Gravitas Spark CrowdFunding

Tag: risk

  • Three Pictures Of Opportunity From A Changing World Order

    Three Pictures Of Opportunity From A Changing World Order

    It is difficult to avoid pictures of the St Patrick’s Day sex-pest parade at the White House but I can assure you it is well worth the effort. Clearly, the rule of law and the world order is enduring a seismic shakedown but it would be a mistake to assume all is lost. Hidden behind the disbelieving headlines and festive mug-shots there are a number of alternative pictures really worth thinking about. Hedge fund billionaire, Ray Dalio, wrote The Changing World Order: Why Nations Succeed and Fail  as recently as 2021 and used five centuries of history to show how nation success depends on cycles much like business. So, I have been struck by three investment trends whose emergence could be attributed to these long-run cycle shifts. The first cycle journey actually starts with cars…..

     

    The mighty Volkswagen AG (VW) of Wolfsburg was founded in 1937 in the midst of another seismic geopolitical shift and 80 years later in 2017 became the world’s largest automotive manufacturer by global sales. In 2021 VW reached its peak market value of €155 billion but the Ukraine war, rocketing energy prices and electric vehicle (EV) competition has wiped almost €100 billion from that valuation since then. In fact, this week the even-older arms and military vehicle manufacturer, Rheinmetall AG, surpassed VW in market value. In reality this is a 10-year story rather than a 135-year history. As recently as 2014, Rheinmetall’s 125-years of manufacturing ammunition, missiles and military transport vehicles had built a total franchise value of just €1.3 billion. The invasion of Crimea by Russia in the same year was the “butterfly wing flap” moment as the company’s valuation over the following 10 years increased exponentially to deliver a 48x return to any far-sighted Kremlin watching investors. The picture below is a graphic reminder of the defence sector resurgence opportunity and the industrial shift away from the internal combustion engine (ICE):

     

     

     

    Of course, Germany is not the only country impacted by geopolitical change. Plenty of Trump apologist commentators seem to believe “Agent Orange” is playing 4D chess and seeking an alliance with Putin to take on the growing threat of China. Well, how’s that going? About as well as Trump’s ‘day one’ defeat of inflation or the $5 trillion evaporation of the US stock markets driven by a tech-heavy “Magnificent 7” meltdown. In contrast to US investors, the Chinese are enjoying a 40% rise year-to-date for their tech sector stocks and a healthy almost-20% gain for the broader Hang Seng Index. Ironically, it’s a Chinese AI company called Butterfly Effect which is creating possibly even greater waves than the DeepSeek cost ‘shock” back in January. Butterfly’s AI digital assistant, Manus, is more powerful than DeepSeek and has automated up to 50 tasks from buying a property in New York to editing a podcast. There have also been big Chinese breakthroughs in recent weeks in quantum computing and robotics adding to a stark picture below (Source: Bloomberg) – a whopping 40% outperformance by the Chinese tech sector over the US tech sector since Trump took office in January.

     

     

     

     

    If it feels like US Big Tech is in relative retreat then the latest data from VC research house, Pitchbook, makes for interesting reading. Big Tech is playing a less prominent role in the US start-up M&A market due to regulatory pressures but big corporates seem to have been replaced by start-ups themselves as acquirors. More specifically, in 2024 more than one third of start-up acquisitions were made by VC-backed start-ups. This highlights the emergence of a new buyer profile and exit route for start-ups; VC-backed ‘unicorns’ with significant cash reserves and an appetite for growth. Indeed, Pitchbook analysts put this rather well:

     

    “Amid the trend toward ‘profitability’, it is important to remember that growth remains essential and serves as a key motivating factor for these buyers…..The high number of VC-backed companies also creates numerous opportunities for consolidation. While acquisitions by VC-backed companies may not often dominate the headlines, they are becoming an important aspect of the venture capital liquidity narrative. ”

     

    The chart below (Source: Pitchbook) shows start-ups accounting for just 20% of M&A by value as recently as 2018. So, the move above 33% today seems significant…

     

     

     

    In summary, the pictures above should be viewed as opportunities happening in real time while we are distracted by tawdry turmoil and photo-ops in Washington. More importantly, we should start to think about geopolitics as the driver of not just nation cycles, but also business cycles and new long-run structural trends.

