Gravitas Spark CrowdFunding

Tag: Investment

  • Big Numbers That Can’t Be Missed

    Big Numbers That Can’t Be Missed

    Now, it’s my turn. I get to vote this week. For lots of busy good reasons, I haven’t read a huge amount on our own election but there’s no doubt it is important. However, I’m conscious I’m just one of 4 billion people voting in the current 12 month period. This also prompts another nagging feeling that it is external events over the lifetime of the next government which will define it. From Ukraine, to Utah, to even Mars, our planet is at an inflection point. The ‘world order’ is dangerously shifting as North Korean troops enter a European conflict zone for the first time, and yet, it would be ill-advised to down tools and just wait. There are other themes and trajectories already established and unlikely to change. Simply put, the numbers are now too big. And, we will continue to watch SIX in particular.

    Artificial Intelligence: It is striking to see various commentaries question the real ‘value’ of AI. During the summer, Goldman Sachs estimated that tech companies were about to spend $1 trillion on AI but queried whether they would ever earn a return on this capital expenditure. Fair question, but there’s another point to be made. The ‘winner takes all’ nature of this tech arms race is existential. The poster child of the AI revolution is Nvidia. Yet again, it smashed analyst forecasts this week in its latest quarterly results. My takeaway is that, of course, there will be misallocation of capital in this existential race but tech companies are going to continue to spend to stay in the race. ‘Exhibit A’ must be Nvidia’s own revenues in its data centre chip division. A whopping $30.8 billion revenues generated in the last quarter revealed a growth rate of 112% vs a year ago. Also, for context, this division has increased its quarterly revenue 7-fold since the early quarters of last year. Note, data centres are the battle ground where AI models are tested and trained, and this trend is set to continue.

    Cleantech: European cleantech suffered a blow this week as Northvolt sought Chapter 11 bankruptcy protection from its creditors. It’s a significant blow to Europe’s efforts to decouple from its dependency on China for electrical vehicle (EV) battery materials, chemistry, design and manufacture. Northvolt tried to deliver in all four process functions and received $15 billion of investment backing to do so. This has been a very expensive way to experience execution risk; both Goldman Sachs and VW have written off investments in Northvolt of $1 billion each. However, just like AI, loss is a recurring feature in any new technology area. So, keep an eye on the big numbers. In this instance, the EU is outspending the US with a $125 billion spend in 2023 (vs $86 billion). But….. China is really the cleantech benchmark. The Middle Kingdom spent $390 billion in 2023 across renewables, carbon capture, utilization and storage, hydrogen, batteries and nuclear power.

    Space: Elon Musk’s SpaceX is the most valuable private company on the planet with a recent funding mark indicating a $250 billion valuation, ahead of ByteDance (parent company of TikTok) on $225 billion. At current pace, it is launching its Starlink satellites (via Falcon 5 rockets) every 2.8 days. If you’re just about getting your head around that launch frequency think about Space X’s massive re-usable Starship which completed its 7th test flight last week. Its payload capacity is 150 tonnes and the plan is for Starship to do two launches…. daily. Now, what if the entire tonnage launched into space in history has been just shy of 40,000 tonnes? That means in the very very near future, Starship alone would be capable of repeating the entire payload history of space in just over 4 months. I’m not sure we have grasped the enormity of this feat and the implications for industries like telecommunications, mining, military defence, tourism, manufacturing or even housing (on Mars?).

    Crypto/Blockchain: Bitcoin is on the cusp of breaking the $100,000 mark. However, we need to start thinking about the entire crypto/blockchain ecosystem. Check out MicroStrategy which on the face of it is a loss-making software business but since 2020 has been investing in Bitcoin. If you thought Nvidia was the best performing share price in the world you’d be nearly correct – it has delivered 2660% returns to shareholders in the last 7 years. But….. MicroStrategy has rocketed by 3420%. Its current market value is $117 billion, making it more valuable than Nike, UPS or Starbucks. Of course, MicroStrategy is a leveraged play on Bitcoin but there are other ways to ‘leverage’ the rapid expansion of stablecoins, crypto funds, tokenisation, blockchain etc. The crypto asset ecosystem has just passed the $3 trillion valuation mark which exceeds the asset value of most countries’ stock markets. These numbers, and the opportunities to plug into this investment pool, are too big to miss…or ignore.

