Let me take you back to 1967 and this famous opening lyric from Scott McKenzie during the Summer of Love:
‘If you’re going to San Francisco, be sure to wear some flowers in your hair.’
I’ve got San Francisco on the brain.
How curious that a city with such a hippie and musical heritage has become an enclave for millionaires only.
The tech wealth that’s come out of Silicon Valley is already huge.
The latest batch of US tech IPOs is sending this into hyperdrive. It also gives us a glimpse of where the future is heading…including for us here in Australia.
Today’s Profit Watch makes the case for a major shift in capital markets…
Let me set the scene a little more.
The New York Times says 2019 could see US$100 billion raised on the US stock markets. That would be more than the epic tech peak in the year 2000.
This is happening as the latest batch of US tech stars go public.
The names won’t be unfamiliar: Lyft, Uber, Pinterest, Slack and Airbnb.
Most of these businesses are based in San Francisco. Their employees and equity holders are going to flood the place with money — especially the property market.
I’ve been there — the place just ain’t that big.
It’s going to send land values skyrocketing.
A reporter for The Wall Street Journal cites a couple trying to get ahead of this tidal wave of greenbacks and spending US$6 million…for a ‘fixer upper’.
And you thought Sydney was bad!
But today, we’re going to follow a different line of thought. It’s to reflect on what happens at the time of an initial public offering and why it’s going to change.
You see…when you’re an equity holder in a private business, you can’t monetise your holding in the same way as you can when you’re in a public company.
If your stock is listed on the share market, you can sell as little or as many shares as you like to raise cash.
That’s why an initial public offering can be such a windfall for investors in a stock like one of our batch above…say Lyft.
Early investors finally have a liquid market to sell to.
Those days are just about finished.
It’s to do with cryptocurrencies…
The biggest development since the 17th century?
I do wonder if the traditional share market will even be around in a decade.
You can put it down to one word — tokenisation.
Expect to hear a lot about this in future years.
Asset tokenisation is where real assets become registered on a blockchain and can be freely traded via some form of representative token (like bitcoin).
For example, if you own a commercial building, soon you will not be forced into the binary choice of either renting it or selling it completely.
You’ll be able, if you so desire, to sell fractions of it — like shares in a business — via the cryptocurrency market.
Anyone who buys your token is entitled to a percentage of the rental income and any capital appreciation — again, like a share.
That gives you the potential to retain, say, 80% and raise cash from the rest.
Anyone who buys the token can sell it on easily, too. There’ll be a public market for it, like stocks.
As an individual investor, you might find you can buy small parcels in iconic buildings and new developments. The possibilities are huge.
This is going to be massive for an illiquid market like real estate. But it doesn’t stop there.
The same can be true for artwork and gold and diamonds or whatever you care to name.
But I’m sure this shift is going to change how value is captured in traditional ‘equity’ businesses, too.
It’s no stretch now for a new company to begin from the get-go with a native token established. It could issue these to staff to incentivise them, like options do now.
The token will appreciate — or fall — in value alongside the fortunes of the company.
The difference will be that it could be traded publicly from the very beginning.
You won’t have to wait — like the good people who invested in Uber — for it go public on the share market before you can release your equity. You’ll be able to do it at any point in the company lifecycle.
Asset tokenisation promises to be a staggering development in capital markets. It’s going to unleash a tsunami of liquidity all over the world.
And your investment opportunities are going to expand on a historic scale.
We’re all in San Francisco now.