The DAO of (Risk) Capital

Thousands of strangers recently came together to bid on an original copy of the U.S. Constitution at Sotheby’s.

I was one of them.

If you’re into crypto / web3, then you know what’s up.

If you’re not, then you may have come across a story about it in The Wall Street Journal or The New York Times … but maybe you’re thinking: scam!

In brief, a group of people formed a decentralized autonomous organization — a DAO — to crowdfund a bid for the Constitution (and deal with all the legal and financial rigmarole).

ConstitutionDAO’s target was $20M.

It raised more than $40M.

In ~ 96 hours.

Alas, ConstitutionDAO lost the auction … to Ken Griffin of Citadel … which is comical for a variety of reasons.

Griffin bought it for $42.3M. It’s the most expensive historical document ever purchased.

Despite the outcome, participating in this experiment has been awesome.

I mean look at these comments:

Once you see the power of a networked community first-hand, you can’t unsee it.
It’s like The Blue Marble photo from Apollo 17 — it changes your perception of the world.

* * *

I don’t mean to be hyperbolic, but web3 has the potential to change everything.

It’s definitely going to change capital formation and entrepreneurial finance.

DAOs can help close the financing gap for businesses all around the world. While it may be a stretch to say that DAOs will disrupt the VC / PE fund model altogether, consider the following

  • Fundraising — Preqin data show that fund managers are taking 11 months to reach a final close in Asia, 25 months in LatAm, and 50 months (!) in Africa (YTD 2021).

    This is just a horrifically inefficient market, with untold sums of wasted time and expenses, and countless volumes of CO2 emissions belched in the atmosphere as people crisscross continents collecting capital commitments.

    ConstitutionDAO raised over $40M in four days, seamlessly aggregating commitments from ~17,500 wallets. The median contribution was .0525 ETH (~ $225), with the top-quartile breakpoint at .1776 🇺🇸 ETH (~ $750).

    Rather than approaching hidebound institutions and gatekeepers, a DAO can directly target true fans / believers — regardless of their ticket size. And the magic is that rather than a handful of people marketing a fund, the community supercharges the fundraise.
  • Sourcing — Instead of paying overheads and expenses for a centralized investment team to scour for deals, members of the DAO could originate, diligence, and vote on potential investments. 

    At first glance, this may sound like a recipe for disaster. 

    But I suspect a DAO would uncover more projects — especially in underserved markets (whether by demography, geography, scale, or vertical) — than traditional funds. And the elimination of fee drag would make more of those deals viable.

  • Alignment — The tokenization of securities enables participants and stakeholders in a deal to attain tighter alignment. It can alleviate the principal-agent problem, spread ownership within the investee company, and even facilitate the participation of external stakeholders.

    Tokenization also could enhance alignment on value creation, particularly on revenue generation. 

    In addition, token holders could receive a variety of pecuniary (i.e., airdropped dividend payments) and non-pecuniary benefits (e.g., exclusive content, limited release products, etc.).
  • Transparency — Blockchains provide greater transparency and auditability than user-generated Excel spreadsheets. Cash flows are visible on-chain in near-real time.

    For instance, you can see the entire history of ConstitutionDAO’s contributions here, and can click through to each wallet’s transaction history. 
  • Exits — Investors don’t have to wait for a liquidity event. A DAO’s tokens could be liquid on day one, and investors could swap their holdings on a decentralized exchange for any number of cryptocurrencies, including stablecoins tied to the U.S. dollar.

* * *

Look, of course there are numerous issues raised in the bullets above, and loads more that weren’t even alluded to.

Developing an ethical, effective, compliant, and secure protocol is hard.

For example, even though I was excited to participate in the ConstitutionDAO experiment — and am amazed at what the team accomplished in so brief a period — I had a few hesitations.

One was participants’ reading comprehension: people seemed to think they were going to own a fraction of the Constitution (i.e., a security token) when the homepage of the DAO clearly stated otherwise.

Another pertained to governance. In return for contributions to the DAO, participants received $PEOPLE governance tokens that granted the right to vote on proposals, etc. These were allocated on a pro rata basis (i.e., a donation of 1 ETH granted you 1 million $PEOPLE). So, the biggest contributors had more votes. 

Not great … but also … as the Constitution recognized … direct democracy isn’t great either. I don’t have a firm view on an optimal solution, but I’m allergic to concentrated power in any form.

Yet another was the “gas” — the fees incurred to transact on the Ethereum blockchain. They’re too high, and they’re making ETH unusable.

