Meet the 'Unicorn Hunters': They acquired companies and still outperformed, Morgan Stanley says

A radical of "unicorn hunters" are successfully acquiring companies without upsetting the market, according to Morgan Stanley. And their show tin crook accepted contented connected its head.

There are 19 nationalist companies that person acquired astatine slightest 2 "unicorns" —private companies with a valuation supra $1 cardinal — successful the past decade, equity strategist Edward Stanley said successful a enactment to clients Tuesday. This radical could get the apical 30 unicorns, oregon much than 800 smaller ones, utilizing conscionable two-times their net-debt-to-EBITDA ratio, a measurement of leverage.

This radical of 19 has outperformed the wide S&P 500 scale by 45% implicit the past 5 years. And it has outperformed by 16% truthful acold this twelvemonth alone, an particularly beardown show considering the wide scale was up astir 13.8% successful 2023, arsenic of Tuesday's close.

That outperformance tin defy accepted marketplace wisdom, arsenic investors typically similar companies that absorption connected interior innovation implicit those that opt for buying backstage businesses, due to the fact that the second tin beryllium much costly.

So what's driving this outperformance that flies successful the look of expectation? Morgan Stanley said these companies person a dense bias toward exertion and aesculapian technology, 2 areas that outperformed the broader marketplace betwixt 2018 and 2022, and since coming disconnected caller lows successful 2023.

These companies person besides been focused connected escaped currency travel procreation and deleveraging arsenic opposed to top-line maturation successful 2023. With this successful mind, Stanley questioned whether unicorn hunting is simply a astute concern strategy with the stocks precocious not rewarded.

But Stanley said the absorption going guardant should beryllium connected whether this radical resumes merger and acquisition enactment successful coming quarters. Also important volition beryllium whether they tin get unicorns astatine a tenable terms that benefits shareholders, thing Stanley said has go much hard due to the fact that delayed operation raises and span rounds tin propulsion backmost valuation resets.

And this comes arsenic the marketplace for unicorns shifts pursuing 2 years of tightening liquidity conditions. The descent successful unicorns is particularly stark erstwhile considering what the marketplace would look similar without a boost from the excitement astir artificial intelligence, helium said.

And Stanley said the challenging scenery for unicorns has made it a "buyers market." Those astir astatine hazard of seeing a valuation chopped oregon being acquired are those that were named unicorns since 2020, erstwhile liquidity conditions were the easiest, helium added.

With this successful mind, Stanley screened for unicorn-hunter companies that person acquired 2 successful the past decade. He besides looked astatine the magnitude of "dry powder" companies would beryllium capable to deploy with a 2.5-times existent statement full-year levels for net-debt-to-EBITDA successful mind. Here's 10 from Stanley's database of those successful the champion position:

Unicorn hunters with the astir 'dry powder'