Alternatives: of Unicorns and Real Asset Values
Blain’s Morning Porridge June 5th 2024 – Alternatives: of Unicorns and Real Asset Values
“He was an alternative musician in the sense of being unable to play any instrument, hold a tune in his head, or sing a single clear note – naturally he was hailed a genius.”
The amount of “dry powder” earmarked for the Alternatives Market is said to exceed $4 trillion. While the sector continues to attract new money, the competition for deals should be rising – in fact finding good deals is more difficult as economic conditions remain tight and impose funding discipline.
This is a two bowls of Morning Porridge morning. I rushed out a reaction to the UK Election Result earlier. And now the main course – a diatribe on the Alternatives Markets.
In the next few weeks I am going to be launching a new Newsletter: Blain’s Alternative Market Digest.
It will be a monthly, perhaps eventually weekly publication, looking at opportunities in the Alternatives markets. It will be available free on the Porridge Website to all Gold and Silver Porridge subscribers – and will be sent to clients of Wind Shift Capital, my alternatives focused business. If you have colleagues in Alternatives, send me their details and I will copy them in on the Alternative Digest.
For the last 15 years I have spent my days striving in Alternatives to provide clients with advisory and financing services on private capital markets. I find it fascinating as I struggle to figure out what deals will work, why they might not work, what its’ worth, and try to attract investors with deals I figure they might be interested in. Over time I’ve pitched multiple real economy deals; financing property, plant, infrastructure, property, assets like aircraft and ships, and exciting new firms, in private equity and private debt formats.
Were you aware the collective noun for a herd of Unicorns is a “blessing”. (You learn something every day on the Morning Porridge!) Yesterday, while desperately trying to educate myself of the drivers and risks of investment into a particular sector, I uncovered some fascinating data on Pitchbook about Unicorns:
There are currently 1401 unicorn companies founded since 2016 – startups that raised a round with post money valuation of more $1 bln – that are still worth more than $1 bln. According to Pitchbook, nearly 8% of new firms that attract Venture Capital (“VC”) funding will grow the sharp, pointy unihorn required to join the blessing.
My next challenge is to find a list of all the broken-horned unicorns that are now worth less, and do a compare and contrast to work out what worked and why what didn’t…. didn’t! Today the most valuable Unicorns are Stripe, ByteDance, Ant and SpaceX. But for every one of these there are hundreds of slower growth or expired firms.
Today’s unicorn “blessing” has been funded through some $800 bln of venture capital money. These companies are now worth $4.4 trillion, a remarkable $3.1 bln per firm. On these numbers, Unicorns are broadly 4-Baggers! Discount that by the 8% of firms that make it, and VC is still a notional 33% return business. You can see why there is plenty of cash allocated to the sector.
The number of unicorns is a clear hint Venture Capital enables value creation in terms of financial worth, but I guess I need to check each firm individually to what they’ve actually added to the sum of human happiness and real social wealth – a very different concept to market value!
The fastest period of Unicorn creation followed the explosion of entrepreneurial endeavour in the wake of the Pandemic. Frustrated nerds, scientists, doctors and engineers emerged from Covid wanting to do something better – and get rich. (Not true: most entrepreneurs spend years entrepreneuring before all it comes together.) Those that hit the market in 2020-22 found their timing was sublime, coinciding with the easy money of pandemic support, stock markets rejoicing their way upwards as the global economy reopened, and the suspension of disbelief among investors who believed sincerely in the everything rally.
In December 2021 the White-Hot stock market propelled 70 firms to unicorn status. Over the 18 months from November 2020 to March 2022 the market created 868 unicorns, or 48 new $1 bln companies each month! It was a feeding frenzy.
Sadly, unicorns can prove unhealthy beasts. Many aren’t with us today, having tumbled into the Darwinian selection machine of zero value SPACs, firms that attracted enormous valuations but zero profits, or creating high value products for twice the price of already better products – witness the Plant-Based Protein firm selling meat-burgers on the premise they were as good as Micky-Dees but cost three times as much. Da-dah… daaaaah…
Conditions started to tighten from March 2022 after Russia’s invasion of Ukraine triggered the energy spike, inflation and rising rates. Even though public stock markets now stand at record levels, over the last 18 months the number of newly minted Unicorns has tumbled to 206 firms, or 11 per month – a 76% tumble in unicorn creation! Should we stick them on a WWF extinction threat list?
