Gravitas Spark CrowdFunding

Tag: finance

  • 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….

     

     

  • 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…..

     

  • 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…..

  • Mr Copper To Sing Again?

    Mr Copper To Sing Again?

    I remember the original ‘Mr. Copper’, Yasuo Hamanaka, being a pretty decent karaoke singer. That’s a story for another day but there’s a risk-aware part of me saying that copper, as in the metal, needs to be sung from those Roppongi rooftops right now. Hamanaka’s claim to trading fame was cornering 5% of the copper market when discovered by US authorities 30 years ago, culminating in jail time for Mr Copper and a top 10 all-time trading loss of almost $3 billion for the mighty Sumitomo Corporation. The scandal dominated global financial headlines for weeks back then but I feel another copper story with big numbers is building. Let’s start with a selection of recent headlines…

     

    Massive copper shortage on the horizon –  The Week 

     

    Copper demand to boom as new technology drives power consumption Trafigura says – Reuters

     

    AI to add 1 million tons to copper demand by 2030 – Data Centre Dynamics

     

    Copper is the “new oil”, and prices could soar 50%   – Fortune

     

    Copper shortage threatens EV transition – DPA Magazine

     

    I think we get the picture. Copper is not just a battery/electric vehicle (EV) story – EVs actually use four times more copper than non-electric autos. Copper is also now a data centre and AI story. However, there’s an even bigger picture. McKinsey estimate the global shift away from fossil fuels to a decarbonised economy will require annual physical infrastructure spend of $9 trillion.  Yep, that’s every year until 2050. Or, the combined market value of Microsoft, Apple and Nvidia in capital expenditure……. every single year for the next 25 years. The critical detail in this decarbonisation move is electrification. Energy supply is one aspect; nuclear, natural or renewable. The transmission and storage of that converted power via electricity is the copper-critical bit. Let’s consider a few more numbers.

    *CRU Group estimate global copper demand to surge by 9.5 million tons in the next decade.

    *S&P Global go bigger – they see global copper demand doubling from current 25 million tons per year to 50 million tons by 2035.

    *For historical context, 700 million tons of copper has been produced over the course of human history. Net-Zero targets for 2050 demands that humanity produces 2x more  than it has ever produced, or 1.4 billion tons (Source: S&P Global).

    *However, the mining industry would like to have a word. Due to chronic underinvestment, planning delays, investment capital scarcity, genuine sustainability concerns, higher interest rates and shiny AI tech excitement the global mining sector is currently projected to increase production by just….. 20%.

    *Oh, and the world hasn’t made a major new copper discovery since 2014. This lack of copper discoveries also means existing mines going deeper, incurring greater costs while the grade (metal per ton of rock) falls alarmingly.

    We have a problem. Arguably, it starts with the investment maths. Consultants, PWC, reckon AI could add $15.7 trillion to the economy by 2030. But…. these technologies and their Big Tech owners require massive amounts of electricity. Both Google and Microsoft consume more electricity than small European countries. So, how about the USA, home of the original Silicon Valley? Right now, US data centre power usage accounts for 22GW, or 4.5% of the nation’s power consumption. However, according to SemiAnalysis research, that figure is projected to reach 100GW, or nearly 20% of nationwide consumption by 2030 due to AI buildout.

    To be absolutely clear, the expansion of grid infrastructure across generation, transmission and distribution is critically dependent on copper and its performance properties. Yet, there appears to be an enormous squeeze on grid capacity coming. That’s not just cheap commentariat opinion. As always, money really talks. So, can you name the electric power company that has outperformed the rocketing AI poster-child Nvidia this year? Well, that would be Vistra Corp which has clocked up a share price gain of 157% compared to Nvidia’s ‘slow-coach’ 121%.

    So, if electric power is spotted as a potential winner by canny investors ahead of a supply squeeze, where does that leave the mining sector and copper? There have been a few clues. For example, BHP Billiton in recent months unsuccessfully tried to buy Anglo-American (and its copper mines) in a massive $50 billion deal. Interestingly, the ultimate fossil fuel kingdom, Saudi Arabia, can also see the electric future. The Saudi mining company, Manara Minerals, is in talks with Pakistan on a potential $1-2 billion purchase of a 15% stake in its Reko Diq copper and gold mines.