     

  • Private Portfolios And Future Returns: Part II

    Private Portfolios And Future Returns: Part II

    Well, we promised. This is a follow-up to our last piece on expected returns for a private portfolio. This time we are going to illustrate a variety of portfolio outcomes with some numbers. However, there IS a catch. Humans are not good at forecasting the future so these returns outcomes are just a guide. A bit like a US-NATO promise to Estonia – we might send military forces to fight off an attack from Russia, but then again we might not. The good news for investors (for Estonia not so much) is that history can provide some confidence but no guarantees. History, in this instance, is the long-run return on private assets which we referenced in last week’s article. As a refresher, here is the reference table we used (Source: Pitchbook):

     

    We noted the various categories of assets and concluded that Spark investors would be mostly invested in private equity and venture capital type assets. Then we decided to use 12% as a conservative ‘base case’  annual growth hurdle (IRR) expected of a portfolio with that mix of assets and quantified that growth over 10 years:

     

    “In real terms (and compounding those rates [12%] of return) that equates to an initial investment of €10,000 growing to €31,000 over 10 years. For context, a fund with publicly listed equities would be expected (by financial planners) to generate 7% returns per annum and thus turn €10,000 into €19,600” 

     

    However, many of the Spark investment opportunities are very early-stage (higher risk) so it would be reasonable to expect something in excess of this 12% base case growth/returns scenario. Rather than use another headline number, we thought this article would be an opportunity to build a returns scenario from the bottom up. In other words, we would use illustrative portfolios of 25 investments each and explore three different mixes of outcomes. Our reasoning for using a portfolio of 25 investments is that this approximates to what many of our Private Portfolio (service) investors are currently trying to target/build as a personal portfolio over three years. The other assumptions used across the different illustrative portfolios are as follows:

     

    Total investment cost = €50,000

    Position size = €2,000 equally invested across 25 companies

    EIIS tax rebate rate = 37%* 

    Holding period = 10 years

     

    *The EIIS tax rebate rate is a ‘blend’ of the new standard rate of 35% and the higher rate of 50% applied to pre-operational businesses.

    Now, let’s consider our first portfolio. According to the US Bureau of Labour Statistics, 65% of start-ups go out of business within 10 years. So let’s use that historic 65% failure rate as a future outcome for our first portfolio. In other words, 16 of our 25 portfolio companies will end up being worth zero. With the remaining 9 companies, we are going to assume that 5 of them become unspectacularly profitable and grind out a typical equity return of doubling every ten years(7% per annum). The final 4 companies are expected to be successful exits or ‘wins’ generating returns of between 7x and 15x. The table below illustrates those outcomes with an overall portfolio rate of return (IRR) of just over 13%. This equates to a multiple of 3.4x of the initial investment cost MINUS your EIIS tax rebate.

    Portfolio 1:

     

    The above example shows how important tax is to the initial cost or valuation multiple paid for your investments ie a 50% tax rebate cuts in half the valuation multiple paid. This portfolio generates a respectable 13% return but in the next example we’d like to demonstrate the importance of “winners”. So, in Portfolio 2 we raise the failure rate to 20 companies (80%) and model the impact of two big exits of 20x and 40x. This scenario delivers a superior IRR (vs Portfolio 1) of 15.4% and a multiple of 4.2x your initial cost of investment:

    Portfolio 2:

     

    Clearly, a return of 40x on a single investment would be huge but for ‘unicorn’ followers of companies reaching billion dollar valuation status this is the equivalent of a €25m company growing to €1 billion. Rare, but increasingly possible given the research team at Dealroom estimate 100 ‘unicorns’ have entered the billion dollar club every year since 2018. However, if the mention of unicorns smacks of fantasy territory let’s look at a more ‘diversified’ mix of outcomes in a portfolio. In particular, we want to model a portfolio reflecting some of the themes (including Spark’s risk management process) we touched upon in our first article of this series. Portfolio 3 is a mix of the following themes:

     

    Recovery: Failure of ‘asset lite’ businesses could actually deliver some recovery values due to the data base built, team domain expertise, customer relationship assets etc.