The slowdown suggests the VC/PE landscape has fundamentally altered, illustrating how the big “multi-bagger” returns from venture capital have become more challenging. Moreover, over the past 6 months we’ve seen the emergence of some 22 AI unicorns, 12 FinTecs, 7 SASS, 6 ClimateTecs, 5 Heathcare, 4 Bitcoin/Blockchain, 2 PropTecs, and 7 “others” including something so historically quaint as to be described as E-Commerce!
Which came first: VC to AI, or AI to VC? The numbers highlight that VC is an industry that follows as much as leads the trend – everything AI has been a winner since Chat GBT. In contrast there hasn’t been an agri-business/bio-engineering unicorn in a couple of years.
Perhaps the reason the pace of unicorn creation is falling is, perversely, the amount of cash directed at the market. A US investment bank reckons there is some $2.3 trillion of “dry powder” targeted at alternative opportunities including VC, (PE and Private Credit are outwith that number – a further $1.6 trl), and as we all know the cost of unused money is painfully high when rates are back up at 5%! It encourages people to use it or lose it. The bank says this is contributing to “dynamic change in more constructive markets..” which I think means VC firms have once more got their wallets out.
(The investment bank in question shall remain nameless. Not because their research information is proprietary, but I discovered recently the same firm cut, copies and pastes the Morning Porridge all around their analyst floors. In proper Hans Blix style I thinking about sending them a very angry letter telling them how angry and I am, while offering them a very reasonably priced gold membership allowing them to give it every single employee at a very cheap rate.)
From the “do I enjoy my job perspective”, Alternatives work for me as they are an excuse to constantly learn new stuff – largely on why some deals work and others don’t, and how different asset classes are from each other. One seldom mistakes an Airbus 350 for a new piece of remarkable MedTech surgical sewing kit – each have completely different risk profiles, yet both might be part of a diverse alternative investment portfolio or attract their own ecosystem of well-informed investors. They each represent real risks from the real world!
In the past I became a minor-go-to-figure in aircraft financing after figuring out what distinguished good from bad deals! I spent what felt like a thousand years traipsing round the Middle East trying to finance a Petrochems project – only to see it stall in an ocean of bureaucratic gloop. At the moment I’m working on a number of MedTech deals which means I’m having to educate myself on a whole new taxonomy, recognise and identify a whole new suite of risks and regulatory pitfalls, and introduce myself to whole new universe of specialist investors, who know much, much more about how quickly medicine and healthcare is evolving.
Over the years I’ve seen the market balloon for our first hesitant steps to persuade some credit funds and real money funds (pension and insurance firms) to buy unlisted deals, off-market asset backed securitisations and replace banks as the main lenders to the property sector – persuading them above market returns compensated for limited liquidity. I went out and preached the gospel of Alternatives to anyone who would listen. It clearly worked; today everybody is an expert on alternatives.
What has driven it’s growth? Pretty much the same thing as created the bull markets of everything…
Cheap and plentiful money in the QE era – is now a more sober, mature market,
The increasingly regulated investment rules and reporting requirements surrounding listed products,
The rein-back of bank lending through increased capital requirements,
The increasing scarcity of public assets to buy, and.
The above market returns achievable in private capital markets
Sadly, from a renumeration perspective… Alternatives are not what they used to be. They aren’t so alternative anymore. The big banks and the big funds are in on the game, dominating the business flow. They are pushing small players like myself to the sidelines. There are large clients who won’t take my call anymore: “sorry Bill, we’re only dealing with the 5 largest firms, we don’t have “bandwidth” to talk to you.” (The traditional 80/20 rule: the top 20% of any market will do 80% of the business.) Others tell me my deals are too small.
The alternatives market is struggling with higher interest rates – when money was cheap it was easier to justify more frothy, speculative, hope-and-a-prayer plays – and the realisation real world assets are determined by the real world: inflation and higher rates diminishes discretionary spending, crushing return models. However, that creates discipline and makes deals better, knowing the funding is more difficult.
Now the market is normalising. Expectations are grounded in the new reality of rates likely to remain higher for longer. With the scale, scope and width of the market, I reckon there will always be room for independents with insights, ideas and the right deals. If not, then I guess my wallet will soon find it out..
If you want to talk or learn more… you know my email..
Out of time and back to the day job…
Bill Blain
Author of The Morning Porridge
Wind Shift Capital