Jumping from the specific case to the general, there’s a gigantic airgap where cyberspace / web3 interfaces with meatspace / reality. 

It’s one thing to get a DAO together to crowdfund a collectible or invest in a handful of hackers coding something in Solidity. 

But creating a community that has the vision and stamina to build impactful businesses and real assets in underserved markets is a challenge of a different order of magnitude.

* * *

This is the decade of digital assets.

I’ve spoken with a few people about the nexus of crypto and private markets over the last year or so — even floated the concept of a venture DAO with one or two — but I’d been downright lackadaisical when it came to putting my thoughts down in writing.

I thought there was a lot of time.

But ConstitutionDAO demonstrates that things are moving fast in web3.

And ConstitutionDAO isn’t the only story. Take a look at AudacityDAO.VC, and MetaCartel, for example.

I’m stoked that I’ll be ringing in 2022 with the Wharton School’s inaugural course on the Economics of Blockchain and Digital Assets.

I’m hoping that it will enable me to develop a business model / protocol for entrepreneurial finance in web3, and meet people who are building in the space.

We’ll see!

* * *

One more thing.

Portico’s undergoing a slight brand refresh over the holidays.

Our website will be down for a bit, but we’ll be back in the new year with bells on.

Have a great finish to 2021!

Best wishes,

Gopal Jain on India’s Transformation

Episode 12 of the Portico Podcast features a conversation with Gopal Jain — co-founder and Managing Partner of Gaja Capital, one of the leading private equity firms in India.

It was a real pleasure to speak with Gopal because he’s lived through the boom-and-bust cycles within India’s private equity industry. Therefore, he’s able to place today’s environment in context, and impart some of the hard-earned lessons he’s gleaned over the last two decades.

We cover a lot of territory in the episode, so you don’t want to miss it!

Check it out on Apple Podcasts | Google Podcasts | Spotify

Grab Bag

  • Sequoia’s Roelof Botha on the decision to eschew the traditional VC fund model (link)
  • Franklin Templeton buys secondaries firm Lexington for $1.75B (link)
  • Temasek launches $3.3B investment platform for firms eyeing global expansion (link)
  • Baring Private Equity Asia financing remake of Metal Gear Solid 3? (🙏; link)

Wall of Shame

Blackstone | KKR · US doctors fear patients at risk as cost cuts follow private equity deals (FT)

From the Bookshelf

Why has government been instituted at all? Because the passions of men will not conform to the dictates of reason and justice, without constraint. Has it been found that bodies of men act with more rectitude or greater disinterestedness than individuals? The contrary of this has been inferred by all accurate observers of the conduct of mankind; and the inference is founded upon obvious reasons. Regard to reputation has a less active influence, when the infamy of a bad action is to be divided among a number, than when it is to fall singly upon one. A spirit of faction, which is apt to mingle its poison in the deliberations of all bodies of men, will often hurry the persons of whom they are composed into improprieties and excesses, for which they would blush in a private capacity.
In addition to all this, there is, in the nature of sovereign power, an impatience of control, that disposes those who are invested with the exercise of it, to look with an evil eye upon all external attempts to restrain or direct its operations.

— Alexander Hamilton (aka Publius), The Federalist. No. 15 (1 December 1787)

Ep. 12: Gopal Jain on India’s Transformation

In today’s episode I speak with Gopal Jain, co-founder and Managing Partner of Gaja Capital, one of the leading private equity firms in India.

It was a real pleasure to speak with Gopal because he’s lived through the boom-and-bust cycles within India’s private equity industry, so he’s able to place today’s environment in context, and impart some of the hard-earned lessons he’s gleaned over the last two decades.

Gopal and I cover a lot of territory in this conversation, so I’ll spare you the rundown of topics. But I’ve been marinating on two of the things that Gopal said since our conversation.

The first is that a couple decades ago, upwards of 80% of India’s most talented engineers and entrepreneurs were migrating to the United States; whereas today, most are choosing to launch startups within India, with the benefit of a robust private markets supply chain of capital at-the-ready.

The second is that Gopal thinks that India’s PE industry could grow from $50 billion in deals to $100 billion over the next five to 10 years. And if that happens, he thinks India could detach from the EM complex and become a standalone market like China.

I was also really enamored with Gopal’s “5+1” construct for explaining the foundational infrastructure that is accelerating India’s digital transformation.

