Gravitas Spark CrowdFunding

Tag: technology

  • A Few Pictures Of Promise

    A Few Pictures Of Promise

    So, despite all the scary headlines and genuine bad-actor or bad-bot risks, artificial intelligence (AI) now officially rules the financial world. Nvidia, the AI chip superstar, is now worth a staggering $3.327 trillion and has overtaken Apple and Microsoft as the most valuable company on the planet. Or to put it in simple futuristic terms, investors are expecting greater returns from this company over time than from any other company operating today. To quantify the sheer scale and speed of the change in expectation from investors, let me paint a slightly different picture. Just over 3 years ago in March 2021 the market value of Nvidia was just $330 billion. So, in just over 3 years financial markets have changed their view of Nvidia’s future by $3 trillion. Wowzers. Now, in the spirit of changing views, allow me to present a few more pictures which promise better things than current headlines might suggest.

    The perception and headlines written post the recent European elections would suggest Green/climate candidates suffered setbacks and populist near-term promises won the day. Indeed, closer to home, Green Party leader, Eamonn Ryan, has decided to step down. A rushed analysis might suggest voters have decided that climate crisis policies have stunted growth and opportunity. However, the following chart from the Financial Times using World Bank data suggests reducing carbon emissions can be achieved, or can be ‘decoupled’, while countries’ growth trajectories diverge in a positive way:

     

     

    Another area perceived to be struggling with our ambition to decarbonise the global economy is electricity. In our last article we certainly identified a significant need, and worrying potential shortage, for critical metals like copper to assist the electrification of economic activity. However, a more encouraging perspective might emerge from an unusual source. China gets bad press on coal, pollution and environmental damage but its electricity story is a global leader. The excellent writer, Noah Smith, has pointed out that China is miles ahead of every other country and could arguably be described as the world’s “first major electrostate”.  The next chart or picture doesn’t lie and is based on data from sustainability research group, RMI:

     

     

    Perhaps, China is a good example of how countries or regions can gain a laggard reputation but can then become a leader. For example, Europe’s productivity growth has lagged the US for almost 2 decades. Incredibly, the GDPs of the US and EU were roughly the same size back in 2008. Today, the US economy is 44% larger than that of the EU. The productivity story in this Financial Times graphic is pretty stark and uses LSE Group data:

     

     

     

    Clearly, the digital revolution has been a big factor in that productivity divergence. However, it’s more nuanced than just digital adoption. Bluntly, US capital backed its entrepreneurs and its flagship digital leader companies in a big way, and in frustrating contrast to a more risk-averse European business and investment culture. It’s not just a finance thing. The US became the coding and software capital of the world. Software developer talent was paid extremely well, were encouraged to create more products and became the rock stars of the US economy. So, would you be surprised to know that the US now employs fewer software developers than it did in 2018? This chart from ADP Research might surprise….

     

     

    Then I read an interesting piece from the excellent Angular Ventures VC newsletter this morning and started to think some more. The newsletter cited a recent post written by Chris Paik at Pace Capital which has raised eyebrows in the tech world. The title alone was provocative.. “ The End of Software”. He reckons AI and large-language-models (LLMs) are driving the cost of software downwards like content creation in the early 2000s. He concluded with the punchy view, “Majoring in computer science today will be like majoring in journalism in the late 90’s.” Ouch. Angular Ventures’ David Peterson can see some merit in Paik’s view on the direction of software travel and paints the picture succinctly:

     

    “It’s uncontroversial at this point to say that LLMs are surprisingly good at writing code. Is the code as elegant or performant as the code written by an experienced software developer? No. Could you ask an LLM to write a custom piece of enterprise-grade software? Also, no. But even today LLMs are good enough to empower non-technical people to write small snippets of code – tiny, trivial, seemingly insignificant lines – to solve problems which they previously thought impossible to solve by themselves. And that is more meaningful than it seems, because it has the potential to shift the clearing price of software itself.”

