Gravitas Spark CrowdFunding

Category: Investment

  • Nightmare On October’s Street….

    Nightmare On October’s Street….

    Hallowe’en has provided its fair share of horror movie classics, but Hollywood does not have exclusive rights to October fears. Wall Street is nervous every year. No pagan myths needed. The historic data shows that financial markets are at their most volatile this month. However, do not confuse volatility with sudden downward moves for stock markets. Yes, two of the worst market crashes in 1929 and 1987, and three of the four 10% + monthly falls for the benchmark Dow Jones Index over the past century all beat Freddy Krueger to the fear punch at the end of the month. However, as a professional risk observer it’s important to know that volatility and risk includes upside moves too. As gold, bitcoin, the German Dax, the S&P 500 and Nvidia hit, or threaten, all-time-highs this week you’d think the volatility this month is only going one way. I’m not so sure. Four things bother me….

    1. US ELECTIONS: Maybe it’s the seasonal pumpkins, but my mood is more orange than blue. Foremost in my mind is that the polling for the US presidential election has increasingly moved into toss-up territory. I’m in danger of going into denial mode (and consistent with earlier articles) when I take comfort from German stock markets(Ukraine) at all-time-highs, bond market stability (inflation) and utilities/ electricity stocks (climate) smoking every sector in the US including technology over the past 3 months. None of these should do well in the event of a Trump regime taking power. Yet, betting markets with real money (Polymarket) are showing Trump a full 12% ahead of Harris in the probability stakes. Of course, this just reflects weight of betting on a Musk mate’s betting platform (and backer of JD Vance) rather than votes. Anyway, it feels like there’s a few things not quite in the price of various US financial assets right now. Here’s a list of US institutions and voting cohorts who could suffer a major crisis of confidence if Trump wins:

     

    • US Federal Reserve – Trump making explicit noises about “control” of interest rate policy.

     

    • US Supreme Court – the ship has sailed on the nation’s highest court swinging violently to the right. But, the five extreme “Justices of the Apocalypse” on the Court will be emboldened to interfere further with federal laws governing female health, the environment, public safety and corporate governance.

     

    • US Media – Trump is talking about taking away licences from national broadcasting networks.

     

    • US Clean Energy sector – the irony of Governor Ron DeSantis banning mention of climate crisis in Florida’s text books won’t be lost on many this week. But, expect Trump to try to undo many of Biden’s signature industrial initiatives in decarbonising the US economy.

     

    • US Department of Justice – senior DOJ officers, the rule of law and 91 felony convictions could be about to ‘go through some things”.

     

    • US Stock Markets – Trump’s plan to apply import tariffs across the board is not just inflationary, but could cause chaos for US manufacturing supply chains.

     

    2.CHINA CYCLE: Trump is pretty clear about being “a dictator on day one” but what about his other autocratic heroes? Well, it looks like the Donald has been in touch reasonably regularly with his Kremlin handler (thanks Bob Woodward) which does not augur well for the defence of Ukraine’s sovereignty. However, we really should be watching China closely. The Beijing administration has launched a massive fiscal stimulus to lift China’s economic activity, with a further $238 billion economic package to be announced this weekend. Chinese stock markets have rocketed by 25% since mid-September and added $3.2 trillion of value to companies listed on the main Shanghai stock exchange. My fear is that this “whatever it takes” move by President Xi fails to alleviate the stresses in the Chinese property market and domestic economy weighed down by an estimated $15 trillion of debt owed (and much of it hidden) in local government financing vehicles (LGFVs).

    Maybe it’s coincidental, but there is a distinctly soggy feel to lots of manufacturing activity data around the world – see September PMI in US, German GDP downgrades etc. So, it’s not just China which needs a boost, and a global cyclical slow down might be the least of our worries. If the Chinese economy continues to stall and Xi becomes worried about his ability to keep power, then the ultimate distraction is war. And, Taiwan is in the crosshairs of that option. Then, note that 90% of the world’s most advanced chips are made in Taiwan and 20% of global goods trade goes through its surrounding waters. Xi might even be watching developments in the Middle-East….

    3.MIDDLE-EAST UNKNOWN: Israel’s Bibi Netanyahu seems quite keen on a permanent state of war, and staying in power. And, possibly out of jail. Sound familiar? Answers on a postcard to Mar-A-Lago. Meanwhile, Lebanon looks like the sixth country or region after Iraq, Yemen, Kurdistan, Syria and Gaza to face mass destruction and population displacement through a combination of rogue leadership and external powers forcing regime change miltarily. Now, we await Israel’s response to recent mass-missile attacks by Iran. The chat is Israel’s critical ally, the US, has asked for restraint. Apparently, Netanyahu might not be in agreement with that approach. Meanwhile, Israeli tanks are firing at UN peacekeeping bases in Lebanon. Bizarrely, these events could be described as fitting previous experiences – it’s Israel’s third invasion of Lebanon, and Iran actually attacked US bases and injured 100 servicemen during the Trump presidency. However, my real fear is that the pace of events is increasing rapidly and could potentially upset the “chaotic equilibrium”. I’m sensing an “unknown unknown” could be on the cards and create a whole new paradigm.

    4.AI CONCENTRATION: Finally, we know AI can’t solve the leadership and power problems above. But, AI itself is inspiring financial markets and business spend. Be careful. A recent Fortune article flagged the dwindling number of contenders in the AI large-language-model (LLM) race. Yes, OpenAI just raised $6.5 billion at a whopping $157 billion valuation for the largest VC raise in history. Elsewhere, the numbers might just be getting too big. Or… should I say costs. Start-up Character.AI has abandoned its attempts to build an LLM to compete with Google, Amazon or Microsoft/OpenAI citing the model training costs as “insanely expensive”. In fact, the Character.AI team and its founder Noam Shazeer have been acquired (kinda) by Google. I say ‘kinda’ because other commentators have been saying this is, in reality, a monster $2.7 billion re-hire of the former Googler, Shazeer. Big bucks. Anyway, if the field of LLM contenders is shrinking, there’s a possibility we end up with concentrated Big Tech 2.0. On that basis, there is a real danger billions will be wasted trying to take on Big Tech in the LLM space. Even for the big wallets there are increasing reports of data limitations for LLMs. In other words, the exponential demand for data to optimise performance is now generating relatively small/linear improvements. Not quite what Moore or other technology scaling laws had in mind. Oh, and the tech sector’s weighting in the S&P 500 hit 42% this month, a record which puts TMT dotcom “bubble” levels of 32% into perspective.