    Banks: It would be easy to move on to the ‘next shiny thing’ in the space or crypto universe but the banking sector is worth watching right now. Governments are finally getting good selling prices (even premia) for rescued bank shares as the UK (Nat West), Germany (Commerzbank), Ireland(AIB), Greece (Piraeus Bank), the Netherlands (ABN-AMRO) and Italy (Monte dei Paschi) all reduce sovereign shareholdings or exit altogether. As an aside, and interesting contrast to ‘shiny new things’  Monte dei Paschi began commercially lending 20 years before Christopher Columbus’s trip to America was financed. Anyway, old or not, the bank sector is hotting up. Breaking news over the weekend suggests Italy’s Unicredito will make a €10 billion + bid for rival BPM, and note Unicredito is already circling Germany’s Commerzbank. Also, it is worth noting that the tax/accounting professional services arm of UK wealth player, Evelyn Partners, has just been bought by private equity (Apax) for £700m. That is significantly more than the £500 million price tag suggested by City analysts.

    Technology Rotation: We have written previously about the particularly strong comeback for technology hardware thanks to AI, semiconductors, EVs and iPhones. The world has become very used to these themes powering the “Magnificent Seven” – Microsoft, Apple, Nvidia, Google, Meta, Amazon and Tesla – to all-time-highs but this analysis of last week’s technology price action in the newsletter, Clouded Judgment, caught the eye:

     

    This week saw the rapid acceleration of an interesting trend that started not too long ago – Magnificent 7 underperformance and software outperformance. Might this be the start of a rotation into software and growth (ie more risky assets)? Meta was down 3% over the last week. Amazon was down 7%. Microsoft down 3%. Google down 6%. Nvidia flat. Apple / Tesla were slightly up. QQQ was down 1.5%. Meanwhile, the WCLD index was up 6% over the last week! In addition to that, there were some really big moves in individual names. Snowflake was up >30% on Thursday after reporting earnings on Wednesday, which lifted the rest of the software market. Also just on Thursday Mongo was up 14%, Confluent / Datadog / Cloudflare were each up 7%.

     

    As a reminder, the Magnificent 7 have an aggregate value of $13.5 trillion which is more than the GDPs of India, Germany and Japan combined. The potential risk of an investor rotation OUT of the Magnificent 7 is a multi-trillion dollar consideration, and also can’t be missed.

    Clearly, my vote can’t change any of the big numbers above. However, these are the numbers which are far more likely to define our investing and business futures on this island.

     

  • Banking On A Deal Frenzy

    Banking On A Deal Frenzy

    This hurts a bit. It kills me to potentially reward poor behaviour, but hey, I’m not nominated to be the Attorney General of the United States of America. The financial giants of Wall Street kept their heads down in the lead up to the US election. We didn’t hear too much commentary on the rule of law, inflationary tariffs or accelerating budget deficits. I mean…who needs property rights (law) or a functioning national balance sheet? Possibly, the infamous Leona Hemsley’s “little people” because they pay taxes, aka the price, in time. But, for now, there’s a very clear short-term calculation being made by Wall Street. A Trump administration determined to slash regulation and speed up commercial transactions is a godsend for bankers. Of course, Elon Musk, Tesla and Bitcoin are perceived as the early big ‘winners’ of a transactional incoming President. However, at a broader level the clear winner in the week since election is the enormous financial sector.

    US Financials are the best performing sector in the markets over the last week (+1.5%) while tech, telecoms, healthcare and materials all have actually booked negative returns for investors(Source: Finviz). That big picture split is interesting and highlights the very essence of what financials are about. It’s all about deals. More deals, more commissions, more fees, more revenues, more bonuses. What deals you ask? Let’s start with the biggies like massive M&A deals. In recent years, the broligarchs have been frustrated by FTC Commissioner, Lina Khan, who has blocked more than 30 corporate mergers/acquisitions on grounds of reduced competition. High-profile deals attracting government(FTC) scrutiny included Microsoft/Activision and Kroger/Albertsons. Only this week, the parent companies of luxury brands Coach and Michael Kors abandoned their merger due to FTC competition-based objections. No deal, no fees. Hence, a more lenient transaction-friendly FTC under Trump is expected to increase deal flow. And, not just in M&A.