     

    My own thinking is still evolving but I do believe Europe and its productivity stagnation might now be an opportunity. That might seem a little bold but the AI talent race is looking good for Europe. In turn, innovative applications of AI in the European economy could close the software and productivity gap with the US. A recent report from VC Atomico on “The State of Tech” states that Europe has more AI talent than the US. Here’s the encouraging picture:

     

     

    Again, the headlines might suggest the US is leading in the AI race but the talent story will be a critical driver of future growth rates. So, lots to think about and, whether it’s electricity, carbon emissions, AI or productivity, readers should be keenly aware of the dangers of chasing rear-view mirror headlines. The data and charts can paint an opportunistic picture not seen by the headline writers. As a final thought, and an illustration of change, the Nvidia $3.3 trillion valuation mark prompted me to look at other historic charts and ‘beginnings’. So, here goes….. Nvidia’s current market value is roughly the same ($3.5 trillion) as China’s entire GDP as recently as 2007. China’s economy today is worth $18 trillion.

    Keep looking at the big picture…

  • Mr Copper To Sing Again?

    Mr Copper To Sing Again?

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

     

    Massive copper shortage on the horizon –  The Week 

     

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

     

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

     

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

     

    Copper shortage threatens EV transition – DPA Magazine

     

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

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

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

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

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

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

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

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

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

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

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

    D-Day Lesson For These Roaring ’20s?

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

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

     

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

     

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

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

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

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

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

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

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

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

  • Watch Out For A New Wealth Wave

    Watch Out For A New Wealth Wave

    AI superstar stock, Nvidia, has just reached a valuation of over $2.75 trillion. That exceeds the value of the entire German stock market. How about the combined value of IBM, Tesla, Facebook, AMD, Netflix and Intel? Yup, that’s what happens when a share price clocks up a 1,000% return since 2022. And yet, those “combined” companies listed all have an AI story too. In fact, I have seen data indicating that 179 of the S&P 500’s constituent companies referenced AI in their recent quarterly analyst results’ calls. So, is AI the only game in town? We think not, and then we found a striking headline…..

    Hargreaves Lansdown rejects £5 billion bid from PE consortium –  Financial Times

    What’s the big deal? It’s not even a big deal. I mean, Nvidia just increased in value by $150 billion over a few hours on NO company-specific news. Allow me to expand. Or should I say converge….?  For those readers unfamiliar with Hargreaves Lansdown, the company is an investment platform serving 1.8 million UK-based clients with a combined £150 billion of wealth assets. However, what really caught the eye and what should resonate with regular readers is the convergence of four distinct themes we have written about in recent months:

     

    *The PE in the headline stands for ‘private equity’ and we are expecting stable or falling interest rates to prompt an increase in buy-out deal activity.

     

    *The rapidly increasing weight of private (not publicly listed) assets in high-net-worth investment portfolios. Research data from Pitchbook reckons private assets could reach a total value of $20 trillion by 2028.

     

    *The UK might be in the middle of the worst election campaign by any governing party in history but investors are beginning to look past the Tory party meltdown. UK companies are cheaper than similar companies in other markets and investors see opportunity and dinghy-free sanity ahead.  

     

    *We have highlighted the potential of ‘old economy’ companies in neglected areas of the market beginning to show signs of a new life. Specifically, we flagged a huge merger deal in the mining sector, the US bank sector actually outperforming technology this year and breaking news of an agreed £3.57 billion buy-out of the Royal Mail by a Czech billionaire.

     

    So, of course, we are intrigued by potential private equity interest in a cheap UK old economy financial services company. However, it’s a bit early for thematic victory laps. It feels like there is more going on than opportunistic feasting on cheap UK assets. Indeed, our curiosity is focused on the sudden appeal of wealth management businesses. Deal activity has been building steadily with Canada’s RBC buying Brewin Dolphin, private equity house Pollen Street swooping for Mattioli Woods and US bank Raymond James acquiring Charles Stanley. Other mid-size UK wealth operations like Quilter, Brooks McDonald and St James’s Place will likely feature in additional media buy-out speculation. This might appear like a simple consolidation trend in a fragmented sector plagued by digital, regulatory, capital, pricing and demographic/behavioural challenges.  In deal jargon this could be described as ‘defensive M&A’. Or, that description could be just plain wrong. What if there’s a new opportunity in wealth management? I can think of two significant drivers right now:

     

    1. We referenced the explosion of private investment assets to $20 trillion by 2028. The good news for investment platforms is that fees on private investments are higher than publicly traded assets given they cannot be traded on a stock exchange in a nano-second.
    2. AI, and Nvidia in particular, is investing in the processing power required for these large language models (LLMs) used to train AI applications. However, there’s a basic component of AI that every business leader, regulator, customer or user will tell you is critical – robust data.