     

    B2B: Almost 70% of Spark investments are business-to-business (B2B) companies in a world where corporate VCs (CVC) are increasingly active eg Google has acquired more than 200 start-ups over the years.

     

    Taxation: Due to higher capital gains (CGT) and income tax (dividend taxation) regimes in Europe and particularly Ireland the ‘hurdle’ or exit/return expected of a young company must be commensurately higher to compensate institutional investors.

     

    Quality:  Start-up funding is, bluntly, more scarce in this part of the world and Spark probably turns down 9 out of every 10 investment opportunities. In theory, we are already investing in the top quality decile of opportunity.

     

    So, in Portfolio 3 the failure rate will be lower than previous examples (60%) and will also not amount to a ZERO return but include a recovery value of 20%. However, as demonstrated above, the key swing factor is the ‘winner’ category of investments. In Portfolio 3 we ‘diversify’ the outcomes of the surviving 10 companies with 6 actual exits. The following table outlines those outcomes across the portfolio:

     

    Portfolio 3:

     

    Clearly, diversification of outcomes and a higher number of more moderate exits does move the returns (IRR) dial. Any investor with a portfolio delivering 14.7% annual returns for an almost 4 X return on initial investment cost should be happy. Of course, these are merely estimates of the future anchored to historic data. We, like all forecasters, will get it wrong. However, it is reasonable to think a portfolio of mainly B2B assets with varying levels of maturity (along the start-up to private equity buy-out spectrum) operating in busy corporate VC activity sectors will achieve some exit success. You’ve read it here many times before… the future is private. But… there’s an additional Spark Private mantra to get to know – the process is portfolio. Private investors should build a sufficient opportunity set by holding multiple investments in a portfolio. As a small aside, this writer’s personal view is that exit valuations in the private asset world will surprise on the upside compared to even the multiples used in the portfolios above. Again, no promises!

    Writer’s Note: The above is just a basis for discussion and exploring the long-run drivers of portfolio returns. I would be more than happy to talk through our investment pipeline and deal-types with anyone interested in building a diversified portfolio of private assets over the next 2-3 years.

     

     

  • What Returns Can Investors Expect In A Private World?

    What Returns Can Investors Expect In A Private World?

    Well, I can’t promise you a future with a beachfront property in “Gaza Lago”. In fact, in the world of investing there are no guaranteed returns. As promised in our recent Private Portfolio Thoughts newsletter, I wanted to address expectations as to what long-run returns a private investor should be looking for in a portfolio of private assets.  First, let’s take a look at ‘industry standard’ expectations based on global historic data compiled by research house, Pitchbook. Of course, these are just averages and no doubt are ‘skewed’ by supra-normal returns for a small number of successful funds in each asset class. However, the table below gives an approximate guide to expectations over various time horizons and types of investment.

     

    The Spark focus is probably towards the top of this table summarising 5-year and 10-year returns for private equity (PE) and early-stage investing through venture capital (VC). However, if we strip out debt and real asset products the double-digit (%) performance picture is pretty similar across the board for private assets. The annual rates of return (IRR) implied by the performance of these private assets (in aggregate) are 13.4% over 5-years and 12.5% over 10-years.

    Let’s be more conservative and suggest that portfolios of private assets after 10 years SHOULD have grown in value at a rate of 12%. In real terms (and compounding those rates of return) that equates to an initial investment of €10,000 growing to €31,000 over 10 years. For context, a fund with publicly listed equities would be expected (by financial planners) to generate 7% returns per annum and thus turn €10,000 into €19,600. Of course, the extra return earned by the private asset portfolios is the compensation required by investors for the higher risk exposure(reduced liquidity, business failure) compared to the shares of large established businesses trading every day. These return numbers (based on history) can be described as “hurdle” rates which investors are expecting to match or beat in order to justify putting their capital at risk over long periods of time. So, let’s apply some hurdles to our world of very young companies (VC) and small businesses (private equity).