    Perspective indeed, maybe Hallowe’en has spooked my normal optimism. On a slightly more positive front and addressing my biggest current destabilising fear – a Trump win – here’s a few things probably not in the AI training models or the current US polling surveys. Don’t forget pollsters are facing an embarrassing hat-trick of misses, after under-polling Republican votes ahead of the 2016 and 2020 elections.  What are the chances they have over-compensated this time? Here’s a few consoling changes in electoral intentions which could surprise on November 5th:

    Female vote: All actual votes in the last 12 months at a state level have missed the huge turnout of motivated female voters alarmed by the assault on healthcare choices waged by the Supreme Court’s reversal of Roe v Wade. See votes in Kansas, Michigan, Ohio, Montana and Kentucky as good lead indicators of what motivation means.

    White college graduates: Apparently wild fantasies about eating pets, visits to Gaza, Hannibal Lecter and election denial is not a vote getter for non-cult GOP voters.

    Senior vote: Like in the UK election, we can miss the senior votes. Literally. Approximately 12 million Americans have died since Trump lost in 2020. Many will have succumbed to old age. Given the average age of a Fox News viewer is 67, there’s a reasonable chance millions of Fox viewers/MAGA cult voters will miss this vote.

    A slightly morbid end, but there could be a happy ending where the ghoulish baddie disappears as the cops arrive.

    Who needs Freddy!

  • M&A Deals Showing Us New Opportunities

    M&A Deals Showing Us New Opportunities

    Global leadership is on my mind. Not the extreme stuff. If you can’t avoid the headlines on the excruciating UK Conservative party leadership battle between “Honest Bob” Jenrick and “Jimmy Dimly” Cleverly, I can assure you it’s well worth the effort. Instead, I’m just back from the IMI National Leadership conference and one of the key speaker messages in our uncertain geopolitical world was to watch ‘personalities’ closely. And, believe them. So, rather than jump into geopolitics, this advice can also be applied to business and financial markets too. The return of large merger and acquisition activity (M&A) is a reliable ‘tell’ of executive confidence. These big deals are the real “believe them” leadership actions, not the quarterly analyst conference call types where management commentary is invariably upbeat, and the analysis even worse. So, with excellent timing a number of M&A developments are catching the eye….

     

    Banking: We mentioned in recent weeks an interesting standoff between Unicredito and the German establishment after the Italian bank swooped in to take a 9% stake in Commerzbank. Let’s just say the biggest Commerzbank shareholder, the German government, were not happy. So, imagine the scenes in Berlin’s political corridors last week when Unicredito used derivative instruments to up their beneficial interest in Commerzbank to 21% and overtake the government’s 12% stake as the biggest shareholder in Commerzbank. This is highly unusual cross-border aggressive M&A tactics and suggests high levels of Italian banking confidence. Indeed, another Italian bank, Intesa, in recent days briefly became the most valuable bank in the eurozone. Not long ago the Italian banking system was in a mess as the world’s oldest bank, Monte dei Paschi di Siena, entered near-collapse restructuring in 2022.

     

    Software: All the tech glory has been in hardware in 2024, and software has been feeling the pain. Valuations in SaaS have slipped, pipelines have sputtered and AI has become a deflationary impetus in the coding ecosystem. Uncertainty has bred deal paralysis. So, the sector would have been hugely relieved to see a big private equity buy-out of Smartsheet by Blackstone and Vista for a chunky $8.4 billion, and a 41% premium to its recent share price average. We will return to the significance of private equity doing buy-outs of large public listed companies, but for now let’s focus on high-risk sector consolidation where management teams are already under pressure…

     

    Hardware: Yes, AI has been a winner for chip manufacturing superstars like Nvidia and Broadcom. However, as with all sudden technology shifts, there can be disruption to established players. Intel is a good example of model disruption. The share price is off 50% and the company has adopted a split company strategy across manufacturing(foundry) and chip design(product). As the sole US player with sufficient process/manufacturing technology, Intel has a future but possibly with a partner…..or predator. Apollo Global have been mentioned in the media as private equity financing partners, but recent reports suggest California’s Qualcomm have approached Intel in pursuit of a friendly takeover. That combination would be a $300 billion (+) chip monster supported by US government policy (US Chips & Science Act) and would cause a seismic shake up in the semiconductor manufacturing ecosystem.

     

    Mining: The software sector might feel unloved over the past 18 months, but spare a thought for the mining sector. And, I’m not talking crypto. No, the basic materials critical to our decarbonised electrified future are supplied by a global mining industry which has been starved of investment capital for….. 15 years. That is about to change. Supra-sovereign legislation like the Critical Raw Materials Act (EU) are a siren sound to the frightening mis-match between our cleantech future and the metals needed to meet climate crisis targets. So, watch the ‘leader signals’ as gold and silver prices hit all time highs, and then check out the deal activity. AngloGold is buying Centamin for $2.5 billion while BHP and Lundin are jointly closing a $4 billion purchase of Canadian copper play, Filo. Also, there’s an interesting $2.8 billion green equipment partnership deal between Australian giant, Fortescue, and Swiss construction player, Liebherr. We’d better start believing……in our planetary survival.

     

    UK: Our final M&A development is not a sector specific observation but highlights another unloved area of the investment world. The UK has been in the international investment ‘naughty corner’ thanks to its own historic lack of investment in domestic assets….and a world-first voluntary trade-reduction deal which nobody wants to talk about anymore. So, it was intriguing to read a recent piece of research from stockbroker, Peel Hunt, on UK deal activity. Apparently, there are currently a remarkable 19 ongoing bids for UK companies in the FTSE 350 index. Not all will happen, as Rightmove, Currys and Anglo American have demonstrated. But, the imminent take private deals for the Royal Mail and Hargreaves Lansdowne are a serious ‘tell’. Britain is in play.