     

    Thanks to years of onerous KYC(know your client) and AML (anti-money laundering) compliance, it is reasonable to conclude that the wealth management industry must be in possession of some of the most accurate and high-value/personal data on the planet. Whisper it quietly but blockchain and digital currency(crypto) technology are also staging impressive comebacks in 2024. We often write about the compounding effect of the convergence of new technologies and I’m wondering if a faltering wealth management industry might be on the cusp of increased revenue opportunities in private assets and reduced costs through AI, blockchain, digital assets, tokenisation etc. Even those companies considered digital leaders are revving up their curiosity. Only this week in Dublin, Revolut’s chair, Martin Gilbert, and founder of Aberdeen Asset Management admitted that a move into asset management by the fintech platform was a possibility – “It’s something we talk about a lot”.

    Expect lots more talk on investment desks in London and Dublin too. On days like today, I miss those desk chats…. and the laughs, lots of them.

    Mark “Dicey” Reilly RIP

  • Market Bulls Shopping in China?

    Market Bulls Shopping in China?

    Well, this is awkward. Perhaps the only fully bipartisan view in Washington these days is that China’s economic influence needs to be curtailed. The Biden administration has just announced further Chinese import tariffs and the push to decouple from Beijing’s giant manufacturing machine is in full swing. Thanks to the Bidenomics IRA and Chips Acts, a wave of multi-billion dollar projects in cleantech (EV batteries, renewable energy etc) and critical computing technology (AI chips, fab construction etc) have landed in the US. Arguably, Europe is on the homeshoring case too, particularly in the EV and cleantech areas. However, while the world focuses this week on the current ‘big shiny thing’ in the guise of AI – and pending results from its $2 trillion poster child Nvidia – the more significant global economic story right now is probably China.

    You might have read headlines about Chinese electric vehicles piling up at ports around the world but there’s much more going on. Chinese export surpluses are exploding as global markets are flooded with not just cars but steel, chips, solar panels, clothing, machinery and many other manufactured goods. It feels like the Beijing regime is compensating for a debt-slowed domestic economy by ramping up its manufacturing and export efforts. Check out the following data points:

     

    *Chinese steel exports in April amounted to 92 million tons, up 16%.

    *Chinese car exports reached 417,000 units in April, up 38%.

    *Chinese aluminum output hit all-time highs in recent weeks.

    *Chinese exports of key cleantech items – batteries, EV cars, solar panels – hit $150 billion in 2023 by growing 20%.  

     

    In fact, despite decoupling attempts in the US and official ‘dumping’ complaints from the EU, China’s current account surplus is at all-time highs powered by exports worth more than $3.5 trillion. One might presume the impact of flooding markets with cheap goods would be deflationary but that ignores the sheer scale of domestic Chinese consumption. It also ignores the reality right now in financial markets. I would highlight three markets in particular:

     

    1. Commodities markets: Copper, iron and zinc prices have jumped by 10% in the past 30 days. Copper has actually clocked up a 30% gain in 2024 alone.
    2. Chinese stocks: Despite US tariffs, banking debt issues and a moribund domestic economy the benchmark stock market, the Shanghai Composite Index, is up 7.6% this year after 3 years of negative returns. In Hong Kong, the news is even better with a 15% gain after 4 painful years of losses.
    3. German stocks: You’d think they’d learn but, fresh from a painful Russian energy dependency experience, Germany’s industrial base is perceived as heavily exposed to China’s economic activity.  That strategic risk is for another day’s discussion but, for now, investors are buying German shares and driving the DAX benchmark to all-time highs.  Arguably, a China ramp up of activity is helping investor sentiment towards German stocks.

     

    There’s a part of me wondering has China become too big and therefore nobody else can compete with the scale and unit costs of their manufacturing base? It’s probably too early to jump to conclusions and the domestic property debt unwind has a long way to go as Japan financial historians will attest. However, there is clearly a Beijing long-term strategy in play now. I would highly recommend the recent article from Noah Smith as to potential current Politburo thinking but these three thoughts stood out for me:

     

    *China wants to dominate and be the ‘world’s manufacturer’.

    *China is balancing overproduction and a weak consumer with a compensatory export ramp up.