    We know that the industry standard in more mature private capital investment strategies is looking to turn €10,000 into something north of €30,000 over 10 years. We might describe this as an expectation to generate 3x your initial investment amount. Arguably, for higher risk investments in our earlier-stage world, investors could expect/demand an even higher return for their portfolios. If investors wanted 4x returns or €40,000 after 10 years that equates to a 15% annual return which is what private equity strategies have achieved(see table). So, that expectation is not unreasonable. But…. how realistic is it in a high risk portfolio of mainly early-stage business failure? We should touch on the key ‘push backs’ we get from investors who are wary of investing in start-up businesses or smaller private equity deals. The following are the most common perceived wisdoms….

     

    “80-90% of start-ups fail”

    “ Exits are more difficult as IPO markets for smaller companies have struggled”

    “I can just buy publicly listed equities and earn similar returns”

     

    There is an element of historic truth to all these statements but I’m going to use the most dangerous words in the investing lexicon by stating “this time it’s different”. First, the history of start-up failure should take into account the characteristics of older vintages of businesses. Let’s think about old economy businesses investing heavily in premises, equipment, overseas expansion facilities, logistics etc. These are, in most cases, “sunk costs” in capital-heavy businesses. Inevitably, if the business gets into trouble these ‘assets’ are not just worthless but can have an actual negative value due to ongoing liabilities/leases, maintenance costs, security, insurance etc. Now, think about many of today’s “asset light” businesses leveraging digital infrastructure and building value through the experience of the founders/team, the data gathered by the business and the development of relationships with clients and partners.

    These businesses don’t have the same level of sunk costs/liabilities (as old economy businesses) which can swamp the value of the operational “franchise”. Instead, the value within a business which might not be meeting growth targets can be recognised by a third party and lead to another form of exit which doesn’t involve liquidation. In the Spark portfolio we have seen a number of businesses acquired by third parties in the same sector in exchange for shares in the acquiring company. These shares clearly have a value and also change the traditional calculations around start-up failure.

    In the world of debt/credit one of the key financial terms/metrics is historic “recovery value”. In main street terms, this is the typical expected percentage of the debt which can be recovered when a business fails in a particular sector. You will see such sector recovery data displayed as a percentage of the debt ie 20 cents, 30 cents in the dollar. So, in the world of start-ups there is normally no debt and the equity in the business is a complete ZERO in the case of struggle or failure. But, now that’s not quite the case. If an acquiring business is offering a share exchange then the “recovery value” could by 20-50% of the original investment. And, the reason for ‘value’ being found in the business is the experience of the acquired team, the database and client relationships. This is happening on a far bigger scale elsewhere.

    Ever heard of the term ‘acqui-hiring”? This refers to a situation in which a company acquires another company primarily for its talented team or employees, rather than its products, technology, or other assets. In an acqui-hire, the acquiring company may not be interested in continuing the acquired company’s business or product, but rather wants to bring the talent into its own organization. Now, here’s another bit of jargon monoxide…. ever heard of CVC? Well, you know what venture capital (VC) does but there’s a subset of the VC ecosystem called Corporate Venture Capital(CVC). This form of VC funding is in reality larger corporations investing in smaller businesses whose franchises/technology could ultimately be relevant and value-creating for the parent company.

    So, you might think Sequoia, Index Ventures, Tiger Global and Andreessen Horowitz are the kings of VC investing. Now, think again. Amazon, Google, Microsoft and Nvidia are hugely active in the VC funding space. As an illustration, Nvidia deployed $1 billion in 50 VC funding rounds in 2024 alone. Furthermore, Google has acquired a whopping 222 start-ups over the years, and in 2023 the “Magnificent 7” tech stocks participated in 208 VC deals. So, the IPO market might not be as start-up friendly as in the past but Big Tech certainly is stepping up to the plate as a new and highly active exit event option.