     

    The deal environment is definitely picking up. Early private equity research data from Pitchbook shows deal count in Q3 was up 8% and deal value up 20% compared to last year. Also, helpfully, the story on the exit side of things is progressing too – global private equity exits are up 13% in value and 3% in deal count. Now, consider that private equity houses have circa $4 trillion of unspent investment capital (“dry powder”) to deploy and things could get rather interesting in unloved parts of the market. Finally, keep an eye on the Middle East for more than conflagration reasons. Oil prices might be falling but investment in the region is rocketing. The recent FT Mining Summit 2024 featured a whopper statistic that 20% of the world’s cranes are located in just one country…. Saudi Arabia. Oh, and Abu Dhabi’s national oil company just bought Bayer’s plastics spin-off for $16 billion. Yep, plastics. If market personalities are telling you they are beginning to love the unloved, believe them.

     

     

  • A Quick Guide For Private Investors In Start-Ups

    A Quick Guide For Private Investors In Start-Ups

    One of our portfolio companies ceased operating this week. Lesson learned? Yes. Would we use the same vetting process again? Yes. And, no, Einstein’s definition of insanity is not in play here. Let’s be very clear that mistakes will continue to be made. We just can’t forecast the future. In fact, human beings are not particularly good at the forecasting thing. However, we can control the controllables,  and one of the critical things for a private investor to control is one’s investment process. Call it a check list. Then, know that we probably turn down 10 opportunities for every one we offer on the Spark platform. So here’s a quick guide as to how we compile a score card for companies seeking new investment capital. Note we will expand on some areas in later articles but, for now, this could be an outline framework used by any wannabe early-stage investor….

     

    Founders: This is probably the most fundamental factor in any company assessment. The calibre of the founders is critical to our confidence that the key people in a startup have the energy, resilience, expertise, discipline and ‘market-listening’ gene to drive a project or business to success.

     

    Solution: A laser-like focus on solving a consumer or business problem which can be clearly defined should underpin any analysis of a company’s product or service.

     

    Validation: Revenues generated by the product or service are the ultimate validation. Note business customers are ‘stickier’ than main street consumers so it is not surprising that business-to-business (B2B) investments tend to attract more investment. Other elements of validation like awards, patents or industry thought-leader financial backers can also add weight to the pitch.

     

    Market Opportunity: Huge global market spend numbers sound good but also attract plenty of competing products and services, and imply a danger subsequent funding rounds shift to the perceived ‘winners’. A niche focus on a particular segment of the market can be an easier ‘sell’ and gain better traction with both prospective customers and investors.

     

    Communication: We just mentioned customers and investors together. For good reason. Founders and startups must be on top of their communications and messaging. A poorly worded investment pitch should raise investor concerns about the primary challenge – forget funding, what about founders’ abilities to win over prospective customers?

     

    Endorsement: Many pitches feature impressive testimonials or endorsements. However, there is a higher impact endorsement – money. Typically, in a funding round we would expect founders to bring some financial/investment endorsement to the table. Think about it – if the founders can’t ‘sell’ their business to ‘warm’ friends, family or commercial counterparties, it’s going to be a lot harder to convince ‘cold’ investors to back a project.

     

    Financials: Of course, not everyone is an accounting wizard. However, returning to our comment about ‘forecasting the future’, whatever projections are put in a business plan are most definitely going to be ‘wrong’. The thing to control is unsubstantiated growth trajectories or ‘hockey stick’ forecasts. Initial projections should show an understanding that a slower grind in the early years is a better (and more credible) base case.

     

    Business Model: Company’s when first entering a market will try out different pricing strategies but there’s a bigger strategic consideration than price. The payment framework for the customer is critical: monthly/annual subscription, up front/service models, wholesale, distribution partnerships etc. Investors should be clear as to how an investee company is going to be paid.

     

    Valuation: This is another area/assessment which is going to end up being completely wrong. However, a base valuation can be derived from the projected revenues/profits in the next two forecast years (and previous 12 months if any). Also, where it is very early days with minimal revenues, a good way to think about a business is to calculate how much would it cost to build the product/company/service today. Monies invested in a company to date are a good basis for valuation. And watch out for technology overspend (so so common) and marketing waste (lots of Google ads algorithm sob stories). On the other hand, proprietary databases built in a niche area can support a business valuation.

     

    Last Mile: Very often investors see great products or services and wonder why the business ultimately does not succeed. This writer increasingly believes ‘the last mile’, aka commercial intensity/engagement, is where analytical frameworks need to beef up risk metrics. Clearly, ‘build it and they will come’ is not a business strategy in today’s world. Scaling up customer bases and revenues is a real challenge for early stage companies. Hence, investors should be very clear about what the marketing/distribution/partner strategy is for a start up business. In many ways, fuzziness on this question makes estimates on the size of a market opportunity (with juicy TAM and SAM numbers) completely irrelevant. A roadmap with milestones, skills/talent build, later funding series, and customer mix evolution should be sufficiently clear for investors to understand the plan and the building blocks required to scale.

     

    Exit: Healthy deal activity for smaller businesses, a sector’s track record of consolidation, cash-rich global players as serial acquirors, the network of the founders etc all help paint an exit picture for an investor. For investors, make sure there is plenty of colour in the answer.

     

    The above is not an exhaustive list but captures the main pillars in our analytical framework, and could become a regular check list for a private investor. Of course, each section features mere highlights and headlines but at the same time this should not be ‘rocket science’. Many of the questions you, the investor, want answered need to be answered by customers and partners too. And, we know clear communication is critical to customer success. So, understand the fundamentals of a business and that’s a decent start to building a robust investment score-card. That’s all you can control. Or as ‘Cousin’ Greg in Succession might say… you don’t need to know everything, just the key business/relationship levers which matter.

  • Check Out Two Big Wins For Banks And EIIS Investors

    Check Out Two Big Wins For Banks And EIIS Investors

    Ok, I was wrong. I really thought that rising interest rates to over 5% over the last four years would cause greater stress in bank loan books. Yes, commercial real estate loans are causing angst in the global financial system but thanks to private equity, pension funds and family offices it’s not just the banks on the hook this time. Clearly, the rise of private investment vehicles in financial markets has helped to de-risk the banking system. Of course, the investor muscle memory of the 2008-2009 credit crisis has had a double impact too. First, consumer protective regulation has forced banks to build huge capital buffers (reserves). Second, bank customers through a combination of lack of finance education, risk aversion and behavioural inertia have added to those buffers. European bank customers in particular have left trillions of euros of cash in the bank earning almost no interest because they have not sought out specific interest-earning deposit or money market accounts. Ireland, with almost €150 billion euro sitting in accounts earning miniscule interest, is the worst European offender.  Here are the numbers:

     

    • Across the EU banking system there is €16 trillion of customer cash sitting in bank accounts.