    *China is preparing its manufacturing base for flexibility and the capacity to switch to war production mode.

     

    The final strategic explainer is more than slightly concerning. So, let’s not over-hype the significance of Nvidia’s results this week. The AI revolution and Nvidia, as barometer of that manic race to technological superiority, is almost irrelevant if China is putting itself on a war footing. On a more upbeat note, the upturn in Chinese economic activity could be the beginning of a significant global economic recovery and a rotation away from technology into ‘old economy’ assets. Regular readers will recognise that thought from previous writings here. Of course, that broadening out of investor confidence will help bulls, portfolios and pensions in the near term but not even the best generative AI model can really tell us what China wants to do in the long run. And remember, the Russian bear experience is that we should probably believe what we are seeing.

     

     

  • Warning: 3 Zones Of Interest

    Warning: 3 Zones Of Interest

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

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

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

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

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

     

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

     

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

     

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

     

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

     

  • Investors Need The Old Economy Too

    Investors Need The Old Economy Too

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

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

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

     

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

     

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

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

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

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

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

  • Another Heroic Age Begins…..

    Another Heroic Age Begins…..

    I’m nervous. My trip to the Park Hotel Kenmare this week isn’t quite in the league of those heroic voyages chronicled in ancient Greek mythology, but the dress code request on the invite pumped the pulse rate for a moment. Just a moment. The invitation to recreate the year of the hotel’s opening in 1897 in a gathering of mostly creative types (after momentary panic) seemed like an opportune way to ditch my far-from-hip personal wardrobe and embrace Victorian disguise. Party on, but still I’m nervous. I have this nagging feeling that the years 1897 and 2024 might have more in common than we’d like to imagine. Indeed, Mark Twain would say the years and risks are rhyming.

    The Thirty Days War of 1897 between Greece and the Ottoman Empire (Turkey) was hardly a century, or even decade, defining event whereas the current war in Ukraine is generationally significant for Europe. Furthermore, the first border-to-border direct attack by Iran on Israel in the past week could, left to escalate unchecked, threaten the planet with warfare of global dimensions. Neither of the current conflicts will necessarily snowball into multi-country warfare, but 1897 starkly demonstrated how military alliances fracturing under pressure in local skirmishes can lead to tragic global outcomes.

    Just before the Greco-Turkish War broke out on the mainland in 1897, there was an intervention made by The International Squadron, a naval flotilla formed by the ‘Great Powers’ of Europe (UK, France, Italy, Russia, Austro-Hungary, Germany) to address a rebellion by native Greeks on the island of Crete against rule by the Ottoman Empire. Apart from being a precursor to war on the mainland, the Cretan intervention ultimately led to strategic disagreement followed by Germany and the Austro-Hungarian Empire withdrawing from the International Squadron. Only seventeen years later the same Balkan region erupted, and those two nations formed the Central Powers alliance with Bulgaria and the Ottoman Empire to fight the Allied Powers in World War I. So, fast forward to today and it’s not difficult to spot the strains in geopolitical alliances as they confront the following crises:

     

    Ukraine-Russia: European members of NATO bordering Russia are terrified by Ukrainian funding (frozen) being used as a partisan political chess piece in an increasingly dysfunctional US Congress. How long before Poland asks for, or sources, its own nuclear deterrent against Russian aggression….?

    Israel-Iran: Clearly, hundreds of missiles launched directly against Israel by Iran is a worrying first-time development in the traumatic history of the Middle-East. However, the co-ordinated defence of Israeli and neighbouring airspace by a coalition of US, UK, Jordanian, UAE, Saudi and Israeli forces could be considered a relatively surprising show of unity between Allied and Arab nations. Less encouraging is the horror of Gaza, and European countries (and the UN) looking for the US to pressure Israel’s leadership into a more humane approach.

    China-Taiwan: The potential collapse of munitions-starved Ukraine is not just terrifying eastern European nations. The perception of ‘abandonment’ of Ukraine by the US has massive European and NATO implications, but will also reverberate through Asia-Pacific island nations watching China’s moves on Taiwan. It is no surprise to see high profile visits from the leaders of Japan and the Philippines to Washington in recent weeks. However, the fate of Ukraine will be the true indicator of the strength of this trilateral alliance. And, China will be watching closely.