    These numbers are big, but, in global terms, are ridiculously small compared to the $15 trillion excitement about AI. The ultimate reality check and irony is that one company, Nvidia, is currently valued at more than $3 trillion. In stark contrast, the entire global mining sector is valued at circa $2 trillion. Clearly, there will be no credible AI roll-out without a functional electricity grid and energy storage infrastructure. How long before tech investors start to scream for more mining and copper production investment?  Probably in less time than it took for Mr Copper’s illegal trading arrangements to be discovered. Meanwhile, we plan to sing the mining story before the screaming……

  • D-Day Lesson For These Roaring ’20s?

    D-Day Lesson For These Roaring ’20s?

    The events of D-Day 80 years ago this week usually feature in the closing chapters of World War II history texts. My own current curiosity lies elsewhere, more focused on change and beginnings. Not the Reichstag fire, not Sudetenland, not Kristallnacht, not Lebensraum, not Poland. These were all events in the 1930s which historians agree shaped the outbreak of a global war. However, that decade of economic distress and social anger, whipped up by populism and propaganda, was probably inevitable. Indeed, it’s possible the seeds of war were sown much earlier. The previous decade known as the “Roaring Twenties” introduced huge economic, cultural and technology advances, but the 1929 crash and Great Depression which followed were the key catalysts for the global horror ahead. That lesson from history should not be forgotten. In fact, we should be on our guard. Welcome to the new Roaring ‘20s….

    It’s not just Reddit influencer, Keith “Roaring Kitty” Gill, reportedly banking hundred million dollar profits trading ‘meme-stocks’ like GameStop in recent days. There’s more than just a sense of giddiness about. Recall the 1920’s witnessed the arrival of mass-production and mass-consumerism as automobiles, electricity, cinema, radio and aviation made technology affordable to the middle class. And, then it wasn’t. Financial collapse and the implosion of banking leverage has been a feature of global economic cycles ever since 1929. It wasn’t a once-off in 1929. The global credit crisis in 2008-2009 proved that point, and then some. The critical factors in these financial earthquakes are excessive confidence and over-estimation of demand. First let’s illustrate confidence….

     

    • The S&P 500 benchmark index for global stock markets has not experienced a daily decline of 2% or more in 325 days (Source: Reuters).
    • The market capitalisation of a media company whose key ‘product’ and biggest shareholder is a convicted felon with presidential ambitions is currently over $8 billion (Source: Truth Social – just kidding!).
    • The private credit (lending) market has grown from $250 billion in 2010 to a whopping $1.7 trillion today (Source: Prequin).
    • This week AI chip maker, Nvidia, became the second most valuable private company in the world with a $3 trillion market capitalisation (Source: Bloomberg)

     

    Regular readers will know my views fall mainly on the optimistic side of AI. However, the odd sanity-check does no harm. Nvidia is a semiconductor manufacturer. In 2023 revenues generated by the entire semiconductor manufacturing sector globally reached $526 billion. So, for context, Nvidia’s market value is now six times the entire industry’s global revenue. I know analysts will talk about future AI spend, cash rich Big Tech customers and real demand, but there’s one other aspect to this growth story which is a little bit different with historical lessons.

    Legendary tech investor, Marc Andreessen, penned his “Why software is eating the world” essay in the Wall Street Journal in 2011 and there is no doubt software has embedded itself in every phone and corporation on the planet. The lovely thing about software is that it is embedded in an activity, generates recurring (frequent and relatively small) revenues and user stickiness/dependency is high. At a basic level software is code. It’s digital, not physical. Sure enough, coding platform giants Microsoft, Google, Amazon, Meta, Baidu, Alibaba etc. have dominated the league tables of most valuable companies in the world since the Andreessen prophecy. But, there has been a subtle recent shift in the value hierarchy.

    Consider that two of the three largest capitalised companies in the world are now HARDWARE manufacturers (Nvidia and Apple). Hardware is physical and brings an entirely different business model and a myriad of challenges including supply chain risks, materials, energy, sustainability, customer credit, consumer fashion, inventory management and capex investment. We don’t have a crystal ball in forecasting ultimate demand for AI but the semiconductor industry used to be known for its vicious cyclicality. With my risk history hat on, I’d venture there’s every chance this manufacturing sector will experience mismatches between supply and demand.  Of course, the automobiles and radios of the 1920’s might not resonate with today’s AI and technology enthusiasts. However, I’d highlight three other numbers which perhaps add to the “Roaring ‘20s” feel right now:

    Sport: The breakthrough of sports like boxing and athletics on a global scale was a feature of the 1920s but fans mostly followed events by radio. Now, it’s TV (or streaming). So, when basketball’s NBA is about to treble its broadcasting deal from $25 billion to $76 billion you do wonder about excess, and the projections of Amazon, NBC and ESPN? Maybe it’s the constant circling of private equity (PE) around US sport….? Latest data from Pitchbook research shows 63 US professional sports franchises have a PE ownership connection where PE involvement is allowed (NBA, MLS, NHL and MLB). Funnily enough, basketball (NBA) leads the way with two thirds of all teams in the league connected to PE.