One of the things we didn’t talk about — but I think you should know about — is the Gaja Capital Business Book Prize, which has some great suggestions to add to your bookshelves. I’ll be adding a few volumes to mine.

My audio came out a bit odd in places, so I apologize if it’s a bit distracting. The good news is I don’t speak much.

There’s so much food for thought in this episode that I don’t want to keep you waiting any longer. 

With that, I hope you enjoy my conversation with Gopal Jain.

This podcast was recorded in November 2021.

Learn more about Gaja Capital and its Business Book Prize.

Follow Gaja Capital on Twitter.

Bain & Company, India Private Equity Report 2021.

Bain & Company, India Venture Capital Report 2021.

The Great Unlock

When I started this business five years ago, I believed that EM private markets investors would embrace a richer, more diversified set of strategies than the traditional PE fund model.

Though I initially framed this evolution as “the tyranny of choice,” I thought it would be liberating — an opportunity to attain better alignment with the universe of investable companies in EM.

Alas, apart from an explosion in corporate venture capital (CVC), progress had been a bit stultifying.

But over the last few months, it feels like we may be entering the great unlock, with firms pushing the market forward with compelling products and strategic moves. 

For instance: 

  • Non-fund structures
    Juven, a Goldman Sachs spinout, plans to invest in a concentrated portfolio of growth-stage tech and consumer companies in Africa. It’s structured like a corporate, with a balance sheet to fund investments, and is reportedly eyeing initial tranches of $10M to $30M in Series B companies, with $50M+ reserved for follow-ons. (Read more).
  • Disintermediation
    We’ve witnessed a hollowing out of SME-focused PE fund managers for several years running. And yet, there are many great businesses in EM that could benefit from entrepreneurial capital.

    Enter the CrossBoundary Group, which has inked a strategic partnership with global search fund investor Ambit Partners. It will be interesting to see whether and how this partnership connects investors’ capital more directly — and profitably — with private businesses in EM. But the insight into industry trends that lay behind the partnership is quite shrewd.
  • Deal-by-deal
    Hiran Embuldeniya, Managing Partner of Sri-Lanka-focused PE firm Ironwood Capital Partners, had an insightful interview with The Capital Quest in which he laid out the structural challenges besetting SME-focused funds. Notably, he highlights the role of DFIs in inhibiting the emergence of local teams:

    Even the DFIs, who were happy to write $5-10 million cheques, are now saying they want to write $30-50 million cheques …

    … a flexibility in mandate was important so that you can choose the deals you wanted. You don’t want to be restricted in doing partial secondaries — if some promoters want to sell a part of their equity or there is an interesting buyout to be done, I did not want to come in and say I am going to bring only new capital, growth equity and take a minority position.

    Ironwood is eschewing the fund model for a deal-by-deal approach going forward, hunting for larger deals where a management buyout might be possible.
  • Hybrids 
    As global PE firms are winding down operations in Latin AmericaPatria is seizing the initiative to attain scale. Following its Nasdaq IPO, the Brazilian firm announced a combination with Chile’s Moneda Asset Management in a $315M cash-and-shares deal (40% cash / 60% shares).

    The transaction expands Patria’s product mix and geographic footprint, and should strengthen the firm’s capabilities in credit. With an uplift of ~$10B in AUM, Patria is primed to accelerate its growth in assets.

    The reality is that scale LPs need scale partners, and Patria is consolidating its position as a partner of choice for large institutions seeking diversified equity and credit exposure in LatAm.
  • Capital market solutions
    Latin American e-commerce giant Mercado Libre teamed up with early-stage VC firm Kaszek Ventures to raise a $287M SPAC

    We’ll have to see the target before developing a view on it; the terms on the sponsor promote are interesting. Either way, I’m enamored with the idea of leveraging U.S. public capital markets to find liquidity solutions for EM privates.
  • Crypto
    This is the decade of digital assets. Crypto has the potential to reconfigure the creation and transfer of value. There is so much happening, so fast, that I can’t keep tabs on all of it.

    I scribbled a few thoughts on why NFTs may be the wedge that unlocks capital flows to African businesses at scale on my personal site here (cross-published on the decentralized publishing platform Mirror here).

Will all of these succeed? 

I don’t know.

But the action is exciting.

What’s particularly invigorating is that the universe of prospective investors in EM private companies is growing. The industry’s reliance upon (increasingly) hidebound institutions is diminishing.

The movements are also a wake-up call, though.

If you’re a PE firm doing business as usual, consider this an invitation to think about your own market position and growth strategy.