     

    Arguably, the timing-fuse for the potential explosion of any of the above crises is going to be a lot shorter than 1897’s seventeen year WW I burn. So, do we panic or seek inspiration? Geopolitical leadership, frankly, is lacking courage or heroes right now. However, dig deeper into the history of 1897 and that year’s other claim to historical significance was its status as the beginning of the last “Heroic Age” and lasted until 1922. This 25-year period saw 17 pioneering Antarctic expeditions launched from 10 different countries, but the Antarctic was not the only study subject enhanced by these expeditions.

    The methods of expedition commanders like Robert Scott, Roald Amundsen and Ernest Shackleton have been the subject of many academic studies and have provided a uniquely pure window into different leadership approaches to life or death decisions under extreme conditions while cut off from the outside world. Geopolitical anxiety aside, I am increasingly optimistic that the stars are aligning for another Heroic Age. So, who are today’s heroes and where is the 2024 unexplored equivalent of the Antarctic? More importantly, can these exploits alter the geopolitical direction of travel?  I have three pioneering hopes.

    Space Exploration: The brilliant George Mason University economist, Tyler Cowen, asserted more than 10 years ago that the US economy had been in a long productivity stall since the early 1970s. He referred to it as The Great Stagnation and this appears to have coincided with the suspension of genuine space exploration in the form of manned lunar landings since 1972. Undoubtedly, the space race of the 1960s accelerated many technological developments so I’m wondering will the renewal of manned space voyages to the moon (Artemis II) and Mars trigger global progress in remote services and activities. Consultancy group, McKinsey, have estimated the space economy will be worth $1.8 trillion by 2035. So, that’s almost like finding another Brazil with lots of new investment capital driving innovation. Think tele-health, agriculture, communications etc. Space exploration also remains a beacon of hope for collaborative endeavour – see the International Space Station (ISS) as a continuing example of cooperation between Japan , USA, Russia, Canada and the European Space Agency.

    Artificial Intelligence (AI): We have written many times about the urgent need to defend The Truth in a digital world overwhelmed by misinformation and bad actors at a corporate and sovereign level. So, it might seem strange that Artificial Intelligence (AI) could be part of the solution. A quick glance at any media headlines would suggest AI will be in the vanguard of misinformation rather than authenticity. However, I am struck in my day-to-day investment role by the number of recent AI applications which focus on one area and also could be a very profound instrument in the discovery of truth. The latest AI focus is video. We know Gen AI tools like Chat GPT or Gemini can be used to deliver super-quick summaries of large volumes of text from market analyst research to autobiographies to business plans. But, now hours of video can be analysed and checked in minutes, even seconds. So, imagine a future screen broadcast which is actually two screens, and the second screen is not a betting or chat platform. The broadcast could be Liz Truss, Donald Trump or Vladimir Putin in full delusion mode and the second AI screen could fact check (or just show previous contradictory video footage of same speaker) and alert viewers to misinformation. My hope is that real time credibility checks could be incredibly powerful in exposing populist charlatans and assisting truth discovery.

    Healthcare: Every week we read about new therapeutic discoveries using gene editing (CRSPRS), cell therapies (CAR-T), mRNA vaccine platforms, neural implants(Neuralink) or even drug manufacturing in space using micro-gravity(Varda). Healthcare remains a challenge for all governments and the recent memory of the Covid-19 pandemic should be an inspiration for further research co-operation. Recent news headlines on WHO worries about H5N1 bird flu mutations will likely focus minds and provide a potent reminder that viruses don’t stop at disputed historical borders. Indeed, a government closer to home looks like it will lose power despite delivering best-on-planet economic performance. Why? Ireland’s government coalition didn’t do enough on the health (hospitals) and safety (homes) of its citizens. You would have thought focus groups and polling research might have picked up on that genetic human instinct……to live. Politics, eh.

    So, maybe nothing much has changed since those courageous expeditions trudged across an unforgiving continent all those years ago. As a species, we are probably still driven by the same three things: discovery of new worlds, the truth, and survival. Clearly, success in these pursuits can be shared and, in turn, bring humanity closer together. So, I’m not sure this vision of our future requires heroic optimism, but we could definitely do with some leadership. And…. I’m sure the ghost of Tom Crean would have some wise Kerry thoughts this weekend on where it can all go wrong.