    Of course, there will always be those investors who believe they can earn approximately similar returns to private asset strategies by choosing a selection of publicly listed companies. Yep, the likes of Domino’s Pizza, Paddy Power, Apple and Nvidia tick those boxes but there’s also an assumption investors will avoid the temptation of selling while on the multi-decade rocket ride. However, the more significant point is about business failure. Think it’s only start-ups?  Sixty years ago the average life-span of a company in the S&P 500 was over 50 years. Today, it’s less than 15 years! By 2027, almost 75% of companies who were quoted in the S&P 500 in 2016 will have disappeared (Source: McKinsey). Not for the first time, I’d suggest it’s worth a read of the excellent The Future is Faster Than You Think to grasp how fast business and technology leadership is changing.

    We can’t forecast the future. However, we should recognise that the world of start-ups today has changed dramatically. As a final illustration, start-up funding was traditionally populated by a majority of consumer-focused businesses – think retail, textiles, manufacturing, food, fashion etc.  The term “B2C” would be used to describe these business-to-consumer companies. Well, that’s changed too. Certainly, for Spark. A whopping 70% of funding deals completed by Spark have been business-to-business (B2B) opportunities. It should also be noted that our vetting process turns away approximately nine in every ten opportunities. Arguably, we are selecting the top decile of quality in the opportunity universe. No doubt we will get it wrong along the way, but this is still a robust risk starting point. And, it’s not the only starting point…

    The purpose of this article is to set the scene for a follow-up piece on how these structural shifts can impact the average private portfolio and future expectations using sample portfolios and outcomes. But always remember…. if I could truly forecast the future, “Gaza Lago” might personally have an entirely different meaning and location.

  • Still Some Golden Theme Tickets Left…

    Still Some Golden Theme Tickets Left…

    I’m going to save you some time. Forget about calendar-driven commentariat reviews and 2025 forecasts for investment or geopolitical risk. Sorry to be the “Grinch of Guru”, but calendars and structural investment themes have zero correlation. Opinion is cheap and even the betting markets are displaying their patchy predictive powers in recent weeks. Yip, just a 6% chance of the Ba’athist beast, President Assad, being toppled in Syria. About as much chance as a Chinese spy in Buckingham Palace… oh wait. Sadly, Prince Andrew is a multi-year clown car journey in particularly poor company but there’s a lesson there too. Almost all significant investment themes – risks and opportunities – are multi-year stories whose plots twist and turn but keep a very clear direction of travel. So, let’s take a look at some of the major themes we have previously visited and a few more developing ones; all with interesting plot twists.

    Europe Crisis or Opportunity: Nothing good in the headlines…..German government falls, UK in second month of GDP contraction, France on its 4th premiership in a year. But, but here’s a few twists on the negatives. The lists of where Europe lags the US is a long one, from labour productivity, to AI and innovation, to stock market performance. And yet, if you strip out the performance of AI hardware star, Nvidia, from the S&P 500 then Europe’s stock market (MSCI EMU) has actually earned better returns for investors than the US benchmark since the most recent bull market started in October 2022. That suggests there are lots of European companies doing very well despite ‘core’ European economies struggling. Check out also in recent days Spotify becoming only the second European tech company since SAP to crack the $100 billion market cap mark. The headlines do not lie but the narrative on Europe is more nuanced than you think.

    Healthcare: Another structural theme from previous years’ writings, healthcare has actually been a winning area for Europe thanks to the miracle weight-loss drugs, Ozempic and Wegovy. Their Danish owner, Novo Nordisk, became Europe’s most valuable company in 2024. However, we might be about to enter an accelerated era of therapy/drug discovery for all types of medical illness. The clue is in the Nobel Prizes awarded in both Physics and Chemistry in 2024 to pioneers of AI usage in research. Now, for those already struggling with how AI large language models (LLM) work and the warp-speed calculations of the almost-monthly iterations of these technologies, get ready for the ultimate head wrecker. Google has just developed a quantum computing chip, “Willow”, which performed a computation in less than 5 minutes that would have taken today’s fastest computers 10 septillion years to complete. Yeah, that’s 25 zeros which exceeds known timescales in physics and vastly exceeds the age of the universe. Think about that. This chip created by quantum physics “used” time which theoretically can’t exist unless…… there are other parallel universes. Google Quantum AI founder, Hartman Neven, calmly wrote that the stunning performance of this chip indicates that “we live in a multiverse”.  Maybe Willy Wonka wasn’t so wrong to say “Come with me and you’ll be, In a world of pure imagination”.