    Securities: The 1920s saw the banks and their celebrity brokers on Wall Street begin to sell stock and bond securities to main street for the first time. Then came the ‘shoe shine’ moment in 1929.  Fast forward to today’s celebrities of the private equity universe and a recent FT report on that exclusive world. The headline-grabbing data point(and possibly harsh) suggests that, in the period 2010-2023, private equity funds raised $820 billion more than they actually returned to investors (Source: Prequin).

    Prohibition: Alcohol and gambling was the government target in the 1920s. So, remember when Bitcoin and its cryptocurrency ecosystem was dismissed by the ‘puritanical’ zeal of high street banks, regulators and law enforcement? Today, Bitcoin is trading above $71,000 and the total value of the crypto universe is $2.8 trillion. In fact, there are now billions of dollars invested in funds owning cryptocurrencies (ETFs) which trade daily on highly regulated public exchanges. Now, that’s a morality tale with a twist.

    Of course, the reference to Prohibition conjures up images of organised crime, judicial corruption, entire city governments ‘on the take’, high profile mob trials and flagrant violations of the rule of law. Couldn’t possibly happen again, could it?  Take that question with just a pinch of orange. On a more serious note, the erosion of the US rule of law is possibly a bigger threat in our immediate future than cyclical excess. Hopefully, the remembrance of D-Day sacrifice will remind those in power of their duty to call out faux (or Fox) ‘patriotism’. And, perhaps a read of the final speech in Charlie Chaplin’s The Great Dictator would help. Ironically, Chaplin’s own patriotism was questioned during a later shameful period (with my surname!) in US Congressional history. The Little Tramp’s words seem timely once again…

    Let us fight to free the world – to do away with national barriers – to do away with greed, with hate and intolerance. Let us fight for a world of reason, a world where science and progress will lead to all men’s happiness. Soldiers! in the name of democracy, let us all unite!    –  The Great Dictator (1940)

  • Warning: 3 Zones Of Interest

    Warning: 3 Zones Of Interest

    Nobody likes to be admonished. So, it’s an interesting commercial call to deliberately call out one’s customers. Even more daring to use the Holocaust as your messaging context. There are no adequate words (almost literally in many scenes) for Jonathan Glazer’s brilliant but upsetting Oscar-winning film, The Zone of Interest. The luxury dream life of Auschwitz commandant Rudolf Höss, his wife Hedwig and five children in a house right next door to the walls of the Nazi death camp is almost two films. One is seen, the other heard. The effect is extremely unsettling – you see nothing, but hear and know really evil events are happening.  However, director Glazer is using this notorious historical setting to deliver a present day admonishment. Like Hedwig Höss and her household, we hear things but choose not to ‘see’ bad things. However, you’ll be relieved to read I don’t plan a similar scolding…..but have some cautionary thoughts.

    It has been an interesting week for the planet’s hottest investment topic, Artificial Intelligence or AI. For main street consumers we are on the cusp of not just hearing about AI, but actually ‘seeing’ it in action. First, Google showed off the latest use cases for its AI model, Gemini, in search, education, video, workflow etc. All hugely impressive, and the intention is for Gemini to be embedded in Android powered phones soon. Not to be outdone, reports are flying around that Apple will do something similar with its iPhone and OpenAI’s ChatGPT model. As the tech-heavy Nasdaq index hits all-time-highs, it’s clear AI is going to move rapidly from being a corporate cloud story (Nvidia, Microsoft etc) to being a main street consumer revolution on our phones. However, the cloud and the powering of AI models is still entirely relevant to this move. Arguably, AI infrastructure is today’s gold rush version of  ‘spades and shovels’ which, for investors, means data centres are critical to deploying AI. You’ve probably already heard that. But, do you ‘see’ the reality…?