    P.S. The dressing up worked out, the creative crew were fantastic company, and the hotel is wow….!

     

  • Countdown To Trend Exhaustion…?

    Countdown To Trend Exhaustion…?

    It’s day 96 of my 100-day no alcohol challenge, so who’s counting? I’m certainly not exhausted. Quite the contrary, but recently I have been prone to describe the benefits as “over-rated”. However, this proximity to completion does focus the mind on other things potentially ending in the world of business and investment. In particular, and by pure coincidence, in my day-to-day risk role I’m seeing some multi-year business trends begin to stall or enter new phases of growth. But, first let’s deal with a monetary shift.

    The consensus view on inflation and interest rates was that both were on a downward trajectory with central banks promising to cut rates if consumer prices were on track for a more manageable 2% annual growth. Europe seems to be on track, and the ECB just today indicated its rate cut cycle could begin in the summer. If anything, the Fed (FOMC) in the US was going to move before the Europeans, with money market traders heavily betting on a June cut. Ouch! This week’s US inflation report (CPI) caused some real pain for those traders as core CPI came in ‘hot’ at a year-on-year 3.8% rate of price increase. That’s way off a 2% level targeted by the Fed and means a significant reversal in monetary leadership as money markets now price an ECB cut in June, and the Fed to follow suit in September. That’s a big change in expectations.

    As always, the cost of money (rates) drives all financial asset prices and this ‘change’ in trend could have an immediate impact on currency markets. Watch the Japanese yen continuing to fall to a 34-year low versus the dollar and Tokyo’s stock market at a 34-year high. A Bank of Japan rate hike might be needed to stabilise its currency, but not necessarily cheered by stock market investors. In fact, the yen-dollar relationship is often used by traders as a proxy measure of ‘risk’. The trend in markets for the last 15-18 months has been ‘risk on’. In other words, asset prices have generally rallied as investor confidence grew. A shift to ‘risk off’ could hurt some of the higher flying assets of recent times. I note Goldman Sachs’ investment division is growing wary of US technology (“Magnificent 7”) but there’s another newer asset class which might also stall its impressive return to form.

    Bizarrely, this new asset class was designed and built to escape the scrutiny and influence of the all-powerful global central banks. I’m talking cryptocurrencies and Bitcoin which has quietly risen to its historic pricing highs of $72,000. However, rather than become independent of the traditional global financial system, Bitcoin has become an asset used by traders to increase risk exposure (buy Bitcoin) or reduce risk (sell Bitcoin).  So, if ‘risk on’ trends are due a pause or reversal, it will be deliciously ironic that decisions in an office in Nihonbashi, Tokyo, by Bank of Japan officials could drive the price action of cryptocurrencies like Bitcoin. However, cryptocurrencies are not the only technology asset on a serious upward trend but facing a few teething problems. The hottest investment topic on the planet right now is AI. However, like central banking, there seems to be an emerging divergence of fortunes…

    The remarkable feature of the AI investment boom, compared to crypto and metaverse, is the sheer scale of investment. It’s not just hype. Nvidia, the $2 trillion poster child of AI and manufacturer of the chips powering AI learning models, is booking real orders and reporting real 6-fold revenue growth in little more than 12 months. However, the future ‘winners’ in providing these AI services are less visible. Of course, Big Tech, with Amazon, Microsoft and Google leading the charge, are busy building or acquiring chips, talent, language models, data and technologies to win the AI race. This race requires vast amounts of investment capital and the smaller players are beginning to struggle. Once upon a time, London-based StabilityAI had raised $100 million at a $1 billion ‘unicorn’ valuation but has ended up with a CEO/founder departure, a Getty Images lawsuit, $99 million of debt and just $11m of revenues. A recent Forbes article suggested the firm had run out of cash to pay its Amazon(AWS) cloud computing bills. Clearly, the overall AI investment trend is intact but it is important to understand the nuances and risk-shifts within that structural story. Now, for an excellent example of that point.

