech bubble and minimized the damage he suffered in the Global Financial Crisis in 2007-08.
Kelly says his team is focused on smaller companies precisely because they've become overlooked and inexpensive. Then, once they're in, they plan to stay for the long term. His current favorite areas include "industrial companies, medical based companies or ed tech, real estate."
He argues that a lot of the biggest startups, especially in tech and social media, are attracting huge valuations because investors are focused on finding the next Amazon or Netflix - either because they missed out on those companies in the past, or think they can get a similar return again.
That means a stock might surge or a company might have a staggering fundraising round based primarily on the industry it's in. From his point of view, that's very dangerous for investors because the company's worth gets detached from any measurement of the strength of its business.
"You start to get valuation based on supply and demand versus fundamental valuation," Kelly said. "The question you always have to always ask yourself is, is that valued because the underlying asset is that good and they're going to grow that?"
The search for value in overlooked places leads Kelly to see more potential in international and emerging markets stocks than in US equities, which are currently close to record highs.
"They've obviously been beaten up over everything that's happening in the tariff wars," he said. He advocates a mix of public and private investment, including private equity and real estate.
Kelly is also putting his clients' money into fixed income, and said he sees opportunities in both shorter duration, high-quality bonds and in international fixed income.
Rather than loading up on a hot or fashionable sector, Kelly says he evaluates potential investments by looking at the strength of a company's business model and its management, and its revenue and cash flow growth.
"When everybody is chasing one idea, that idea is going to be mispriced," he said, while conversely, "When you get under capitalization you get cheap prices."