A few questions to get you going:

  • Does your firm have product-market fit in 2021? Or are you selling a product the market’s no longer buying?
  • Should you consider a joint venture, acquisition, or strategic partnership? Would doing so rerate your firm’s equity value?
  • What is it about your firm that’s differentiated and relevant to investors / potential partners?

 Always happy to be a thought partner!

Contact me here.

— Mike

Is Sustainable Investing Dangerous?

In the latest episode of the Portico Podcast, I interview Tariq Fancy — the former CIO for Sustainable Investing at BlackRock— about his delightfully thought-provoking essay The Secret Diary of a ‘Sustainable Investor’.
Tariq and I get into the important distinction between ESG-related investments in public and private markets, as well as the roles the public and private sectors can play in solving climate change and inequality.
You don’t want to miss this one.
Check it out on Apple Podcasts | Google Podcasts | Spotify


Actis closed its Actis Energy 5 vehicle with $4.7 billion of fund commitments (~20% above target), and the firm anticipates that co-investment opportunities will take the aggregate capital deployed to $6B.

It’s a massive success that signals a strong endorsement of the firm’s strategic pivot. Notwithstanding the challenges besetting the EM PE industry, Actis’s decision to eschew growth equity and embrace real assets was a bold decision.

Assuming they execute smartly, the firm should be well positioned to attract and deploy sizable volumes of capital going forward.

DPI, Quona & Talking About Impact

Development Partners Internationalannounced that it closed its third flagship fund at $900M, with an incremental $250M in co-invest available for deployment across Africa. 

Hats off to the team following what had to be a grind of a fundraise. African PE has gone through a challenging period, indeed.

One of the things I like about DPI’s refreshed website is the clarity and focus re: impact and ESG. Impact has been a part of DPI’s DNA since inception, but they’ve brought it to the fore with a clearly articulated impact agenda that is tied to the SDGs. It’s well done.

One of the best examples I’ve seen of a firm communicating its commitment and strategy toward impact is Quona.

(Don’t miss our interview with Monica Brand Engel discussing fintech and financial inclusion here).

Quona recently refreshed their brand identity, and I love it.

Their new website deftly threads the impact needle — conveying the dynamism and scale of their commercial opportunity whilst establishing the firm’s bona fides as an OG impact investor.

You should check it out.

I hadn’t thought about it until recently, but most of our client engagements now incorporate an impact strategy audit and / or the development of customized impact frameworks and measurement methodologies.

I should hasten to add that these aren’t ‘greenwashing’ exercises, and that Portico’s not interested in levying an ESG tax on firms (see interview with Tariq Fancy above).

That said, we’re always happy to help mission-driven firms (1) identify and accentuate the additionality of their investments; and (2) hold themselves accountable with meaningful metrics.

Send me a note if you’d like to chat.

Noisy Customers

ILPA released its fund terms survey. You have to be a member to download the full study, but anyone can glimpse the key findings or read about it in Institutional Investor.

The nut of it is that LPs are paying more in management fees (because they’re allocating to larger and larger funds), and those management fees are covering a smaller share of expenses (because GPs are passing along more operating costs to LPs).

Is it just me, or is it becoming an annual ritual to hear institutional LPs complain about the actions of (mega-cap) PE firms?

And then exacerbate the problem by handing (mega-cap) PE firms even more money?

Here’s a tip: you’re getting worse terms because the people on the other side of the table don’t respect you. They know that you’re not willing to walk away, because then you’d have to find a new manager relationship — and that entails work and a modicum of career risk.

The good news in the report is that “transparency has improved” so the institutions have a better grasp on the volumes of beneficiaries’ retirement savings that are being used to fund GPs’ operational expenses.

Wall of Shame

For Private-to-Private transactions, [employee] dissatisfaction is concentrated in non-management employees and comes mostly from how management treats them. In Public-to-Private transactions, the dissatisfaction is stronger, multi-faceted, and present for all employees, including management.

— “Employee Views of Leveraged Buy-Out Transactions” by Marie Lambert, Nicolas Moreno, Ludovic Phalippou, and Alexandre Scivoletto

From the Bookshelf

The inventors we remember are significant not so much as inventors, but as founders of “disruptive” industries, ones that shake up the technological status quo. Through circumstance or luck, they are exactly at the right distance both to imagine the future and to create an independent industry to exploit it.