    How do I put this delicately? Well, if the incoming Attorney General is already under investigation by his House of Representatives colleagues for sex trafficking, let’s just say the whole area of compliance could be significantly relaxed. We can expect more financial products to be launched and faster in a more relaxed regulatory environment. One area already due to increase activity levels is the IPO sector. Interestingly, Sweden’s Klarna has just announced its plans to list publicly (IPO). However, despite its Swedish home, Klarna is going to list in the US, not Europe. Oh, and Klarna is a financial company. It’s also a great comeback story – the buy-now-pay-later (BNPL) platform and its 85 million customers is heading for a $20 billion valuation. That’s a tripling of value since the fintech ‘winter’ of 2022. Note fintech is not the only survivor of the investor ‘winter’ of 2022…

    The cryptocurrency universe has already been perceived as a Trump regulatory relaxation winner. Bitcoin has rocketed to all-time-highs of $93,000 with an individual asset value of $1.7 trillion exceeding that of Facebook/Meta. The wider cryptocurrency ecosystem has achieved a market value of $3.2 trillion but the bigger story is possibly stablecoins (cryptocurrencies backed by liquid financial assets ). Again, I’d highlight ‘transactions’ as the opportunity for financial services platforms. Stablecoins were used in $8.5 trillion of transactions in the second quarter of this year. That’s more than double Visa’s transaction volume of $3.9 trillion. It also provides a pretty good clue as to why Stripe acquired stablecoin platform, Bridge, for $1.1 billion.

    For the avoidance of doubt, more transactions and deals is an overall positive. More exits, more funding, more deals… the circle of start-up life. At Spark we know more deals, exits and IPOs eventually feeds into the smaller regions of financial markets. We also know there’s a hefty €150 billion sitting in Irish bank accounts earning almost zero returns. It’s not just an Irish phenomenon. There is currently a record $7 trillion of cash sitting in US money-market funds. That’s not a huge surprise when one can earn 4-5% interest in these US deposit accounts for relatively minimal risk. However, watch out for lower US interest rates and increased mega deal headlines in the coming months. Then watch that cash move. And, not just in the USA.

    The EU economy is 99% driven by 26 million private small and medium sized businesses (SME) who account for €5.4 trillion of economic activity. The headlines will almost exclusively focus on the impact of a Trump regime on US multinationals, corporation tax, homeshoring etc. Rather like the trading evidence in markets of the past week, probably not much will really change for the “broligarchs” and the big tech multinationals. However, the markets are telling you financial services will enjoy greater deal activity which will feed through the global funding ecosystem. Indeed, right now there’s an all-time-high number of investment campaigns on the Spark platform (8) with interesting additional private asset/deal opportunities in the 2025 pipeline. We’ve written it before; the future is private.

    So, it seems like a good time to launch Spark Private, the personalised service to grow your private asset portfolio. More details on that next week, after you’ve finished gasping at AG Gaetz.

  • Silver Linings For Finishing 2nd Almost Everywhere…

    Silver Linings For Finishing 2nd Almost Everywhere…

    I blame the Irish. Should have seen it coming. Poor immigrants once upon a time, the changed perspectives were there for all to see. A couple of Kellys, a Mulvaney, a Spicer, a McMahon and a McGahn, all key lieutenants in the Trump 1.0 cabinet of 2017, championed Muslim bans, Mexican walls and family separations. I’m being flippant and skipping through a few decades of political evolution here but political integration of immigrant communities is a good thing. Take it as a genuine US presidential election positive. Of course, there will be plenty of Democratic Party navel-gazing and gnashing of teeth in the days and years ahead, but finishing second for the first time in 20 years (last popular vote loss was 2004) will focus minds on the stunning shift of ethnic minority voters to an anti-immigrant Trump ticket.

