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WeWork Saga Has It All as a Cautionary Investment Tale

Mohamed A. El-Erian

(Bloomberg Opinion) -- It’s tempting to dismiss the latest twists and turns in the WeWork saga as yet another illustration of the peculiarities of an individual company. But such a narrow focus would be a mistake. The WeWork debacle has broader implications for an investment world that has over-extended its romance with certain less-well-understood investment risks.

Among the many stunning latest developments is the announcement that the valuation of WeWork implied by the proposed SoftBank rescue is less than one-fifth of the one targeted in the now-withdrawn initial public offering of just two months ago. Meanwhile, the rescue — which follows a failed financing path through junk bonds — would give SoftBank control of the company. Adam Neumann, the company’s founder, is to be replaced as chairman by an executive who will need to scramble to climb up both the sector and corporate learning curves. Neumann’s generous payout stands in stark contrast to the large-scale employee layoffs that are ahead.

These developments powerfully illustrate a range of concerns that have been bubbling for a while among those following not just what’s happening within the venture capital world but also what has been a more general sizeable shift of investors to less-liquid asset classes in search of higher expected returns.

If nothing else, WeWork highlights how private valuations can become divorced from what can be realized in public markets. It points to the distortionary effects of throwing lots of money too early at startups that are not yet able to manage a scale shift in operations and investment. It illustrates the downside of a founder personality cult that, when it goes wrong, can risk the whole enterprise. And it serves as a warning to the overly optimistic assumptions of investor exits that still prevail in both private equity and venture capital.

None of these issues will come as a huge surprise for long-term observers of these private markets. But they have yet to sufficiently inform, let alone influence, what has been a huge increase in broader investor interest in an asset class that, almost by definition, is not built to deal quickly and efficiently with massive inflows without a significant increase in already notable investment and operational risks.

WeWork also speaks — or should speak — to risks that go beyond venture capital.

Facing ultra-low and in some cases negative yields because of central banks’ prolonged reliance on unconventional policies, investors have been forced well beyond their natural habitat in search of higher returns. This first played out in the acceptance of diminished quality for several investment strategies and in the willingness of investors to underwrite greater potential market volatility and defaults. With demand shrinking traditional risk premiums, investors were forced to also sacrifice more liquidity. It’s a phenomenon that has played out not just directly but also through the growing proliferation of what seems to be highly liquid investment instruments on inherently illiquid asset classes, like some ETFs and passive products, which too many investors regard as offering immediate liquidity at reasonable bid-offer spreads.

The WeWork saga is far from over, and it will undoubtedly be the subject of several business school cases. But already its early lessons extend well beyond the company and its investor base, offering a cautionary tale for less-informed investors who might be lured down a similar path.

To contact the author of this story: Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He is president-elect of Queens' College, Cambridge, senior adviser at Gramercy and professor of practice at Wharton. His books include "The Only Game in Town" and "When Markets Collide."

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