    Artificial Intelligence (AI): Arguably, the world of AI has moved in a completely different direction. The shift of investment capital away from bits (software) to atoms (hardware) has been spectacular. Another company nobody ever heard of until recently, Broadcom, has become the latest technology hardware company to join the trillion dollar market capitalisation club. The US chip maker is now one of FOUR tech hardware companies in the list of the 10 most valuable companies on the planet. Clearly, investors see AI infrastructure as the early ‘win’ in the AI arms race. However, do NOT ignore software. Interestingly, the Clouded Judgment software newsletter has flagged a 20% expansion in median software valuation multiples since mid-November (from 5.6x to 6.7x revenues). Also, Nvidia has dropped in value by 11% in recent weeks. Yes, rotation from hardware to software and back again will be a feature of the multi-year AI revolution but the venture capital data from CB Insights confirms the direction of AI travel. Global venture capital (VC) deals in AI jumped 24% in Q3 to the highest levels seen since the Q1 2022 peak. In fact, one in every three dollars of VC investments went to AI start-ups.

    Banking and Fintechs: Closer to home, Revolut has just confirmed it has more than 3 million customers in Ireland. A staggering 75% of all Ireland-based adults now use the UK fintech platform for banking and payments. Meanwhile, the US bank sector has rocketed 30% higher this year, Europe is seeing Italian banking M&A deals and the largest asset manager in the world, Blackrock, has embarked on a private asset acquisition frenzy. We have written before that the future is private and I’m wondering are big corporates thinking the same? Sticking with the fintech sector, it was striking in the past week to see the shipping/logistics giant AP Moller lead an €80m investment round for UK fintech, Zopa Bank. In the same week, we note another globally significant name, Walmart, was the lead investor in a $300m round for fintech platform, One. Hmmm….Private banking/fintech, private opportunity.

    Climate & Electrical Vehicles (EV): Apparently, 11 out of 16 EV battery manufacturing projects in Europe have been canned or delayed. Of course, the $15 billion investment in Northvolt was the highest profile casualty in 2024 but there will be other twists and turns in the electrification journey. And, possibly a lesson in long-term planning. China 20 years ago had almost zero car production capacity. Now, it is on track to manufacturing 30 million cars a year and has surpassed Japan as the biggest exporter in the world with 5.17m units sent overseas. In fact, Chinese built EVs now account for 76% of the global EV market. So, if one were to be thinking 20 years ahead again what is most likely to drive investment returns in the transport world? Well, how about not driving. More specifically, self-driving. So, I’m quietly stunned that Google’s Waymo self-driving cars are clocking up 175,000 rides per week compared to 50,000 rides 6 months ago. That’s actually more than 1 million miles of autonomous transport delivered with an almost flawless safety record. I sense 2025 could see self-driving transport go mainstream and, as I write, Waymo have announced they are about to trial robo-taxis in their first non-US city, Tokyo, next year.

    The list of themes above is not exhaustive but they are structural themes measured in decades rather than calendar years. These are the most likely golden tickets to deliver standout returns like Nvidia’s 27,000 % return over the last 10 years. But, as always, we should keep an eye out for reversals of long standing narratives too. Argentina might be the prompt for contrarian thought while on track to deliver the best stock market returns of 2024. Who knew! So here’s two thoughts to chew over for the festive season: i) A European refugee reversal as Syrian and Ukrainian citizens potentially return home in 2025 and ii) A renewed embrace of nuclear power/investment to drive the electrification of the global economy.

    “Oh you should never, never doubt what nobody is sure about”         –   Willy Wonka

     

  • 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…..