    Things looked bad for the Harris campaign very early on Tuesday evening. Hispanic-heavy Miami-Dade County in Florida had given Hilary Clinton a 30 point winning margin in 2016. On election day, Trump obliterated that by 40 points to secure a 10 point winning margin. There were other shockers – Star County (Texas and 97% Hispanic), Suffolk County (New York) and my personal favourite, Anson County in North Carolina. Republicans have won this 45% black county only once before since…. 1870. Wowzers. The purpose of this article is not to follow most post-mortem commentary and examine where the Democrat messaging didn’t connect but rather to highlight some potentially positive developments. If anything, the change in the mix of the Republican vote is more interesting. Try the dilution of white voting power.  The ‘dilution’ phrasing might surprise readers’ perceptions of what constitutes the Republican party base vote, but the scores are in:

     

    *Trump won less of the white vote this year (55%) than 2020 or 2016. And…

     

    *Harris (43%) did better with the white vote than Hilary Clinton or Joe Biden.

     

    *Hispanic men voted for Trump 54% vs 44% for Harris.

     

    The always excellent Noah Smith in his newsletter recalled a former Irish Republican, Ronald Reagan, saying that Latinos would eventually become Republicans. The social negatives attached to that shift are for another day but Smith highlights an even more important point for a polarised US society:

     

    “This largely destroys the narrative that non-white immigration will demographically drown White Americans under a tide of imported minority votes….. At some point, Republicans are going to realize this, and hopefully become less anxious about America’s racial future. Hopefully they will also realize that any attempt to make voting harder actually hurts them in the future, because the impact would fall disproportionately on their own base”.

     

    Oooooh Tucker Carlson might not like that narrative challenge to the “Great Replacement Theory”. But, there’s also another positive attached to this stunning shift in voting patterns. Harris lost so emphatically and so early that there was no dispute over electoral process. In fact, Trump improved his vote in 90% of all counties in the USA, and that includes Guam flipping to red. For those who hoped for decency, that feels like finishing 2nd just about everywhere. Many wanted democracy to prevail. It did, but with the anticipation that the “right” side probably had to win for a smooth transition, right? That caveat is for another day’s discussion too.

    Also, while we are on the topic of ‘right’, another stunner for me was that the white evangelical vote was 22% of the total vote and they voted 81-17 for Trump. Other voters who make up the remaining 78% of the electorate voted overwhelmingly for Harris by a 19 point margin (58-39). So, without white evangelicals Harris would have won the election by 20 points!  Let’s hope God is right……

    Meanwhile, for the socially agnostic financial markets, uncertainty is a wealth destroyer, paralyses decisions and kills investment activity. So, not surprisingly, there have been a few financial wins in the early days after the election. We’d highlight the following:

     

    *Banking and asset management stocks like Goldman Sachs, Blackstone, Blackrock, JP Morgan and Apollo all flew up by 10% or more.

     

    *The S&P 500 had its best day in 2 years and best ever post-election bump (+2.5%).

     

    *Elon Musk’s Tesla jumped 15%

     

    *Bitcoin’s price rise by 9% to $75,000.

     

    The Musk win is probably a struggle for some but the EV revolution is climate critical and hopefully keeps Trump tangentially on board with decarbonisation of the economy. Intriguingly, the presence of Musk as chief Trump mascot could bring a slightly contrary positive. There are some, including me, not comfortable with the billionaire “broligarchs” brazenly pushing their own commercial agendas. However, it would be a mistake to conclude that it is only the Republican party engaging billionaire promoters. The Democrats had their own, possibly glitzier line up of billionaires, influencers and celebs. And, the big strategic mistake would be to react to a Jaws-like electoral savaging by suggesting “we need a bigger boat” or better billionaires. That boat has sailed. The positive lesson from this would be to “listen” and start exerting proactive power.

