There is a sequence of scenes from Ron Fricke’s spellbinding film Samsara that have been lodged in my brain since I first saw them several years ago.
In the first scene, a Buddhist monk at the Thikse Monastery in Ladakh rhythmically taps a copper funnel, emitting vibrant particles of sand that he arranges into intricate designs.
Under the watchful eyes of children, he and several other monks undertake a labor of precision and care.
The camera pans out to reveal their creation: a stunning mandala of what appears to be a wheel of time.
In the next scene, the monks stand meditating in front of their composition — a rich tapestry of color and symbol.
A monk wearing a golden shawl reaches forward, pauses, and then carves four intersecting lines through the center of the mandala, evoking the 8-spoke wheel.
Swiftly, the other monks join him in destroying their work, sweeping the sands into the center of the table.
Where once there was design and order now lay a multicolored ruin.
The mandala can’t be reassembled with the particles that formed it.
The impermanence of one’s life work is the obvious parable.
But to continue the (less metaphysical) discussion from The Return of Anarchy, the mandala is a fitting allegory for the frameworks investors have been relying upon for decades.
I’m not simply referring to the class of investors who think markets go up only — the legions whom the Fed has conditioned to buy the dip.
I’m talking about an entire generation’s architecture of assumptions built up during Bretton Woods II. Most importantly: the assumption about global surpluses being recycled into dollar-denominated assets, thereby suppressing the cost of capital.
A recent podcast with Jeff Currie, Global Head of Commodities Research and Partner at Goldman Sachs, brought this home.
Two of Jeff’s points resonated deeply:
(1) deglobalization and ESG have structurally lifted the demand curve for commodities; and,
(2) the surplus economies of the Bretton Woods II system now have — and are actively fostering — sufficiently large domestic markets to shun U.S. assets (e.g., China’s push for consumption-led growth, Saudi Arabia’s Neom).
The cost of capital is going up.
It’s not about a hiking cycle. It’s a transition from a 40-year regime of declining interest rates — from a world enamored with financial engineering to one oriented toward actual engineering.
A few questions for the medium term …
1. Fund Manager Attrition
In a recent interview, Lux Capital’s Josh Wolfe prognosticated that “50-75% of active investors in private markets will disappear within the next two years.”
That seems high, notwithstanding the proliferation of sole-GP VCs. But how many LBO firms (and their portfolio companies) are going under?
As a reminder, Bain & Co. analyses show margin growth in buyout-backed companies was flatlining prior to the surge in inflation (see chart below). Moreover, margin expansion was accounting for only 6% of the value bridge in the median deal — multiple expansion was 56%.
This is an ugly picture, and it doesn’t even broach the havoc of rollover risk.
Do read John Dizard’s farewell column at the FT.
2. EM FX
The strong-dollar cycle eviscerated EM performance over the last decade. In a world with less demand for dollars and an increase in local consumption, will EM local currency products begin to outperform?
And if so, what does this tell us about the opportunity sets in EM private markets? How would this impact the valuations of businesses with natural hedges (i.e., hard-currency revenues, local currency costs) relative to those generating local-currency revenues?
3. Crypto as a Bulwark for the Dollar
This is a bit rich coming after the collapse of Terra’s algorithmic not-so-stable-coin (never touched it). But could a collateralized stablecoin offset declining demand for dollars amongst legacy foreign buyers? And if so, at what scale?
As of March, Circle’s total U.S. Dollar Coins (USDC) in circulation amounted to $51.4 billion, with a 1:1 reserve held in cash and short-dated U.S. government debt. That is a far cry from China’s FX reserves of ~ $200B in 2001 (shortly after the country joined the WTO).
But, I do wonder how large the demand for USDC could get. To take one proxy on annual flows, global remittances reached $589B in 2021.
Beyond these questions, we are evidently moving toward an investing environment that demands global perspective — an ability to assess political and economic risks clearly, and then navigate them deftly.
As the political scientist Ivan Krastev put it to Der Spiegel (emphasis added):
A friend of mine works at one of the biggest business schools. I told him: Everything you are teaching is useless. Just as useless as teaching socialism studies was in 1990. The world of globalization and free trade, in which the economy was only interested in bottom lines and not in politics, will be over.
In my own experience, the education SAIS offered when I studied there 15 (!) years ago has traded at a discount to an MBA.
It will prove more relevant in the decades to come.
- Avanz Manara — Avanz Capital’s Egyptian subsidiary launched a fund of funds to support the growth of SMEs and the development of the private capital industry in the country. It appears somewhat akin to a private sector Fondo de Fondos. I’m excited to see how this develops. If you missed our podcast episode on Egypt’s venture landscape, listen here.
- Weijian Shan — In the run-up to PAG’s IPO, Weijian Shan made some bold comments about the mismanagement of China’s economy (see here and here). They are obviously correct. That doesn’t make them any less brave. Listen to my conversation with Shan here.
- Jean Eric Salata — Consolidation amongst asset managers is proceeding apace. Baring Private Equity Asia reached an agreement with EQT for a total consideration of €6.8B (€1.5B in cash plus €5.3B in ordinary EQT shares). I think Jean Eric Salata goes down as one of the greatest market timers of his generation: saw the private equity opportunity in Asia, developed diversified products for LPs seeking Asia exposure, sells near the top.
- Sequoia & Corporate Governance — Interesting blog post from “Team Sequoia India & Southeast Asia” following some governance messes in their portfolio. Notable for its framing and what’s not said.
- Apollo Embraces Digital Assets (& Life Sciences) — Apollo is making moves into the crypto world (see here and here). Says Marc Rowan, “Many of the rails or the technology or the platforms or the systems that support what’s happening in [non-fungible tokens] are actually the precursor to changes in our financial system and we ignore them at our peril.” Apollo also formed a strategic partnership with Sofinnova Partners.
From the Bookshelf
The years 1945-89 are thus coming to seem more and more like a parenthesis. This does not mean that we are about to return to bad old ways. The past, having once happened, leaves a record and a memory, and that memory is one of the reasons why the things it recalls will not simply be repeated. But it is also true that people can forget to remember—or, perhaps, forget to forget—and that as we move further away from 1945 the reasons why it seemed so important to build something different will be less pressing. That is why we must remind ourselves not just that real gains have been made, but that the European community which helped to make them was a means, not an end.Tony Judt, A Grand Illusion? (Hill & Wang: 1996)
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