Rajan Roy in Margins:
The thing is, money has expectations. At an individual level, most of us have become accustomed to bank savings accounts effectively returning zero. That wasn’t enough for us though. Our money felt antsy, so it found index funds and other passive funds, to once again, find a bit of yield. They are certainly riskier than a bank savings account (where your only risk is the bank going under), but hey, no one has ever really lost in a Wealthfront account. Money swims towards yield.
That same, tiny behavioral shift takes place at every level of the risk curve, from your savings account to the trillions of dollars managed by large pension funds. That’s exactly how it’s supposed to work; rather than that money sitting in your 0.01% savings account, you put it to work somewhere else. For a pension fund, they might even have a prescribed expectation of yield (to match expected liabilities), meaning, to maintain a consistent return, they have to move up the risk curve.
So all these dollar-organisms all start swimming towards riskier waters. Treasury investors shift to corporate debt. Public equity hedge funds shift to late-stage private equity. Late-stage private equity shifts to mid-stage, mid-stage to early stage. Seed rounds become bigger. Angel investors become a thing. Unicorns, unicorns, and more unicorns. Ashton Kutcher.
And that’s how we end up where we are. In the past, if somewhat risky corporate debt got you 10%. It now gets you 7% (I’m making up numbers here) so you start taking meetings with late-stage growth companies.