    My favourite trivia question of the week has been how many data centres will Microsoft open in 2024. Every answer I have received has been wrong, mainly in the low double digits. The reality, per a recent Financial Times article, is that Microsoft is opening a data centre “every three days”. Mind-blowing. These are $300-400 million facilities, not Starbucks cafes or KFC restaurants. And, that’s just one company. Here’s another – Echelon Data Centres. I had the pleasure of briefly meeting its owner, Niall Molloy, at the excellent Renatus Real Deal 2024 conference this week where Molloy was interviewed as winner of the “Deal of the Year” award. I was stunned to learn Echelon only started in the data centre construction business in 2017. Just 7 years later private equity giant, Starwood Capital,  has invested $850 million in Echelon and the business is currently valued at north of $2 billion. A super story of bold vision and world-class execution, but Molloy had a cautionary word about the pressures on global electricity grids as data centre campuses begin to match the power consumption of capital cities. The AI and data centre revolution is coinciding with an even bigger global shift – decarbonisation of our economies. The solution is more electricity power, and the challenge is the expansion of under-invested electricity grids. However, where there is risk there is opportunity.

    Ireland has been mentioned as one of the most challenged national electricity grids and many readers will have ‘heard’ the negatives of data centre power consumption. However, all data centres now have to create/install their own power supply and most likely the source will be renewable energy. That means huge investment capital is required because it is no longer just a construction project, but also includes incremental builds of electricity generation and water supplies. Hence, we should ‘see’ this week’s reports of Intel’s plans to expand its Fab34 semiconductor chip factory in Leixlip as a ‘wow’ moment. The plans are not new but the financing is ground-breaking. Intel was originally looking to spend $2 billion. Now, the number is $11 billion and global private equity player, Apollo Global, is being tapped as the solo partner on the project. The entry of global private equity into AI infrastructure funding should signal opportunity and expert eyes ‘seeing’ a way forward despite grid challenges. So, my second cautionary word after ‘seeing’ a consumer AI shift is that there are risks but also huge opportunities away from the actual technology. In other words, investing in power, storage, construction, critical minerals/materials, water, skills training/resourcing and other professional support services could generate top class returns.

    Clearly, private equity giants have spotted an investment opportunity. And, don’t forget Blackstone’s recent $1 billion purchase of a majority stake in Dublin-headquartered data centre engineering firm, Winthrop Technologies. Still, there’s one final cautionary tale; under-investment caused by political inertia or regulatory uncertainty. Exhibit A on political misrule is probably the UK. However, Brexit might be the go-to lament you ‘hear’ but the reality is a long-standing issue we wrote about in March:

     

    The Institute for Public Policy Research estimates the under-investment in business at $500 billion less than what other comparable OECD countries have invested since 2005. Public sector investment (infrastructure) was a further $200 billon below the G7 average. All in, this chronic lack of investment places the UK 27th out of 30 OECD countries.

     

    As regular readers will know, we have been quite positive about UK investment opportunities in recent months but this warmer view has been based on a contrarian prompt. Investors have been fleeing UK investments for years and Panmure Gordon published some startling figures in a research report from their Economics team this week. I would highlight three in particular:

     

    • UK public companies trade on a like-for-like basis (taking into account sector and growth characteristics) at a 17% valuation to comparable companies trading in the rest of the world (RoW).
    • The gap in valuation between the biggest UK companies (FTSE 100) who are globally engaged and the more domestically-focused smaller UK companies (FTSE 250) is at its widest in 20 years.
    • Funds focused on UK investing strategies have reported outflows for 82 of the last 97 months (Source: IA)

     

    Please ‘see’ this as the damage inflicted by chronic under-investment for almost 20 years. So, given our planet faces an existential threat without decarbonisation, the critical need for investment in global electricity grids is not exclusively an AI or data centre issue. Data centres are just a ‘wall’ blocking the bigger picture view . Without joined-up policy thinking, we risk ‘hearing’ about data centres but missing a planetary extinction event moving into irreversible territory. Don’t zone out on this one.

     

  • Investors Need The Old Economy Too

    Investors Need The Old Economy Too

    Investors need to be aware of investment cycles as well as economic cycles. The investment stars of today can be the performance dogs of tomorrow. Just don’t tell South Dakota Governor, Kristi Noem, who has spectacularly blown up her vice-presidential ambitions in recent days. Kristi got her MAGA guns, God and babies messaging confused and thought it was a good idea to publish a book featuring a tale about her shooting a misbehaving puppy, Cricket. Not sure there’s even an emoji to cover that. Nor do investors really need to be told that shooting puppies is not a great vote winner. However, investors do need to know that star stocks can fade and badly performing ‘dogs’ do make comebacks.