     

    • 54% of that cash earns on average 0.13% in low-interest overnight accounts. Implicit in that number is that 46% of customer cash is in longer-term deposit accounts. In other words, almost half of European bank customers commit cash to ‘term deposit accounts’ which, in exchange for waiving access to the cash over defined time periods, pay depositors average rates of 2.65%.

     

    • Ireland has a VERY different mix of customer behaviours. Just 12% of customer cash earns income in term accounts. A whopping 88% of Irish cash sits in overnight accounts, earning almost nothing.

     

    Clearly, this is a win, if not a scandal, for Irish banks. On the other hand, the European banking system is in pretty good shape, steering capital away from higher returns but also higher risk. As an illustration of the European bank risk culture, I was staggered to see that US banking giant, JP Morgan, has a market value of $540 billion which exceeds the combined value of Europe’s top 10 banks. So, Europe’s banks are doing ‘ok’ but not exactly chasing higher returns for their shareholders which translates into underwhelming valuations. However, if you thought this was a hit piece on banks you’d be wrong. The other eye-popping data point I discovered this week was that in the critical world of customer experience (CX) – now a main priority for 80% of companies per Gartner – banks in seven major economies outside Ireland now top the CX league tables. That just wasn’t on my 2024 bingo card. In fact, that banking ‘bingo card’ is putting together a very interesting string of numbers….

     

    • US and global stock markets are hitting all-time highs again after August wobbles. Yes, the US tech sector has been the star sector of the last 12 months (+42%) but you might be surprised to see US Banks in second spot with a 29% return.

     

    • Euro area banks handed out €71 billion in loans for house purchases by consumers in July, the highest level since August 2022.

     

    • Italy’s Unicredito bank is signalling increased executive confidence with a shock swoop for a 9% stake in Germany’s Commerzbank. The Italians have asked permission of the German government to pursue merger discussions. Wow. Cross-border M&A featuring major European banks has not been seen for years.

     

    • Europe’s financial markets are increasingly pricing in climate-related risks. ECB reports that eurozone banks were charging companies in the top 25% of carbon emitters monthly interest rates 14 basis points higher on average than those in the lowest 25%

     

    • You may not have heard of Tether but it is a fintech platform specialising in trading digital currencies which track/tether to traditional major currencies using blockchain. These asset-backed digital instruments are known as stablecoins. Tether has 350 million stablecoin users globally and, incredibly, has generated more profit ($12 billion) than the world’s biggest asset manager, Blackrock, and its $10 trillion portfolio since early 2023.

     

    • Perhaps it’s no big surprise that Revolut is reportedly about to launch a stablecoin for its 45 million customers, of which 2 million reside in Ireland.

     

    One of the other big messages in the CX world these days is that brands suffer without innovation. Keeping the status quo is really going backwards. We have written before about the massive data/AI opportunity for banks and the ultimate platform play: payments. Trillions of dollar wealth has accrued to innovators in the social media and cloud computing platforms. Now, it could be the turn of payments to deliver trillion dollar opportunities. While we write of opportunities might we suggest another?

     

    As tax-return season kicks in, private investors should note that EIIS tax-friendly opportunities just became more lucrative. Thanks to changes in last year’s Finance Bill, many investments in early-stage companies currently attract 50% income tax rebate opportunities for Irish investors. Now, think about all that cash sitting in bank accounts with inflation of say 3.5% eroding its purchasing power. Here is a quick illustration of wealth destruction:

     

    • Keep €20,000 in overnight deposit as usual.
    • Hold for 10 years while asset prices inflate by 3.5% per annum.
    • Spend the €20,000 after 10 years but get only ‘value’ of €14,000 due to asset inflation/purchase power erosion.

     

    Or….. try this EIIS investment strategy.

     

    • Invest €20,000 in portfolio of 7-8 early stage companies.
    • Receive €10,000 back in income tax rebates.
    • In 10 year’s time, if your €20,000 investment has returned just €4,000, you have beaten the bank.
    • That €4,000 hurdle requires just one of your investments to double in value while all the others go to zero.

     

    Gotta be worth thinking about. Certainly, if you’re sitting on cash which will lose 30% of its purchasing value over the next 10 years. Better still, move some money into term deposit accounts and look for 3% long-term rates. Then think about using EIIS to offset the taxes on that deposit income. In the “real” world of tax savings that 3% interest earnings (offset with EIIS rebates) on your deposit equates to a 6% gross return typically promised on other types of assets, like a property or multi-asset wealth portfolio. Definitely worth a chat with your accountant.

     

    Finally, from a Spark perspective, we can promise our investors a very interesting pipeline of up to 8 EIIS deals spread across SaaS software, biopharma, medtech, ESG/sustainability and AI before Santa arrives and the EIIS window closes for 2024. And, if we were in Santa letter-writing mood we’d be tempted to ask government and banks to join the dots and incentivise specific support for small early-stage businesses via bank deposit accounts. Showing my age here, anyone remember SSIA’s of the early naughties? Answers on a post card to Apple or the Department of Finance with a recent €14 billion windfall/capital infusion to kick things off….

     

     

  • Are You Following The Wrong Monster AI Moves?

    Are You Following The Wrong Monster AI Moves?

    There are now “Nvidia watch” parties. Yip. Stay up on a Wednesday night, grab some popcorn and watch the release of Nvidia’s quarterly results. There’s a whiff of Nokia about this single company focus. Then again, the commentariat are beginning to say in all seriousness that Nvidia’s results are more important to global financial markets than the Federal Reserve’s Open Market Committee (FOMC) and its guidance on the direction of interest rates. Bonkers. Anyway, Nvidia’s results this week were a bit of a yawn. Stunning growth, earnings beat, $50 billion buy backs and raised forward guidance. Still not enough for the party people, as the AI chip monster promptly lost $150 billion of market value in the after-hours trading session. Interestingly, data from the last 50 trading days has confirmed Nvidia as the most traded stock in the world with an average value transfer of $40 billion each day(!). That’s more than previous kings of the tape, Apple and Tesla, daily trading combined. So, AI certainly is focusing trading minds but we could be missing more significant business events. Like real monster moves. Try these for size….