    One of the critical shifts in voting patterns was urban voting. Democrats still won the big cities but the winning margins were embarrassingly small compared to double-digit history. Urban voters in the likes of New Jersey, New York, Chicago, San Francisco and Detroit have witnessed a disgraceful decline in the condition of their cities. And, other urban voters have noticed. Where Democrats have governing power, they need to deliver better city living. Security, mental healthcare, housing, crime and infrastructure are very real challenges experienced, in particular, by the lower middle and working classes. Investment and solutions to these challenges will improve urban lives and win votes.

    Commentators recently described the US voter base as one now split evenly across three cohorts: i) white college-educated, ii) white non-college educated and iii) everybody non-white. Currently, the Republican party is connecting more effectively and adding voters with two of those three. The Democratic Party should be surprised and concerned about the only one with which they are growing/connecting. The good news is that the key driver of political power in today’s America is not ideology or race. The winning factor is DELIVERY, perceived or promised. Clearly, social growth and stability are important for a nation but there’s a price for everything. In this instance, the price (inflation) – and a perception of social agenda prioritisation – was too high. Just ask Latinos, now known as “Latinx” in Democratic Party literature.

    For investors, less financial regulation, lower technology oversight(AI) and more deals (M&A, IPOs) all promise more exits and further investment cycles. All good news, until it’s not. Note, only 15 years ago the world paid a shattering economic price for deregulation of financial credit markets. Go back another two decades, and here’s a final thought for the autocracy delivery (over democracy) fans out there celebrating technology and commercial freedom…….

    The last global authoritarian empire to implode was tipped into collapse by lies and a catastrophic failure of technology .

     

    “Every lie we tell incurs a debt to the truth. Sooner or later, that debt is paid”

     

    – Valery Legasov, chief of the Chernobyl disaster investigative commission.

  • Looking For US Election Clues In The Data….

    Looking For US Election Clues In The Data….

    Despite the lead photo in this article, I’m going to steer clear of politics. And, hopefully in 8 days’ time we can steer clear of 1939. For now, there is possibly one area where there is no debate. The 2024 US Presidential election is too close to call. That hasn’t stopped some big bets, and even bigger statements. But, they are just bets. For posterity, I took a screenshot of the latest betting probabilities yesterday. You might think “game over” with a 94.5% probability of a win for Donald Trump. I think not. Furthermore, the data doesn’t ‘think’, but instead provides robust guidance.

     

     

    First, not a single vote in the election has been counted yet. However, early voting has already started and is a mix of ballots mailed/returned in advance and early in-person voting at designated early voting stations in certain states. So, the data so far gives us an idea of WHO has voted. In turn, we can compare the profiles/mix of who has voted so far with the early voting patterns in the elections of 2016(Presidential), 2020(Presidential) and 2022(Mid-terms), and try to identify significant CHANGE. To add to the complexity of analysis this time are the unusual characteristics of earlier elections which make it difficult to make apples-to-apples type comparison. Here are the two most significant factors:

    Covid 19: Due to the ongoing pandemic health measures in 2020, early voting accounted for 101 million votes out of 158 million votes cast. Democrat voters overwhelmingly chose to avoid in-person voting and used postal ballot papers.

    GOP Election Strategy:The Republican share of that early voting was depressed by the party’s strong messaging on the potential for fraud, and encouragement to vote in-person on the day. That messaging has been reversed for the 2024 election.

    So, in the states where early voting registers record party affiliation we would expect to see reduced health fears lowering the share of Democrat early voting. At the same time, the share of Republicans voting early would be expected to increase. This is, in fact, what has happened. However, there are some interesting data points which might surprise when you look a bit closer. In the critical “swing states” where registration details are available there are ‘outlier’ representations (not votes) along ethnic, age generation, education, gender and party affiliation lines. Given we have 8 days and 8 articles to write, I don’t propose to go through each line today. However, given the 94% win probability flagged above, I’d start with a few ‘biggies’.