    Financial market stars are often the ‘next shiny thing’ and the Covid-19 pandemic introduced lots of new companies which suddenly entered our daily lives and kept the global economy going. Consider online payments and Shopify. Its share price collapsed by 20% (and $20 billion!) in one evening this week and joined other pandemic superstars like Peloton, Zoom, RingCentral etc. in a combined $1.5 trillion loss of market value since the end of 2020 (Source: Financial Times). Meanwhile, the old economy which was kept alive by these companies is finally shaking off its ‘dog’ status as the tech-obsessed investment markets realise we need the old stuff too. In fact, three recent developments have caught our eye and signal potential opportunity.

    First, we need to dig. Not literally, but the most basic activity underpinning economic activity since the Stone Age is probably the extraction of basic materials. So, when a potentially massive deal in the mining sector is reported we should pay attention. The $39 billion approach by BHP Billiton for De Beers owner, Anglo American, shines a light on a sector which has been largely shunned by investors on ESG, geopolitics, talent retention and energy cost worries. A pick up in M&A activity suggests a floor for executive expectations and potential upside opportunity for investors. Indeed, in our recent Private Portfolio Thoughts newsletter we wrote:

     

    “….the entire out-of-favour global mining sector is now worth approximately the same as just one technology company, Google ($2.2 trillion). However, when we see research showing China controlling almost 80% of the value chain in electric vehicle (EV) battery production we’d expect a few mining and mining technology ‘diamonds’ to be completely undervalued as the world races to EV adoption and net zero targets.”

     

    The mining sector, despite its sustainability (ESG) challenges, is a critical part of our decarbonised future. As an illustration, the race to electrify the global economy requires more copper in the next 25 years than has been produced in the sector’s entire history.  But a shortage of investment threatens that electric transition. For investors, capital shortage (vs ‘hot’ capital stampedes) means probable opportunity and…..on the capital front, there might be better news too.

    The critical cog in the global financial system is the banking sector. Of course, banking had its almost-perennial risk shock last year with the failure of Silicon Valley Bank(SVB) but, arguably, the lack of systemic knock-on impact should be taken as a positive. Furthermore, the stabilisation of interest rates (even if not falling) without major economic casualties to date is also encouraging. So, like the mining sector, we’d be looking for major deal activity from ‘insider’ executives to confirm there was potential sector upside ahead. Step forward Spanish banking.

    Bilbao-based BBVA has just launched a hostile $13 billion bid for its domestic competitor, Sabadell. Not just a bid, but a riskier hostile one too. Also, don’t forget recent bank deals in the UK  – Nationwide buying Virgin Money ($3.7 billion) and Barclays acquiring Tesco Bank (up to $1 billion). This feels significant and check out the performance of the financial sector in a “Magnificent 7” tech-dominated US market. Larger US financials are actually outperforming the top tech names in the Nasdaq 100 index year-to-date (+10% vs +7.6%). Also, it is interesting that the traditional barometer of the broader old economy, the Dow Jones Index, is on a 6-day winning tear. Perhaps, the dogs (but not Cricket) are back?

    Finally, the combination of the old economy Dow Jones rising, banks gaining deal confidence and shunned sectors doing M&A prompts a further thought. Public markets have been shrinking for years in terms of numbers of quoted companies listed on public exchanges. However, the role of private capital and private markets has grown in significance. Pitchbook’s latest research suggests private markets now control $14.7 trillion in assets, growing by an annualised 12.8% each year since 2012.

    Those private assets include private equity, real estate, infrastructure, venture capital and private debt/credit. The latest projections from the Pitchbook research team say these assets could stretch to $24 trillion by 2028 in a positive macro environment. This writer has also seen research showing family offices for the uber-rich now allocate 46% of their investment portfolios to private assets. So, let’s join the dots here. It seems entirely possible that ‘old economy’ companies could be purchased in private buy-out deals, backed by private capital and more confident banks. That’s a healthy development for investment markets but also provides opportunities for investors to diversify their portfolio into private assets. Now, start digging, or even mining those possibilities.