Like many small businesses, Portico had a difficult year.

(It didn’t start off with the best of outlooks, tbh).

Covid shifted project timetables several months to the right, and it materially impacted our clients’ fundraising plans. Some projects we were working on just died on the vine.

As a result, Portico went ~6 months without a penny of cash flow, and some projects we invested scores of hours of energy in delivered $0 to the income statement.

We didn’t take out a PPP loan and dissaved from the company coffers. I think that was the right decision, but it leaves less room for maneuver and new initiatives.

One benefit of this stress test of the business was the affirmation of the need to pivot.

I’ve been testing market demand for a business in the secondary space, but a scalable business model for it remains elusive.

(Last year’s idea fell flat, even though 2020 has been a SPAC bonanza).

Candidly, I’ve been too focused on finding an incremental solution to a problem in a shrinking market, as opposed to starting from first principles and generating a novel idea in a growing market.

The upside is I’ve rectified this recently and unlocked an exciting idea that brings me energy.

One successful initiative for the year was the launch of the Portico Podcast (more below the fold). It’s been a fun experience so far, and I’ve received enthusiastic feedback, which has been nice. 

* * *

So, what next?

A few predictions for the decade ahead …

1. The Decade of Digital Assets

We are in the very early stages of migrating toward an entirely new internet — one that is open, decentralized, and contains extraordinary possibilities for the reconfiguration and exchange of value.

I mentioned Otis last year, but another example you may want to look at is the NBA’s Top Shot — an officially licensed marketplace that enables individuals to own highlight reels of their favorite players. It’s like trading baseball cards but with a globally active secondary market for cards and live transaction comps for pricing. Each asset’s fidelity, scarcity, and ownership are verified through registration on the blockchain.

There’s also bitcoin. I wrote about cryptocurrencies vs. the U.S. dollar last year. But now Morgan Stanley’s Ruchir Sharma has joined the fray. I think institutional adoption of bitcoin will happen at scale over the next 10 years. (Disclosure: long BTC).

These are just a few examples, but the digitization of assets is going to be enormous.

 * * *

2. Single-Asset, GP-led Secondaries

There is a crisis of illiquidity in EM private markets. 

I’ve been digging into this as part of my research into a scalable business model in the secondaries space, and I estimate that there are ~1,200 PE and VC fund managers sitting on ~7,000 un-exited investments across EM.

(These figures are for funds with vintage years 2008-14).

Distributions from EM funds have been poor, and they’ve undershot the global PE benchmark every year (see below).

There is a clear problem here that GP-led secondaries can help solve: identifying sub-scale assets that — once liberated from the confines of the PE fund model — can pursue long-term growth initiatives with a reasonable return profile.

With a different shareholder base and investment structure, companies can pursue a broader range of growth strategies, and investors’ returns may be less contingent on a liquidity event.

I think we’ll see more EM GPs use these vehicles in the decade ahead.

But, if you’re interested in EM direct secondaries in general, I’ve been doing research in this space and may be able to help you out.

Click here to send me a note.

* * *

3. New Financing Structures

DFIs are distancing themselves from the traditional fund model as a means for non-bank financial intermediation in EM. This is unfortunate for smaller fund managers that depend on DFI capital to get / stay in business, but it is what it is.

I’m cautiously optimistic that this will create space for new, creative forms of financing for un- and under-banked enterprises.

As one example, the team at CrossBoundary Group has open sourced their project financing model for mini-grids, and I think this collaborative approach to generating shared prosperity is a glimpse of the future.

 * * *

Most of us have been trapped inside and deprived of foreign travel for a calendar year.

I am very much looking for the explosion of energy and excitement that people will exhibit once this pandemic is behind us.

Until then, I have a gift for you.

Please don your favorite set of noise-cancelling headphones and prepare to immerse yourself in 4 minutes and 30 seconds of transcendent bliss. 

Don’t multitask.

Set a timer if you must.

Just click this link to escape to the Cañon del Sumidero in Chiapas, Mexico.

Glimpse majestic natural beauty. Listen to a magical tune. Ponder the possibilities of human ingenuity and creativity.

Health, wealth, and happiness to you and yours.

Abrazos,
Mike


Weijian Shan on Leverage and Turnarounds in Asia

In the latest episode of the Portico Podcast, I interviewed Weijian Shan, the Chairman and CEO of PAG — a leading Asia-focused alternative assets firm with ~$40B in AUM. 

It was a real honor to have Shan on the podcast, as his life story is remarkable.

If you haven’t read his memoir Out of the Gobi yet, I heartily encourage you to do so. It’s an extraordinary book that recounts Shan’s experiences during the Cultural Revolution — particularly the six years he spent doing hard labor in a re-education camp — and the transformative impact that the normalization of U.S.-China relations and Deng Xiaoping’s economic reformshad on China generally, and on Shan in particular.

And he’s just written a new book called Money Games, which details the rescue of one of Korea’s largest banks on the heels of the Asian Financial Crisis.

In addition to his books, Shan and I discuss the importance of stakeholder analysis when structuring private equity investments; whether there is a problem of too much debt in the Chinese economy; SOE reform, and the prospects for China’s economic rebalancing toward domestic consumption; the institutionalization of private equity in Asia; and, his advice for younger people who wish to pursue a career in private equity, among other topics.

If you need to catch up on past episodes on your new device over the holidays, we’ve got you covered:


Grab Bag

  • Has persistence persisted in private equity? Evidence from buyout and venture capital funds (link)
     
  • Do private equity investors create value? Evidence from the hotel industry (link)
     
  • The failure of the standard model of institutional investment (link)
     
  • Special deals from special investors: the rise of state-connected private owners in China (link)
     
  • Ben Thompson on Stripe and financial infrastructure (link)
     
  • France broadens retail investor access to private equity (link)
     
  • RBI toying with idea to allow industrial houses into banking (link)
     
  • Are venture capitalists deforming capitalism? (link)

From the Bookshelf

This age of globalization has made it easy to imagine that the decades ahead will bring more convergence and more sameness. Even our everyday language suggests we believe in a kind of technological end of history: the division of the world into the so-called developed and developing nations implies that the “developed” world has already achieved the achievable, and that poorer nations just need to catch up. But I don’t think that’s true. My own answer to the contrarian question is that most people think the future of the world will be defined by globalization, but the truth is that technology matters more.

— Peter Thiel, Zero to One (Currency: 2014)