    The betting markets are not votes. However, one of the factors cited by the analysts is the very tight margins in the polls/surveys conducted with likely voters. As current polling sees it, the seven swing states (Wisconsin, Pennsylvania, Michigan, Georgia, Nevada, Arizona and North Carolina) are +/- a few percentage points for Kamala Harris or Donald Trump. In real terms these swing state pulse checks are “within the margin of error” which the experts think is 4-5%. Now, what gives the betting markets and various experts more fuel is the historic tendency of polls to miss the “hidden” Republican voters who turn out on election day. The consensus thinking is that the polls are probably not picking up this hidden Republican vote again. So, there’s a school of thought out there that thinks Trump is probably going to do 4-5% better than even the current polls are showing. Hmmm. That thinking presumes professional pollsters have decided to NOT model that factor again. That is unlikely given professional pollsters have had their credibility battered by big misses in 2016 and 2020. So, as a data person, I’m wondering if there’s now a possibility of  a 5% over-count of prospective Trump votes? Two factors are worth considering.

    Turnout:I said they’d be “biggies”. So, the biggest number of the lot is overall turnout. If it’s very high, or at record levels, then traditional analysis would suggest that favours a Democrat presidential win. Early voting levels at 50% of 2020 numbers at this point (41 million votes returned) indicates a strong turnout. But the next data ‘biggie’ is intriguing.

    Female Vote: The female vote has been bigger than the men vote in every US general election since 1964. In 2020 63% of eligible females voted vs 59.5% of men. Now, add the fuel of abortion/healthcare freedoms to female voting fire and consider the current female polling gap of 12% points in favour of Harris (55-43). In the other column, men break about 9% points for Trump (54-45). The maths of the female vote holding those levels is that a smaller male voting cohort won’t close the losing gap of 2020 even if Trump wins the men’s vote by 10%. Of course, the swing states will have their own cultural characteristics but arguably the ‘hidden vote’ this year could be female Republican voters switching to Harris. Recall current thinking is up to 10% of Republicans might switch (or stay home?). A further gender point is that Republican strategy is to get new male voters to vote. According to election strategists, that is notoriously difficult to deliver. Current early voting numbers are not showing any real male surge. On the contrary, the 248% increase in black female voters in Georgia is eye-catching. Also, in Michigan, the gender gap in the early voting is actually bigger than 2020 or 2022 (56.6% female, 43.4% male).

    For me, the female vote is the critical data point to watch. There have been millions of words written on shifts within the Hispanic vote, younger Gen Z voters and Black males but the big momma of this election is women. We will dig deeper in later articles. In particular, 2022 mid-term elections might be the more powerful guide to this one. It feels like not enough weight has been given to the massive 2022 swings seen in recent red states like Kansas, Ohio and Kentucky. As said, not a single vote counted yet, but here’s a bet which might be attractively priced right now…

    Just a bet but….. Kamal Harris to win the national vote by 5%, and wins 5 of 7 swing states easier than the polls show. Oh, and gets to within 1% of taking a huge red scalp in Texas or Florida. More tomorrow.

  • Torn In The USA: A European View

    Torn In The USA: A European View

    I know, I know. Who wants views, just get this bloody vote over with. Well, we hope the bloody bit doesn’t come true but, if you want Hitler’s generals and your chief cheerleader is a just-revealed Putin (pay)pal, then you never know. Anyway, forget the politics. Let’s pause and reflect where the US economy is today, not where it will be in 11 days. Also, note that financial markets, for the first time in 2024, through emerging market equities and inflation-measuring instruments (bonds, gold) are beginning to think about a different USA to come. However, in this article I’d like to highlight ten things which the average European would envy about our US ally today.

     

    1. The US stock market now accounts for 50% of the global total, but is home to less than 5% of the world’s population.

     

    1. The IMF this week (Financial Times) has provided some explanation for this dominance by highlighting stagnant European productivity growth since 2005. In the same two decade period US productivity has rocketed by 40%.

     

    1. Technology you say. You’d be right. Just 5 US technology companies – Apple, Amazon, Google, Microsoft and Meta/Facebook – have a collective market value of $12.2 trillion which is more than the value of any other stock market in the world. Indeed, the new AI chip star, Nvidia, is worth more than the entire stock markets of five of the G7 countries.

     

    1. The old stuff is going well too. US domestic oil production hit 13.4 million barrels a day in August. That’s the highest production number for ANY country(even OPEC) in history. The US is a NET exporter of oil while Europe watches its eastern gas pipelines anxiously. But, you won’t hear that on Fox News. Drill baby, drill…just not the facts.

