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IMO, these valuation write downs are not driven by the decline in the value of underlying assets but the lack of liquidity of positions in such assets. When th

by akg_67 11y ago

IMO, these valuation write downs are not driven by the decline in the value of underlying assets but the lack of liquidity of positions in such assets. When the liquidity seized in high yield corporate bond market in Q4'15, it brought in to focus liquidity of all other asset classes. Most institutions dealing in assets that are not readily tradable are demanding higher discount for risk due to lower liquidity of such assets. This is resulting in lowering of fair market value for such assets. This is happening all across the alternative asset space and not just for private startups.

TuringNYC 11y ago
There is always liquidity -- at a price. To give an extreme example...i'm standing ready to buy ANY startup at $1. Guaranteed liquidity. I note this because il-liquidity is usually an indication of a decline in value. It means there are smaller numbers of uninformed buyers out there to buy something at an inflated price.
- dia80 11y ago
  I think you mean any startup with a limited liability structure!
hueving 11y ago
'lack of liquidity' is just another way to describe the situation where there is no buyer at the price you want. I have an amateur painting that I really like and would not part with unless I was offered $1000 or more. However, nobody would actually pay that because it's not that great (it just has sentimental value to me). I don't pretend that the art market is just in a 'liquidity crunch' because I'm not able to sell it, I just recognize that the market value of the painting is much less than I'm willing to accept. People in finance like to use this phrase to describe unpleasant market pricing behavior to help justify the losses they would realize if they had to sell in the current market. "there was no housing crash, just a liquidity lockup that made people desperately sell their homes!"
- MagnumOpus 11y ago
  You don't understand the concept of liquidity. Finance people (and anyone else with a hat full of brains) knows the difference between a market clearing price, and there being no liquidity. No liquidity means: I can sell 500 of these shares per day (paintings, buildings) for price x but no higher - while at normal times I can sell 50,000 of these for price x but no higher.
  - semi-extrinsic 11y ago
    The underlying assumption of "normal times" is what can cause problems with the concept of liquidity for assets that are rarely traded. E.g. if you define "normal times" as "the one transaction that occurred when I bought the asset".
  - hueving 11y ago
    You just echoed exactly what I said. Lack of liquidity is just another name for lack of demand at the price you want. You could certainly sell more than 500 shares if you started lowering the price. Let me ask you a question (since you "have a hat full of brains"), would you value Tesla the same if they were able to generate sales for 500 cars at the current price rather than 50,000 at the current price? If you can 'normally' sell 50000 units of something in a day at price X and suddenly you can only sell 500 units for price X, it means the demand is gone at that price point. Basic supply and demand applies to everyone, including people with hats full of brains. Take any market that is in a "liquidity crunch", and cut the asking price by 90% of what you're trying to sell and see how quickly liquidity returns. Long term capital management paid a hefty price to learn that no demand because of "lack of liquidity" is the same thing as no demand because people don't want to pay the asking price. There is no such thing as "normal times", there are just current market conditions. Oil traded at close to $100 during "normal times" just a couple of years back. Coal companies were good investments 10 years back. There are lots of people waiting for the market to return to "normal times" that will be waiting a long time.
    - shwouchk 11y ago
      While I see your point, there is also a difference in kind between no one buying your painting at $1000 because it isn't worth that much, and no one buying any painting for $1000 because they are afraid and being extra causcious with the money...

by akg_67 11y ago

TuringNYC 11y ago

There is always liquidity -- at a price. To give an extreme example...i'm standing ready to buy ANY startup at $1. Guaranteed liquidity. I note this because il-liquidity is usually an indication of a decline in value. It means there are smaller numbers of uninformed buyers out there to buy something at an inflated price.

dia80 11y ago
I think you mean any startup with a limited liability structure!

hueving 11y ago

'lack of liquidity' is just another way to describe the situation where there is no buyer at the price you want. I have an amateur painting that I really like and would not part with unless I was offered $1000 or more. However, nobody would actually pay that because it's not that great (it just has sentimental value to me). I don't pretend that the art market is just in a 'liquidity crunch' because I'm not able to sell it, I just recognize that the market value of the painting is much less than I'm willing to accept. People in finance like to use this phrase to describe unpleasant market pricing behavior to help justify the losses they would realize if they had to sell in the current market. "there was no housing crash, just a liquidity lockup that made people desperately sell their homes!"

MagnumOpus 11y ago
You don't understand the concept of liquidity. Finance people (and anyone else with a hat full of brains) knows the difference between a market clearing price, and there being no liquidity. No liquidity means: I can sell 500 of these shares per day (paintings, buildings) for price x but no higher - while at normal times I can sell 50,000 of these for price x but no higher.
- semi-extrinsic 11y ago
  The underlying assumption of "normal times" is what can cause problems with the concept of liquidity for assets that are rarely traded. E.g. if you define "normal times" as "the one transaction that occurred when I bought the asset".
- hueving 11y ago
  You just echoed exactly what I said. Lack of liquidity is just another name for lack of demand at the price you want. You could certainly sell more than 500 shares if you started lowering the price. Let me ask you a question (since you "have a hat full of brains"), would you value Tesla the same if they were able to generate sales for 500 cars at the current price rather than 50,000 at the current price? If you can 'normally' sell 50000 units of something in a day at price X and suddenly you can only sell 500 units for price X, it means the demand is gone at that price point. Basic supply and demand applies to everyone, including people with hats full of brains. Take any market that is in a "liquidity crunch", and cut the asking price by 90% of what you're trying to sell and see how quickly liquidity returns. Long term capital management paid a hefty price to learn that no demand because of "lack of liquidity" is the same thing as no demand because people don't want to pay the asking price. There is no such thing as "normal times", there are just current market conditions. Oil traded at close to $100 during "normal times" just a couple of years back. Coal companies were good investments 10 years back. There are lots of people waiting for the market to return to "normal times" that will be waiting a long time.
  - shwouchk 11y ago
    While I see your point, there is also a difference in kind between no one buying your painting at $1000 because it isn't worth that much, and no one buying any painting for $1000 because they are afraid and being extra causcious with the money...