    The simultaneous growth of global GDP and an ageing demographic has ensured a steady flow of pensions and savings capital into equity markets. This has resulted in long-run returns for investors in developed equity markets of 6-7% per annum over the decades. However, as the investment pool of retirees increases my little ‘risk radar’ is seeing a problem and a solution. Firstly, many readers will be aware of the Irish stock exchange(ISEQ) and the mighty London Stock Exchange (LSE) losing constituent companies to other major exchanges(NYSE, Nasdaq) or publicly listed companies being bought out by private capital. Only this week we were forced to ponder a scenario where the LSE could possibly lose FTSE 100 index titans, Royal Dutch Shell (move to a higher valuation US stock market listing) and BP (reports of a bid from Adnoc, Abu Dhabi’s national oil company). From a simple numbers perspective, the investment opportunity pool on a public market/exchange (LSE) is not just shrinking by hundreds of billions (in market capitalisation) but also potentially losing two of the 5 biggest income generators (dividends) for pensioners in the UK. That’s a problem. Now, the solution.

    Jamie Dimon, CEO of JP Morgan, in a recent CNN interview highlighted the same problem; at its peak in 1996 the US had 7,300 publicly listed companies. Today that number is 4,300. However, like AI, investment capital might just have shifted into a different corner of the same opportunity pool. In fact, it has. The number of US companies backed by private equity firms has grown from 1,900 to 11,200 over the last two decades (Source: JP Morgan). So, the solution for investors is to expand their investment horizons into private equity funds, private buy-out deals, EIIS investments etc. Until incentives are improved for companies to go public (regulation, quarterly reporting burdens, costs, PR etc), this public-private shift will continue and investors/pensions will have to find opportunities and income/dividends in private companies. Bluntly, the future is bright, but it’s private. And, it is no accident that Spark Private Portfolio investors are currently being offered an exclusive opportunity to expand their portfolios into an interesting private healthcare buy-out deal. Unsurprisingly,  the most valuable private companies right now are very much looking at the future – check out Open AI ($100 billion ) and SpaceX ($180 billion) – but what about that other Musk combination of new tech and transport, Tesla?

    Tesla’s 30% share price decline in 2024 might be perceived as a Musk-specific governance issue but the entire electric vehicle sector (EV) is encountering some growing pains. Check out these headlines:

     

    EV Sales Revved Up. Now Buyers Are Pumping The Brakes – Barrons

     

    Ford to delay rollout of new electric pickup and SUV as EV sales slow –   The Guardian

     

    China’s first quarter EV sales growth slowest in a year –  Reuters

     

    As the benchmark player, Tesla’s poor recent results and actual year-on-year sales decline in the US prompted the commentariat to quickly ask whether this was an EV market blip or something more structural. From this Dublin desk, and a country with an abysmal track record on timely infrastructure modernisation, it looks like the charging infrastructure (not enough charge points on routes) for the EV revolution is due some catch up globally. In particular, US consumer surveys continue to cite charging/range anxiety as a factor. More short-term factors probably include high interest rates (falling soon?), consumer expectations of continued manufacturer discounting and new super-cheap Chinese alternatives. This all sounds very familiar to long term observers of global durable goods manufacturing cycles, and with so many companies investing to win the EV landgrab, there will be casualties among manufacturers. Just ask the computer chip industry. In fact, that industry gives us a chance to conclude on a positive note.

    If anyone doubted the Bidenomics manufacturing revolution in the US, then this week was seismic. Taiwan’s chip manufacturing giant, TSMC, confirmed an expansion of its capital investment in the electoral swing-state of Arizona. The new TSMC investment number is $65 billion compared to an initial plan of $40 billion and will result in 3 chip factories being built in the state. Critically, a mix of US government grants and loans offered to TSMC will add up to a whopping $11 billion of investment incentives. That’s great news for Arizona, albeit TSMC might have to plan for male-only recruitment. It looks like the AI chips of the future will be built in Arizona, but the state’s Supreme Court is definitely searching for the past. In imposing a total state-wide ban on abortion this week, the state’s highest court had to travel back in time to revisit supportive legal text in the statute books from …..1864. Now, that is exhausting.