     

    1. Not surprisingly, US banks with the biggest corporate customers in the world are doing quite well. US banking giant, JP Morgan, has a market value of $540 billion which exceeds the combined value of Europe’s top 10 banks.

     

    1. Maybe Europe will disrupt US economic hegemony and bounce back with AI? Ehhhh…that’s not looking like a great bet right now. The sheer cost of talent and large-language-models (LLM) used to train and build AI applications are turning the AI race into Big Tech 2.0. Recent newsflow would suggest it’s only Microsoft/OpenAI, Amazon, Meta and Google who have the deep pockets to win the race. And, Asia will be watching anxiously too. The Asian dominance of hardware/semiconductor chip production is in “transition” as Taiwan’s TSMC just told the markets that the production yields in its new Arizona plant are 4% higher than in its home base Taiwan.

     

    1. Speaking of home bases…US home owners are sitting on $32 trillion of value attached to their home equity. That’s a quadrupling of property wealth from the $8 trillion low recorded as recently as 2012. How did that happen?

     

    1. Jobs, and lots of them. The US economy is at full employment, the highest seen in 100 years. Oh, and average hourly earnings are up 26% since 2020. In fact, US real (adjusted for inflation) wage growth is up 26% since 2000. More companies too…

     

    1. Back in 2015, 2.8 million new companies were formed in that year. The number in 2023 was 5.5 million. That’s a near doubling of start-up activity in less than 10 years. And…. money doesn’t just talk.

     

    1. Risk earns rewards. High risk venture capital (VC) is the oxygen of innovation and explains much of the US tech dominance. The US capital markets are the source of 50% of ALL venture capital funding globally. Asia is 40%. And Europe…… ahem…… 5%.

     

    That’s enough. But, I could mention military dominance too as Russia impales itself on imperial delusion in Ukraine and is now resorting to throwing North Korean troops into meat-grinder combat action on its own soil in Kursk. Of course, the US is not in a perfect place, leaving aside its toxic partisan politics. Its health and hate crises seem to be impossible to address by looking overseas for solutions or perspective. Indeed, the sheer presence of 350 million guns in the most prosperous land on the planet are a startling reflection of fear in the midst of so much opportunity. We can only watch over the next few days, as US citizens cast their votes. The list of ‘wins’ above looks like a fabulous starting point. The polls suggest voters are not so sure.

    As Europeans, we can attest to similar ‘win’ lists for Germany and the UK ten years ago. Not so today, and their voters painfully know they played their part in believing not-so-great-again political calculations in new energy and trade policies. Tick tock…..

     

     

  • Four Huge Trends For Your Private Portfolio

    Four Huge Trends For Your Private Portfolio

    I scared a few people last week. Apologies. Then again, you could be a public servant or journalist in the US today and be referred to as “the enemy within” by the bookie’s favourite for the Oval Office. Or, how about being a lifetime Tory party member faced with the extremist choice of “KemiKaze” Badenoch or “Honest Bob” Jenrick as your next leader? Better still, put yourself in the shoes of the Tory tactical masterminds who ‘traded’ leadership votes and eliminated their own likely winning candidate, Jimmy “Dimly” Cleverly. Breathe, just breathe slowly. We can’t promise an end any time soon to populist buffoonery but in the real world big changes are afoot. Four developments, in particular, caught the eye this week and highlighted future opportunities for those building new businesses or investment portfolios.

     

    Electricity: If $150 billion of hurricane damage in Florida doesn’t focus climate crisis minds I’m not sure what will. Indeed, there is an encouraging reality check beginning to filter into financial discussions. Just this week the Washington Post ran a story about the cost of extreme weather exerting further strain on an already challenged Federal government’s fiscal position($35 trillion debt). Of course, moving away from fossil fuels to electricity is already set to be the greatest financial shift ever experienced by the global economy – $275 trillion to be invested in the transition by 2050(Source: McKinsey). So, the following statistics really hit home. They are sourced from the International Energy Agency (IEA) and flag the recent growth of electricity use being twice as fast as the growth of energy demand. However, the future is about to turbo charge that relationship. Between now and 2035 electricity usage will outpace energy demand growth by a factor of 6x. Yep, that’s electric vehicles (EVs), AI chips, data centres all doing their future thing. Another way of looking at this shift is that this 6x electricity acceleration equates to the entire energy demands of Japan (4th biggest GDP in world) being added EACH year to global electricity usage.

