Do ESG Investors Believe In Unicorns?
The once red-hot market for unicorn investments has turned chilly. These start-up enterprises with a value of at least $1 billion have enjoyed relative easy access to private capital this cycle. Robust growth, easy credit and a fair amount of hype combined to elevate the early valuations of these companies. Peloton Interactive, Inc. (PTON), the maker of stationary bikes and treadmills, marketed itself as “selling happiness.” Ridesharing company, Lyft, Inc. (LYFT) claimed it was “at the forefront of societal change.” Corporate real estate leasing company WeWork aimed to “elevate the world’s consciousness.”
High aspirations for sure, but under closer inspection these companies have struggled. Peloton has fallen -26% since its late-September initial public offering (IPO). LYFT has fallen -27% since coming public in March. WeWork has seen its “value” fall from $47 billion in its last private funding round to $8 billion in Softbank’s controlling purchase last week. While there are certainly fundamental issues with businesses models, profitability and total addressable markets (TAMs), when evaluated for compliance with environmental, social and governance (ESG) standards these companies notably fall short in the governance category.
Peloton voluntarily disclosed to material weaknesses in their financial reporting, putting at risk the viability of their future projections. Peloton also incorporates a non-ESG compliant dual share structure in which early investor shares are given 20 votes versus 1 vote for common shareholders. For its part, WeWork leased property from then CEO Adam Neumann, an inappropriate insider deal. WeWork also has a dual share class structure in which Neumann’s shares are granted 10 times the voting rights of common shareholders.
While once-hot unicorn companies have been a source of recent pain for their investors, strict standards would likely preclude them from investment in ESG funds. As ESG adoption expands, so too will the scrutiny of companies seeking capital from the public markets.
Dana Large Cap Equity Fund top-ten holdings as of September 30, 2019: Apple, Inc. (2.36%), Alphabet, Inc. Class A (2.28%), Microsoft Corp. (2.21%), CDW Corp. (2.20%), Comcast Corp. (A) (2.02%), D.R. Hoton, Inc. (2.10%), Intel Corp. (2.09%), Bristol-Myers Squibb Corp. (2.06%), T-Mobile, Inc. (2.04%), Thermo Fisher Scientific, Inc. (2.01%).
Dana Small Cap Equity Fund top-ten holdings as of September 30, 2019: Cabot Microelectronics Corp. (2.28%), CoreSite Realty Corp. (2.07%), EastGroup Properties, Inc. (2.06%), Chesapeake Utilities Corp. (2.04%), Horizon Therapeutics (2.03%), Southwest Gas Corp. (2.02%), Centerstate Bank Corp. (2.00%), Banner Corporation (1.99%), Synnex Corp. (1.99%), Stag Industrial, Inc. (1.97%).
Dana Epiphany ESG Equity Fund top-ten holdings as of September 30, 2019: Nexterra Energy, Inc. (2.76%), Amazon.com (2.74%), PepsiCo, Inc. (2.70%), Apple, Inc. (2.65%), Automatic Data Processing (2.55%), Microsoft Corp. (2.41%), Alphabet, Inc. Class C (2.40%), American Express Co. (2.15%), Facebook, Inc. (2.11%), Intel Corp. (2.03%).