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The WeWork saga has been ever-present in financial headlines in recent months. The brief version of the story can be summarized in a few steps:

WeWork, a company involved in subleasing buildings had been raising venture money in the private markets with valuations as high as $47 billion. One of its main investors was the multinational conglomerate Softbank.

As the company sought to go public, the underwriting banks pitching its initial public offering to public market investors hoped to achieve a valuation in excess of the peak private market valuation, but public market investors balked at the idea for various reasons.

WeWork’s business model may have been deemed questionable by investors who may have viewed it as a real estate company masquerading as a tech company, with a lofty valuation more in-line with the latter, but underlying business drivers of the former.

As well, some of the highest profile IPOs of 2019, like Uber and Lyft, had not met expectations for public market investors.

There were also a host of glaring governance issues at WeWork. WeWork intended to go public with a dual-class share structure which would allow the chief executive officer and founder to retain full voting control of the company, leaving public market investors with minimal voting control regardless of their proportional ownership of WeWork stock. There were also widely publicized allegations of self-dealing and potential conflicts of interest concerning the CEO.

The IPO failed, along with debt financing that WeWork was set to receive contingent on a successful offering. The financial state of the company rapidly deteriorated, with Softbank having to provide rescue financing to WeWork in October.

The WeWork saga is an unfortunate story. But what lessons does it hold for institutional investors specifically?

Though extreme, in my opinion, certain parallels can be drawn between the WeWork story and recent developments in other asset classes, particularly in alternatives. As fixed income yields have gotten lower in recent years and expected equity returns have continued to fall, there is a pronounced thirst for yield among institutional investors, which has been a key driver behind their increasing allocations to alternatives. These increased allocations drive capital flows into these spaces, driving valuations higher.

Also, critically, the supply-demand imbalance within these asset classes has led to a deterioration in investor-friendly features within them. In private credit, we’ve seen a pronounced increase in covenant-lite loans, giving institutional lenders weaker recourse. In private equity, we’ve witnessed a pronounced increase in sponsor-to-sponsor transactions and a pivot to more exotic and uncertain transactions like turnarounds. In the venture space, dual-voting stock has become commonplace, oftentimes meaning institutional shareholders hold little voting control over these issuers when they go public. In 2018, the proportion of companies going public with negative profitability reached its highest level since the tech bubble.

The WeWork story could perhaps be considered a logical extension of these developments, at least in the venture space. WeWork and its CEO tested the patience of institutional investors, putting forward what many viewed as a dubious business model and bad governance, perhaps with the expectation that in this environment, these prospective investors would simply accept these shortcomings. Institutional investors (namely public market investors) pushed back, causing WeWork’s IPO to fail and potentially creating a new narrative around the IPO market.

Return expectations for all asset classes fluctuate over time. As we’ve seen in the alternatives space and in the IPO market, as the need for yield has become more pronounced and broad return expectations have fallen, complexity has increased, and investor-friendly practices have become less prominent. This means that more than ever, institutions must look beyond simple capital markets expectations when considering the true merits of their allocations.