    Coding Carnage:  During a leaked “fireside chat,” the head of Amazon Web Services (AWS), Matt Garman, suggested that in as little as two years, human developers may need to learn different skills to make way for artificial intelligence coders. “If you go forward 24 months from now, or some amount of time — I can’t exactly predict where it is — it’s possible that most developers are not coding,” he exclaimed in audio leaked to Business Insider.

    Consulting Charge: The big global consultancy firms are on the AI charge, and I don’t mean their fees. CB Insights has flagged some very big numbers as the Big 4 accountancy outfits ramp up AI investment:

     

    • Deloitte — announced $1.4B upskilling program (December 2022) and $2B for development of industry-specific applications of tech including AI (April 2024)
    • EY — invested $1.4B in AI, launching EY.ai enablement platform (September 2023)
    • KPMG — spending $2B on AI & cloud services in partnership with Microsoft over 5 years (July 2023)
    • PwC — investing $1B in genAI in its US operations over 3 years (April 2023)

     

    Then check out what another professional services giant is saying. Less than one year after announcing it would invest $3B in AI tech, publicly traded Accenture reported $600M in gen AI bookings in Q2 FY 24 and $900M in Q3 FY 24. On the company’s Q2 earnings call, CEO Julie Sweet said, “Our sales in generative AI…are the fastest we’ve ever seen.”

    Productivity Proof: There’s lots of commentariat guff about AI lacking enough use cases. Ahem. Let’s see what European payments player, Klarna, is doing. Quite well actually. Having cut staff from 5,000 to 3,800, staff productivity has exploded upwards by 78%. The company has so much faith in the AI tasks performed in marketing and customer service that management is talking about cutting staff by a further 50%. One can only imagine what other European fintechs like Stripe and Revolut are going to do. But two things are certain. These nimble fintechs can’t do nothing as the cost advantage is existentially massive with AI. Oh, and that’s fintechs. So, what are the lumbering ‘digital transition’ legacy banks going to do? Do, or dAI me thinks.

    Of course, AI chip expectations attached to Nvidia have a good chance of ultimately disappointing as with all cyclical manufacturing companies in history. However, the twaddle about “lack of use cases” now needs to come with serious business health warnings. Note that Klarna also told the market that 90% of its staff are using generative AI tools… daily.  Also, when talking to a medtech consultant with IBM in Dubai this week, she stated that EVERY pitch or business project now contains an AI piece.

    Just today I’m reading about plans in the UK to move to a 4-day week and you know AI will be in the discussion. It’s also in HSBC’s latest report on the UK venture capital scene. A stunning more than one in every 5 dollars raised ($4.4 billion forecast for 2024) is going to the not so niche sector of AI. Not technology, not life sciences…. just AI. Now think about ChatGPT’s parent, OpenAI, potentially receiving multi-billion dollar investments from Apple and Nvidia at a $100 billion + valuation, and then see CB Insights report M&A activity in the AI sector delivering a record 119 deals in Q2 this year.

    The business message seems very clear. Don’t watch. Move, and fast.

  • Watch Out For Joyful Asset Shocks

    Watch Out For Joyful Asset Shocks

    Wow, what just happened! In the last 33 days we saw an incumbent US President forced out of his re-election campaign, financial markets take a battering, Japan’s Nikkei dropping 20% in just two days’ trading,  the Republican National Convention celebrate polls predicting the second-coming of their Cheesus, and a likely funds-deprived military capitulation of Ukraine to Agent Orange’s mate in the Kremlin. It was all rather scary and in the financial markets the ‘fear gauge’ measured by an options derivative, the VIX index, rocketed from its long-run median level of $17.6 to $60 on the 5th August. In fact, that was the largest single-day increase in the ‘fear index’ in history. Then, over the next 7 days it fell right back to its average $17 level. Incredible. But, not even the VIX could have foretold the emergence of the ‘joyful warrior’ Kamala Harris as the pollsters’ best current bet for the White House in the November election, nor the invasion of Russian territory for the first time since 1941 by Ukrainian soldiers (in German tanks!!). These are amazing geopolitical turnarounds but not necessarily the type of shocks to move financial markets. However, we’d like you to think about a few developments which really could shock….in a good way.

     

    Productivity: The scary headlines would suggest recent ‘revisions’ of US jobs data revealed a less healthy US employment picture. The revisions showed that the statisticians over-counted the number of jobs created in the year to March 2024 by 818,000. However, before we go all wobbly-kneed about job creation moving at a pace of  ‘only’ 175,000 new jobs per month (vs previous estimate of 245,000) we need to consider that US GDP growth numbers have not changed. This means that labour productivity which has stalled for decades is picking up serious speed. Hmmm. Anyone tempted to ask ChatGPT what’s going on? Well, our AI boom might be beginning to pay dividends but in a more subtle way. Probably the best read of the week is a guest contribution by Brian Albrecht, Chief Economist at the International Centre for Law & Economics, on Noah Smith’s always excellent blog. Two snippets really hit home with me. First, the subtle impact of AI:

     

    To be clear, the progress isn’t about chatbots. Instead, it’s about small improvements across every sector of the economy. It’s the human resources manager using AI to sift through resumes more efficiently, the logistics planner optimizing delivery routes in real-time, or the data analyst automating report generation. These minor advances, multiplied across millions of workers and thousands of businesses, are what will ultimately drive significant productivity gains.

     

    Second, massive change in productivity could be already under way but is hidden by upfront costs like training, reorganizing workflows and designing new processes:

     

    The computer revolution offers a helpful parallel. In 1987, Nobel laureate Robert Solow famously quipped, “You can see the computer age everywhere but in the productivity statistics.” This “productivity paradox” persisted for years. It’s almost comical now to think of 1987—when the original Macintosh was brand new, and C++ was just gaining traction—as an era when “the computer age was everywhere.” Even then, the transformative potential of computers was clear to many observers. Despite the invention of the personal computer in the 1970s, we didn’t see significant productivity gains until the late 1990s. Why? It took time for businesses to figure out how to use computers effectively, redesign workflows, and develop complementary innovations.