  • Buying Privately Begins To Work Out

    Buying Privately Begins To Work Out

    So, Adam Neumann wants to buy WeWork out of bankruptcy, and Don Poorleone is apparently a billionaire again. Yep, the Donald’s social media platform, Truth Social, has cracked a $7 billion valuation by moving from the private market to listing on a public market, the Nasdaq exchange in this instance. Amazingly, this valuation is based on annual revenues of barely $3 million and operating losses of almost $50 million. That doesn’t work for me but perhaps a Trump Bible (oh Lordy) is needed or a quick chat with Adam Neumann. Remember Adam tried to list WeWork publicly via IPO  in 2019 with a $47 billion valuation. After a nano-second of Wall Street scrutiny that valuation and IPO was pulled, Adam was removed and we eventually had to wait until 2021 for a $9 billion listing to happen. Today, WeWork is a zero. Such is life in the racy world of high-ego IPOs but there’s a positive aspect to these two shame-free deals. A healthy financing market needs buy-out and IPO activity to pick up. In particular, private markets where we focus our efforts need to see exits via buy-outs and IPOs. Happily, recent developments in both areas are encouraging and involve more credible leaders. Let’s see what’s really working.

    Sticking with IPOs as a signal of good funding health, Californian AI play, Astera Labs, rocketed up 72% on its Nasdaq debut on March 20th giving it a $9.5 billion valuation. Social media platform, Reddit, followed suit the next day with a 48% IPO bump up and a matching $9.5 billion market capitalisation. These significant post-IPO spikes in value will bolster the confidence of others considering IPOs, and boost exit valuations. As always, confidence is critical to funding activity and a giddy IPO ‘shop window’ always helps the mood. However, regular readers will know the ‘Big Daddy’ driver of financial markets is the cost of money (or investment capital). Here too, there is increasing giddiness and activity.

    Funding costs(or interest rates) reflect two things: central bank interest rates and then the extra bit (the ‘spread’ in financial jargon) added on to reflect the commercial and economic cycle risks. Well, you might be aware that central banks in most advanced economies have stopped hiking interest rates and have signalled potential rate cuts. However, the investment markets have already started to cut their add-on bit (spreads) which is a really big deal. Consider the following headlines:

     

    Junk Issuers Rush To Refinance With Spreads Lowest Since 2022 – Bloomberg

     

    Investors Pour Money Into US Corporate Bond Funds At Record Rate – Financial Times

     

    Junk Bond Sales In Sterling Surge At Fastest Pace Since 2021 – Bloomberg

     

    The term ‘junk’ refers to higher risk borrowers and is relevant to our risky world of start-ups and private equity. The headlines point to a stampede by investors to lend( through debt/bonds) to higher risk companies. In the US alone, corporate bond funds have attracted $22.8 billion of investment in the first quarter of 2024. So, this combination of greater debt availability and all-time-high equity markets attracting IPOs is the perfect environment for increased traditional private equity buy-out activity (using debt and equity). The year 2023 was one to forget for private equity deals but check out the following encouraging developments in recent weeks:

     

    Private equity firms Advent International and CVC Capital have joined forces to make a €2 billion bid for UK-based Partner in PetFood (PPF).

     

    US private equity firm Bright Path Sports Partners has bought a 40% stake in Ipswich Town football club for £105 million.

     

    Canadian private equity house, Brookfield, is looking to buy a $3 billion stake in Australia’s second largest telco, Optus.

     

    Grant Thornton US is going to sell a majority stake to private equity firm, New Mountain Capital.

     

    Switzerland-based Partners Group has launched a $12 billion private equity secondary strategy fund.

     

    Clearly, this mix of firms from different parts of the world are spotting opportunity. It is worth pointing out one more factor potentially in private equity thoughts. The headlines have been full of stories about technology sector domination of stock markets, AI euphoria and the concentration of investor expectations in a small group of US tech names, aka the “Maginificent 7”. However, with perfect timing, the Financial Times this week has highlighted “US small-cap stocks are suffering their worst run of performance relative to large companies in more than 20 years”. In fact, since 2020 small caps on average have risen by 24% compared to a 60% move by larger companies. That divergence in performance equates to a significant ‘discount’ valuation opportunity for anyone looking to buy smaller companies. So, what happens next?

    It is reasonable to expect more buy-out activity of smaller companies which, in turn, will raise expectations and valuations in early-stage companies. The trickle-down effect of buoyant public equity markets and greater access to cheaper debt will certainly attract institutional investment capital. And, the good news is that private investors can benefit too by building a diversified portfolio of early-stage companies. Even better, Spark’s Private Portfolio investors can invest in our first ever buy-out deal of an established profitable business in the coming weeks. Yep, profitable. Call it the difference between ‘working’ and WeWork. That really is the truth, and we’d even swear on a Trump bible to that.