     

    Banking: In the old days it was banks that provided loans, or credit. Now, every second ‘growth’ headline in investment markets is referencing “private credit”. So, what is it? It is quite simply lending by private pools of capital(not banks), usually sitting within large investment firms. The original “Barbarians at the Gate” were private equity firms who used debt to buy out big companies. Today you might read about Blackstone buying software Smartsheet for $8 bilion. Back in 1988 it was KKR buying RJR Nabisco for $25 billion. Historically, the debt part of the ‘leveraged’ buy-out came from banks. Now the Barbarians (private equity) want to do the banking (debt) too. In the last 12 months there have been 14 different partnerships announced between banks and private credit(debt) firms. Most recently, Citibank announced a partnership with private equity/credit giant, Apollo Global. Amazingly, this relationship turns banking orthodoxy on its head – Citibank’s investment bank will source the deals and Apollo will provide the money/debt. Bankers turned deal makers, deal makers turned bankers. Wowzers. Note, if the Barbarians are now keen to provide debt funding to companies, then they must see opportunity and excellent returns. Current estimates of the size of the market indicate private lending assets (AUM) currently at $1.5 trillion growing to $2.7 trillion by 2027 (Source: Prequin).

     

    Life Sciences: Despite the anti-elite denial of science prevalent in the social media and political spheres, the incredible speed-to-discovery of vaccines seen during Covid-19 is set to continue. However, with a little AI twist. Arguably, AI won its first Nobel Prize in recent days. From The Japan Times….

     

    “The recent awarding of the Nobel Prize in chemistry is an incredible vote of confidence in the potential for artificial intelligence to transform the way medicines are invented by using AI to illuminate and manipulate proteins, life’s most basic building blocks. The Royal Swedish Academy of Sciences honoured University of Washington professor David Baker and two scientists from Google DeepMind, CEO Demis Hassabis and senior research scientist John Jumper.”

     

    Yep, AI machine-learning cracked the code to predicting protein structures with Google scientists right in the middle of it all. Meanwhile the Nobel Prize for Physics went to the “Godfathers of AI”, Geoffrey Hinton and John Hopfield, who developed the tools which power the neural networks underpinning today’s AI boom. Now, think about the Nobel tradition of rewarding decades of research and recognition. Then think about chemistry protein discovery work barely 2 years old and not one, but two, Nobel prizes. Simply astonishing.

    Nuclear Power: It’s not just gold hitting all-time highs. Uranium mining stocks are flying too. Let’s face it, the news flow in nuclear power has been hard to miss. Japan has just re-started a 47 year old nuclear reactor at the Takahama nuclear power station. Amazon is pumping $500 million into nuclear capabilities, and Google has entered an interesting deal with Califormia start-up, Kairos Power. Google has committed to buying nuclear power generated by multiple small modular reactors(SMRs) built by Kairos. And, one for the nuclear history buffs – the infamous Three Mile Island nuclear power station will be restarted in a $1.6 billion deal struck between Microsoft and the energy utility, Constellation. Again, AI is the power demand trigger for these moves. And, mining stocks sitting on uranium reserves might just be the wrong price (low) if a Big Tech AI race goes nuclear on many levels.

    So, there’s four thoughts or trends which are very much part of our future. You might spot AI as the common factor across a lot of these developments but that’s possibly not the only private opportunity. There seems to be some enormous shifts happening in traditional sectors like infrastructure, materials, banking, power and chemistry. The good news is that there are lots of private companies plugged into these transition sectors right now and many will need funding (debt or equity) in the years to come. If that sounds like a private portfolio-building strategy then you’d be right. It’s time to take a private dip. Even better, we might be able to help you very soon…..

     

     

  • 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….