     

    My own sense of things is that we are obsessing over generative AI (chat bots) and missing the integration of AI applications which have been around far longer than ChatGPT or Gemini; think machine learning, automation, robotics, virtual assistants etc. Of course, with far more powerful digital assistance available this has a potentially huge impact on the formation of new companies.

     

    New Business Formation: The US Census Bureau shows that 5.5 million businesses were started in 2023. This is the highest total ever and is a 57% increase on the numbers prior to Covid in 2019. Recent data from Ryan Decker and John Haltiwanger at the US Federal Reserve showed a surge in new business formation, particularly in hi-tech industries. But, there’s a pick-up in business formation in sectors like construction and building services too. These trends point to fresh ideas, innovation and pressure on incumbents to keep pace. It also points to higher productivity ahead. Our reference to ‘old economy’ activities like construction is deliberate because there is another forgotten sector beginning to stir.

     

    Critical Materials: This week the price of a gold bar reached $1 million for the first time ever. I’m no gold bug and I really don’t want to get into a philosophical debate about stores of wealth and inflation protection. But, I do know one thing. Gold tends to lead when the mining sector is due a recovery. Mining has been in the naughty corner for almost 15 years but I’m beginning to wonder whether sovereign anxiety over the supply of critical materials will lead to not just regulatory action (see the EU Critical Raw Materials Act) but actual sovereign/state investment in mining assets? If AI is now considered by nearly all experts as a sovereign-level risk race then the sector critical to industrial supply chains and decarbonising the planet could be about to receive its own positive sovereign attention.

     

    Electric Vehicles: Finally, on the theme of global decarbonisation, we could be on the cusp of a serious acceleration in electric vehicle (EV) adoption. Consider the following three developments:

     

    *For the first time ever in July, more than half of all vehicles sold in China were electric.

     

    *BMW pulled ahead of Tesla as the lead EV brand in Europe last month for the first time. Note to Elon Musk, Silicon Valley “broligarchs” and a few tech heads closer to home; funding a felon can be brand destructive.

     

    *Electric vehicles are now cheaper than combustion models in China.

     

    So, the competitive landscape is broadening out with Chinese and European players catching up with Tesla. This also means production of EVs is ramping up as market penetration of the total auto market approaches 20%. This production volume surge also has cost implications. According to Wright’s Law, used by MIT and proven in the wind and solar markets, when production of an item doubles the cost of producing that item falls by 20%. Critical to the EV revolution is the cost of lithium-ion batteries, and the cost of those batteries has fallen by 90% since 2010. Indeed, as the headline above suggested, China has reached a critical market penetration inflection point. Given the cost of batteries in China have fallen by 51% in just the last year, one can understand why EVs are racing past combustion models. Get ready for the virtuous circle of more production, lower costs and accelerated consumer adoption globally.

     

    All four developments above are capable of delivering significant positive shocks to the global economy and could be perfectly timed for a joyful new US President. Whoodathunk!

     

  • Themes Checklist For The Beach

    Themes Checklist For The Beach

    The weather forecast isn’t great.  I’d usually suggest some couch thinking time but that phrasing has now become a politically-charged innuendo in the US which tops off possibly the most bizarre presidential campaign month ever. Don’t ask about couches or dolphins, or JD Vance. And, he thought having no children was the problem…..! Anyway, given the amount of delusion in the air, I’m going to suggest a beach plan. That might be the wrong plan, but thematically we might be on the right track in the world of finance. So, for those enjoying some time off, one can review and reflect on the following:

     

    Old economy: Our suggestion “Investors Need The Old Economy Too” in May started subtle, then went full hammer. This move hasn’t just been a tech shift from software to more traditional hardware manufacturing. Say hello to the ‘great rotation’. The old economy stocks roared in July. The top performing sectors in the US were industrials, financials, utilities, basic materials and real estate. As an illustration of the scale of rotation, note technology stocks actually had a negative month (-2%) while US regional banks and housebuilders rocketed 19% and 17% respectively.

     

    Smaller companies: We have written “Betting On Small Can Really Win” but boy oh boy did it rock in July. Smaller companies tracked by the Russell 2000 index whipped the performance of the large company S&P 500 by 10 percentage points. That’s the largest monthly divergence between size cohorts ever recorded in history.

     

    Climate and cleantech: Another theme close to our hearts. VC Breakthrough Energy Ventures backed by Bill Gates has just raised the largest climate fund of the year with a funding round of $839m. In Europe, the momentum is good too. Private equity deal values in European cleantech are now on track for their best year ever(Source: Pitchbook).

     

    Fintech: Stripe and Revolut valuations in recent private share sale activity have jumped by 40-50% and London remains a fintech investment hotbed. Latest British Business Bank data tells an interesting City story –  the UK fintech sector is attracting 11% of global VC investment (and 48% of all investment in Europe), a share only exceeded by the US.

     

    UK Comeback: In March we wrote “Time For A UK Recovery” and waited for credibility and competence to return to Westminster. The scorecard at the moment looks pretty good: UK equities are seeing the strongest inflows of foreign institutional investment for years (Source: BOA), and on the currency front, the GBP (formerly known as the “Great British Peso”) has been the strongest major currency performer in the year so far (Source: Bloomberg).

     

    Digital infrastructure: We wrote “Get Ready For The Cloud Wars” back in November and this has morphed into a global foot race to acquire, invest, service and build the infrastructure of our digital/AI future. From data centres to state-of-the-art chip manufacturing plants the investment giants are moving fast to get involved. While Microsoft opens a data centre every three days, it feels like the likes of Blackrock, Apollo and Blackstone are competing for digital infrastructure headlines every few days too. In fact, Blackstone estimate digital infrastructure spend by top tech companies will exceed $1 trillion over the next 5 years.

     

    Wall Street veterans would say  ‘the trend is your friend’. So, we aren’t giving up on any of these themes just yet. However, we will return to two critical risk factors for many of these themes in a later article. Geopolitical risk from Taiwan to Iran to US electoral chaos looks like it is escalating rather than fading. US politics can make for electric watching (with the shock too) but the just announced prisoner swap deal between Russia and the US was significant. The allied multinational effort by the Biden White House shows the value of joined up thinking and shared values but the planet faces other bigger challenges. Arguably, our highly charged politics needs to address the fundamental challenge of climate and electricity too. For another day, but the race to decarbonise and electrify the global economy is definitely not on track…..

