The Growing Blessing of Unicorns: The Changing Nature of the Market for Privately Funded Companies

• Author: Kenneth W. Wiles,Keith C. Brown
• Date: 01 September 2020
• Published date: 01 September 2020
• DOI: http://doi.org/10.1111/jacf.12418

IN THIS ISSUE:

Private Equity

and Public

Companies

VOLUME 32

NUMBER 3

SUMMER 2020

APPLIED

CORPORATE FINANCE

Journal of

8Private Equity: Accomplishments and Challenges

Greg Brown, University of North Carolina; Bob Harris, University of Virginia; Tim Jenkinson,

University of Oxford; Steve Kaplan, University of Chicago; and David Robinson, Duke University

21 Private Equity and Portfolio Companies: Lessons from the

Global Financial Crisis

Shai Bernstein and Josh Lerner, Harvard University; and Filippo Mezzanotti, Northwestern University

43 Board 3.0: What the Private-Equity Governance Model Can Oer

Public Companies

Ronald J. Gilson, Columbia University and Stanford University; and Jeffrey N. Gordon,

Columbia University

52 e Growing Blessing of Unicorns: e Changing Nature of the

Market for Privately Funded Companies

Keith C. Brown and Kenneth W. Wiles, University of Texas at Austin

73 EQT: Private Equity with a Purpose

Robert G. Eccles, University of Oxford; and Therése Lennehag and Nina Nornholm, EQT AB

87 Private Equity and the COVID-19 Economic Downturn:

Opportunity for Expansion?

David Haarmeyer

92 University of Texas Roundtable on LP Perspectives on the

State of Private Equity

Panelists: Chris Halaska, Memorial Hermann Health System; Tom Tull, Employees Retirement

System of Texas; Russell Valdez, Wafra; and Shelby Wanstrath, Texas Teachers Retirement System.

Moderator: Ken Wiles, University of Texas at Austin

100 Columbia Law School Roundtable on Public Aspects of Private Equity

Panelists: Emily Mendell, International Limited Partners Association; Chris Cozzone, Bain Capital

Double Impact; and Donna Hitscherich, Columbia Business School. Moderated by Aamir Rehman,

Columbia Business School

108 A CEO’s Playbook for Creating Long-Term Value: Ten Essential

Resource Allocation Practices

Harry M. Kraemer, Jr., Northwestern University; Michael J. Mauboussin, Counterpoint Global;

and Alfred Rappaport, Northwestern University

118 A Tale of Leadership in Value Creation

Greg Milano, Fortuna Advisors

128 What Public Companies Can Learn from Private Equity Pay Plans

Stephen O’Byrne, Shareholder Value Advisors

52 Journal of Applied Corporate Finance • Volume 32 Number 3 Summer 2020

CB Insights, a vendor of data on and analysis of private

companies, reported that by March 2020, there were 464

rms throughout the world that could boast of that lofty

status. at was more than triple the number in existence just

ve years earlier, with scores of former unicorns having already

graduated to other organizational forms through acquisitions

or initial public oerings (IPOs). Needless to say, this collec-

tion of companies controls a substantial amount of nancial

capital. e private equity research rm PitchBook Data

estimates that, at the close of 2019, the market value of U.S.-

based unicorns alone exceeded $600 billion.¹

is remarkable growth of the unicorn market under-

scores the important fact that it has become increasingly

common for companies to operate and grow to signicant

levels while remaining privately held. Of course, it is virtually

impossible for rms to attain a $1 billion valuation through

internal growth alone, since these companies almost always

receive considerable infusions of nancial capital from private

sources, often through multiple funding rounds spread over

several years. ese private funding rounds, each of which

can involve hundreds of millions to billions of dollars in new

*We are grateful for the comments and contributions of Scott Heintzelman (Preqin),

Farrah Kim and Linda Zhang (CB Insights), Eric Lang, Neil Randall, and Brad Thawley

(Teacher Retirement System of Texas), Patrick Pace and Uzi Yoeli (UTIMCO), Robert

Parrino (University of Texas and Hicks, Muse, Tate & Furst Center for Private Equity Fi-

nance), and Jonathan Cohn (University of Texas). We would also like to acknowledge

Neha Grover and Lauren Wiles for their research support. The authors remain solely re-

sponsible for any errors or omissions in the analysis.

1 See Garrett James Black and Bryan Hanson, 2019, Unicorn Report-2019, Pitch-

Book Data Inc., as well as Gené Teare, 2020, “Private Unicorn Board Now Above 600

Companies Valued At $2T,” Crunchbase News, June 20. Also, as noted in Katie Benner,

2015, “The Unicorn Club, Now Admitting Members,” The Wall Street Journal, August

23, the rst person to use the term “unicorn” was Aileen Lee of Cowboy Ventures, a

seed-capital venture rm. Incidentally, just as a group of wild horses is called a herd, a

collection of unicorns is referred to as a blessing, which explains one meaning of the

seemingly quixotic title for this study.

capital, have oered rms a viable alternative to the tradi-

tional path to raising sizeable amounts of capital through an

IPO in the public market. Indeed, such non-public capital

fundraisings, which have been dubbed “private IPOs”—or

“PIPOs”—have increased dramatically in popularity since rst

appearing regularly in 2012. Indeed, such PIPOs are now an

integral mechanism by which rms often become unicorns in

the rst place, thereby remaining outside the control of public

equity investors for longer periods of time.

All of which begs the question: Why would the owners

and decision-makers of a edgling company prefer to receive

nancial capital from private investors rather than public

ones? As has been well chronicled in the research literature

over the past 30 years, the answer appears to involve issues

related to how the rm is run and controlled. Specically, the

research provides consistent documentation of private inves-

tors’ ability to impose better governance structures than public

equity holders, particularly with respect to reducing agency

and free cash ow problems. Karen Wruck, for example, has

identied several key elements of privately held companies

that have helped them outperform otherwise comparable

public companies, including smaller, more active, and inter-

ested boards comprising the rm’s largest shareholders and

overseeing operating managers who are also motivated by large

equity stakes.² Along with the spurs for eciency and value

2 Karen H. Wruck, 2008, “Private Equity, Corporate Governance, and the Reinven-

tion of the Market for Corporate Control,” Journal of Applied Corporate Finance 20, no.

3: 8-21. For a review of how private equity involvement can improve corporate gover-

nance structures, see also Mike Wright, Kevin Amess, Charlie Weir, and Sourafel Girma,

2009, “Private Equity and Corporate Governance: Retrospect and Prospect,” Corporate

Governance: An International Review 17, no. 3: 353-375, as well as Edward Peter

Stringham and Jack Vogel, 2018, “How Private Equity Enhances the Market for Corpo-

rate Control and Capitalism,” Columbia Law School Blue Sky Blog, September 13.

ne of the more striking developments in nancial markets over the past decade has

been the ascent of unicorns, companies that have reached market valuations of

$1 billion without access to public capital. Once considered rare enough to liken to a mythic

creature—the rst unicorn sighted was the Chinese rm Alibaba in 2005, and the term itself

was not coined until 2013—these rms have become almost commonplace in recent years.

by Keith C. Brown and Kenneth W. Wiles, University of Texas at Austin*

e Growing Blessing of Unicorns: e Changing

Nature of the Market for Privately Funded Companies

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