Twitter IPO Likely Sign of Risk Tolerance, Oaktree Chairman SaysBei Hu
Twitter Inc.’s initial public offering may have signaled the return of risk tolerance that should prompt professional investors to pause, Oaktree Capital Group LLC Chairman Howard Marks said.
Rising risk appetite in financial markets has reinforced the cautious approach that Oaktree, the world’s largest distressed-debt investor, has taken in the last two years, Marks said in an interview in Hong Kong. Still, the economic outlook and asset prices do not yet justify mass selling of assets, he added.
Twitter raised $1.82 billion in pricing its IPO at a higher valuation than Facebook Inc., as investors paid a premium for its promises of fast growth. The San Francisco-based company, which is unprofitable and has one-fifth as many users as Facebook, surged 73 percent on the first day of trading in New York, the biggest one-day gain for an IPO that raised more than $1 billion since Alibaba.com Ltd.’s debut in 2007.
“When the punters who were chastened in the crash crawl out of their caves and begin to punt again, then you have to wonder about the extent of risk tolerance in the environment,” Marks said. “When risk tolerance becomes widespread, then prudent professionals like us tend to become more conservative.”
Twitter closed at $44.90 in New York from the IPO price of $26. The stock touched a high of $50 earlier in the day.
The current price valued Twitter at 22 times estimated 2014 sales, compared to Facebook’s 11.2 times, according to analyst projections compiled by Bloomberg.
The company received orders for about 30 times as many shares as it offered at the IPO price, a person with knowledge of the matter said.
Twitter’s IPO fever “feels like emotional buying,” Marks said during a separate interview with Bloomberg Television today.
“The Twitter IPO will be one piece of evidence that the race to the bottom has resumed,” said Marks, referencing a memo to investors he wrote in February 2007, called The Race to the Bottom, about how people engage in aggressive behavior when they are unafraid and moving up the risk curve.
Twitter may have priced the IPO a bit cheap to ensure IPO success, attract public attention and set a momentum for the stock, Marks said, adding that he questions if the company would have priced the IPO at half of its true worth.
Describing the U.S. economic recovery as “gradual” and “unsteady,” Marks said investors are still waiting to see momentum in economic growth.
“My mantra for Oaktree for the last two years has been move forward but with caution,” Marks said. “This rising level of risk tolerance in the environment amplifies that feeling on our part.”