     

  • Five Tech And Money Moves To Watch

    Five Tech And Money Moves To Watch

    You do wonder. Regulators all over the world are in a flap about AI and cryptocurrencies, and their potential dangers in the wrong hands. Meanwhile, every summer millions go on holiday and are literally robbed. Welcome to the “Wild West” of foreign exchange. Who hasn’t puked at the ridiculous margins/commissions charged by airport exchange bureaux, retail banks and various financial intermediaries for a basic financial transaction?  One doesn’t need to be a financial guru to know that nowadays, in our ‘flash boy’ world of high-speed trading technology, the professional traders trade financial instruments like bonds, equities, commodities and currencies at ultra-low costs where commissions are struck at tiny portions of a single percent. The professional traders’ jargon monoxide might use the term ‘basis points’  for these tiny percentages but main street consumers will usually use expletives to describe commissions (plus margins or spreads) that can amount to a cost well over 10%…. or a thousand of those basis points. So, that’s the moaning over. Let’s look at the recent tech and money developments which might inspire…

    Turning first to one of the better solutions to foreign exchange (FX) pain, Revolut, it was interesting to see the company just receive regulatory approval in the UK after a three year wait. The Revolut FX service is, on average, about 25x cheaper than the majority of consumer options. A new UK licence was also nicely timed for a share sale which put a $45 billion valuation on Revolut. That looks like a 50% uplift in valuation for the British fintech and illustrates a renewed investor enthusiasm for innovative payments platforms. Check out Ireland’s Stripe where a secondary share sale from early investors(and staff) to VC giant Sequoia was done at a $70 billion valuation. That’s an encouraging 40% jump from its March 2023 valuation low. However, it’s not just Irish international financial giants attracting foreign investment capital.

    The recent Renatus Private Equity M&A H1 report on the Irish market showed activity picking up with 207 deals completed in the first half of 2024. That compares against a 30% fall in M&A deals globally (Source: PwC). For this writer, it was significant to see, in a high interest rate environment, that financial services was the second most active sector in the country after software. Indeed 21 of those 31 deals in financial services were in accountancy and insurance. Many of the acquirers were larger overseas groups looking to consolidate intermediaries rather than the wholesale providers of financial products. Maybe, there’s a bit more going on than just cost and brand consolidation?  What about a seismic cost shift?

    If you thought cryptocurrencies and blockchain were dead you’d be dead wrong. Bitcoin is flying high and supporting a digital currency ecosystem worth $1.3 trillion. Small stuff really, but think of my FX moan earlier and know that digital currencies and blockchain are ABSOLUTELY the route to cutting out the commission cowboys and intermediary ‘tolls’ which bedevil global financial services, and particularly the average consumer. Consider the following headlines:

     

    Kamala Harris’ digital dollar vision: A new era of financial inclusion?  –  American Banker

     

    “Bitcoin is a legitimate financial instrument,” Says Blackrock CEO Larry Fink – Yahoo Finance

     

    Goldman Sachs to launch 3 tokenization projects by end of year – Fortune 

     

    You didn’t think I wouldn’t mention Kamala this week, did you! So, in the interest of political balance it should be noted that it’s not just the prosecutor getting involved in digital currencies. The felon too is due to headline the 2024 Bitcoin Conference. The former fella used to call cryptocurrencies a ‘scam’ but, not unlike his disastrous recent VP pick, he’s capable of the most marvellous position reversals (and debate commitments). It’s difficult to call or even visualise the US political future but there’s a fascinating visual story developing on the AI front.

    We have written previously about a subtle technology shift in the investment world away from software and towards hardware. We all know the Nvidia chip story by now, but who knows EssilorLuxottica? Not quite the tech everyday name. And, that’s because EssilorLuxottica is not a typical technology play. It is, in fact, a luxury sunglasses designer and manufacturer – yep Oakley, Ray-Ban, D&G, LensCrafter and Vogue are all their brands. Moreover, Facebook/Meta who dived into the metaverse prematurely are now looking to buy a stake in the luxury glasses player. Of course, the potential of a worn screen/glass interface could be the next iteration of the 8 billion mobile phones on the planet. Early days yet, but AI continues to move at rapid pace. Of course, Meta’s move for hardware could be viewed as a strategically defensive move as the consumer information landscape shifts rapidly. Google had pretty robust quarterly results this week but latest breaking news could be interesting…

    The AI pioneers at OpenAI have announced the launch of their own AI-powered search engine, SearchGPT. The product is only available in beta version for 10,000 users but I’m sure Google’s executives will be watching the feedback rather closely. So, despite the summer holidays it’s fair to say there is plenty going on. And hopefully, one day, holiday makers will have an AI assistant embedded in their ‘sunnies’ to spot an airport FX robbery in real time!

     

  • The Hottest Investment This Summer

    The Hottest Investment This Summer

    Ok, I’m a bit hot and bothered. When a tee-shirt ripping Hulk Hogan is the warm-up act for possibly the next President of the United States I’m inclined to think our planet is in trouble. The Republican National Convention(RNC) in Milwaukee this week marked a new level of bizarre in US politics, but the hot air sadly can’t be confined to the GOP speaker line-up. As a record-breaking 1,400 tornadoes and scorching heat batters the US, I am resigned to the fact that decarbonisation of the global economy is way down the MAGA Republican (GOP) list of priorities. However, political mayhem can often leave investment markets unmoved, even relaxed. This seems to be the case so far, but things are fascinatingly stirring in long-forgotten parts of the market and I see one particular opportunity heating up fast. First, let’s look at some data:

    Technology: It’s not just Microsoft having a bad cyber outage day. In recent days, technology stocks experienced their worst share price falls since 2022. However, overall, stock markets continue to hit new highs. Why?

     

    Old Economy: Sectors neglected for months, even years, are attracting investors who are watching potential interest rate cuts and interesting valuation discounts to technology, pharma and AI-giddy companies. The top performing sectors over the past week were old-fashioned financials, industrials, energy and real estate.

