Grant's Interest Rate Observer - February 18, 2000
JUST TO BE CONSERVATIVE
Built into the valuation assumptions of a new work of analysis by Wit Capital is the forecast that each and every closely held investment in the Internet Capital Group (ICGE) stable will appreciate by approximately 200% a year in each of the next three years. ICGE, the business-to-business e-commerce company incubator, has a $31 billion market cap following a substantial correction. (So severe was this setback that even ancient Boeing, valued at $36 billion, has overtaken it in the capitalization tables.)
"While we recognize that that growth rate represents a substantial premium to almost any measure of historic average returns by private equity investors over longer time periods," the Wit report, dated February 7, states, "we note that the composition and prospects of [Internet Capital Group's] operating platform are very much more accessible for analysis than any 'closed-box' venture portfolio." Does 200% sound a little bit aggressive? On the contrary, Wit claims, it represents "an approximate 90% discount to the company's average historic return." That would imply that this "average historic return" was 2000%. For chronological perspective, ICGE was founded in 1996. According to a January 10 Barron's article, "about half" of the company's venture investments were made since Sept. 30, 1999.
Sensitive to the needs of the more conservative investor, Wit also presents an alternative scenario for the same stable of venture investments. Under the more cautious assumption, the value of these holdings will appreciate over each of the next three years by an annual rate of 185%. To the people who think these things, of what possible significance is the federal funds rate? Of what possible worry are death, taxes or the law of supply and demand?