     

    Smaller Companies: Only a few weeks ago we wrote an article “Betting On Small Can Really Win”. Hoo boy. The share prices of smaller companies over the past week have been on an historic tear. Stock indices which track smaller companies are flying as Trump would say “like you’ve never seen before”. The Russell 2000 is a benchmark used for smaller companies in the US and it has rocketed 12% in just the past week.

     

    UK Markets: The benchmark FTSE 100 post the Tory election rout immediately embarked on a two week winning streak. Coinciding with this political re-set, UK consumer confidence just hit a 3 year high.

     

    Venture Capital (VC): The latest data from VC research team, Pitchbook, shows that fintech and cleantech/sustainability start-ups are attracting the most investment in Europe of recent quarters.

     

    Clearly, investment capital is ‘rotating’ out of large company technology and looking for alternative opportunities. Furthermore, some structural themes are here to stay. So, we believe there are alternative opportunities to plug into the ‘monster themes’ like AI, decarbonisation, cloud wars and electrification. Where better to start than our planet and the urgent need to stem global warming? We have written many times before that this $9 trillion per year decarbonisation spend can’t happen without critical materials like rare earths and base metals. However, the mining sector essential to extract these critical materials has been starved of investment as large pools of capital shun the sector’s poor sustainability/ESG track record.

    That is changing as the big money now realises if there’s no mining, there’s no EVs, no batteries, no AI, no data centres etc These big funds are now pushing for sustainability assurance solutions which will allow them to deploy capital again and ensure the supply of critical materials can keep up with the demands of economic electrification. So, if you can excuse the mining pun, we have found a little gem of a play on mining/ESG which ticks the following boxes:

    *Market leadership: The company is a fintech with mining-valuable data built over 4 years.

    *Market fit: It is winning mining company customers – there are 4,500 publicly listed and investment capital-hungry mining companies – and generating more than $1m of annual revenues already.

    *Institutional endorsement: Critically, big investment houses are telling the mining industry this company’s independent ESG assurance process can open up investment and significantly speed up investment decisions.

    *Structural tailwinds: The macro themes of smaller companies, UK and old economy all feature in this opportunity.

    *Money talks: And.. founders and international institutions are putting in their own money to grow the company’s global footprint.

    So many boxes ticked, with macro and structural themes aligning. This has to be our hottest opportunity to fight global heat this summer, and for many summers more. But, not too many. This company will surely be bought by a global data player or consultancy in less than 5 years with a potential 10x return to private investors. Think Bloomberg, Accenture, Reuters, S&P Global etc but don’t tell them yet – we are keeping this opportunity exclusive and private.

    Links to next week’s webinar here and the company’s investment memorandum here.

     

  • Betting On Small Can Really Win

    Betting On Small Can Really Win

    Please, no political bets. The headline is absolutely not referring to the UK Prime Miniature. The 14-year Conservative Party mission to shrink public services, business investment, critical trading relationships, institutional integrity and individual standards of public behaviour is ending in electoral wipe-out. Time for new beginnings, even small ones. As I read about UK ‘global leadership’ (with China) in a potential 9,000 millionaires leaving the country before the end of this year, I’m thinking more about generational change and down-sizing shifts in wealth creation strategies. That might seem strange in a world of mega-trillion tech companies but wealth works across different types of assets and for different generations. First a couple of size observations.

    An interesting chart this week from Private Equity/VC research data house, Pitchbook, showed smaller private equity(PE) funds outperformed bigger ones over a 10-year time horizon. In the best performing quartile of funds the performance gap was a whopping 6.7%. In real money terms, the returns of small funds were one third higher than the bigger funds. Here’s the chart:

     

     

    Clearly, the challenge of earning high returns with massive pools of money runs into the problem of a smaller opportunity set. In other words, big funds can only deploy capital in bigger companies and miss out on opportunities with smaller (probably faster growing) companies. However, funds as they become bigger can also suffer from strategy “drift” as pressure to deploy capital forces funds into other sectors, geographies, vintages, styles etc. As a classic illustration of this challenge, look no further than the ARKK innovation fund managed by Cathie Wood. Back in 2021, a big winning bet on Tesla and other innovative companies by the ARKK fund attracted billions of investor dollars. However, since then, the fund has cratered in value by 59% while the funds which track the Nasdaq tech index are up 37%. Big can sometimes be painful. Of course, new strategies can help diversify risk for investors and five headlines caught my eye this week:

     

    Blackrock Muscles Into Private Assets Market For Wealth Clients – Bloomberg

    Andreessen Horowitz plans to launch a private equity fund  –  Fortune

    Carlyle and KKR beat rivals to win $10bn Discover Financial loan portfolio – Financial Times

    Private Credit Is Trouncing Private Equity So Far This Year – Wall Street Journal

    Watford FC Sells Digital Equity Tokens – Techopedia

     

    So, the giant manager of publicly listed assets is looking for private assets, the venture capital giant wants private equity, the private equity monsters are going for better returns in private credit (loans) and Elton John’s former club is looking for digital equity. Got all that? Probably not, but, if we think about Elton and the music business 20 years ago then you’re witnessing a similar generational shift in investment/wealth products. Investors, as individuals or as families, are increasingly looking to invest in private assets, not just publicly listed companies or funds. There is also an additional trend we should be watching. Private investors are now organising themselves in syndicates or family office structures and the latter segment is sitting on enormous pools of wealth. Try these for size:

     

    *Family offices currently manage circa $10 trillion of investments. Compare that to the higher profile hedge fund industry which manages $6.5 trillion.

     

    *There are currently 15,000 family offices operating and actively investing globally.

     

    *Now, for the banger. In the next 20 years there will be a seismic transfer of wealth from “Baby Boomers” to the next generation. Current estimates of this generational wealth transfer exceed $80 trillion.

     

    So, this investor base of family offices will have new principals and new ‘purpose’. Apart from asset growth , tax structuring, succession planning and philanthropy, it is increasingly likely these investors will be ‘values driven’, and possibly less interested in the buy-and-sell 5-year cycles of private equity and venture capital funds. In this writer’s view, a massive pool of patient purposeful capital is poised to disrupt the traditional way companies are funded. And, for smaller companies and smaller investors this should be considered a win without any need for Gambling Commission scrutiny…..