Let’s focus, first, on the act of invention. The importance of the outsider here owes to his being at the right remove from the prevailing currents of thought about the problem at hand. That distance affords a perspective close enough to understand the problem, yet far enough for greater freedom of thought, freedom from, as it were, the cognitive distortion of what is as opposed to what could be. This innovative distance explains why so many of those who turn an industry upside down are outsiders, even outcasts …

Another advantage  … [is] being a disinterested party. Distance creates a freedom to develop inventions that might challenge or even destroy the business model of the dominant industry.

 — Tim Wu, The Master Switch (Knopf: 2010)

# # #

The information presented in this newsletter is for informational purposes only. Portico Advisers does not undertake to update this material and the opinions and conclusions contained herein may change without notice. Portico Advisers does not make any warranty that the information in this newsletter is error-free, omission-free, complete, accurate, or reliable. Nothing contained in this newsletter should be construed as legal, tax, securities, or investment advice.

Copyright © by Portico Advisers, LLC 2021, all rights reserved.

Ep. 11: Is Sustainable Investing Dangerous?

This episode of the Portico Podcast features a conversation with Tariq Fancy — the former CIO for Sustainable Investing at the ~$10 trillion asset manager BlackRock.

He’s also the author of the delightfully thought-provoking essay The Secret Diary of a ‘Sustainable Investor’.

I reached out to Tariq after reading his essay because it raises some uncomfortable truths about the explosion of ESG-related products across public and private markets. 

While I agreed strongly with his writing about the nonsense of ESG-related investments in stock and bond markets, I maintained that sustainable- or impact-focused investors in private markets could drive meaningful change.

I also wanted to think through whether the so-called ‘greenwashing’ effect changes with scale.

I know managers whose investments are driving positive environmental and social change in some of the most underserved markets — indeed, some have been featured on the Portico Podcast.

And honestly, I worry that the asset-gathering activities of large-cap firms will not only crowd out the earnest players trying to increase human dignity, but also tarnish the idea that private markets investing can be a positive-sum enterprise.

I also worry about the proliferation of service providers bilking people with asinine accounting and compliance solutions — a phenomenon that famed corporate finance professor Aswath Damodaran refers to as the ESG Gravy Train

I remember reading an article in the FT over the summer about PwC looking to hire 100,000 people to provide ESG advice and thought the madness must stop — we’re creating entire categories of jobs that inhibit the flow of capital to productive users of financing.

And we all know that scale providers can absorb these costs, thereby entrenching their market position and reducing competition from new entrants and smaller firms.

So, you can see why I was keen to speak with Tariq about these issues, as well as the roles the public and private sectors can play in solving the structural environmental and social challenges of climate change and inequality.

But we also talk about Tariq’s nonprofit, Rumie, which should resonate with listeners of the podcast. 

Rumie provides free digital education to learners in over 176 countries, including Afghanistan where one of their big initiatives is to create more content in Dari and Pashto so that women and girls can continue their education despite the return of the Taliban.

I’d encourage listeners to visit Rumie’s website. And, if you’re a fund manager or institutional investor who’s interested in supporting the growth of a nonprofit in the edtech space, reach out to Tariq and say hello.

This podcast was recorded in October 2021.

Read The Secret Diary of a ‘Sustainable Investor’.

Learn about Rumie and sample some of its bite-sized lessons.

Donate to support Rumie’s mission.

Follow Tariq on Twitter

Read Aswath Damodaran’s post on The ESG Movement: The “Goodness” Gravy Train Rolls On!

The Mission & The Model

Portico’s recent digs at KKR and Blackstone generated some rousing feedback.

I considered taking on Apollo or Carlyle this month to pump the engagement metrics.

Alas, one reader suggested that — in addition to pointing out market failures and emperors wearing no clothes — I should consider profiling lesser-known managers that are attaining success as well.

The Portico Podcast is an attempt at this — a channel where I recede into the background and shine a spotlight on individuals who I find to be bright and entrepreneurial, and who either employ a differentiated investment strategy or have a fresh view on an important topic.

So far, these have included:

And yet, I can’t shake this reader’s comment …

… because it tells me that I’m not channeling enough of my energy toward Portico’s mission: closing the finance gap through the creation and dissemination of knowledge.

* * *

I recently participated in a two-week strategy course, which revealed an inherent tension between our mission and our business / revenue models.

In part, the tension is a function of the long sales and project cycles, which impinge on our ability to create knowledge. But it’s also because we customize our engagements for each client — solving one pain point for one firm.

Specific knowledge is hard to productize and scale.

I’ve been considering a pivot that would have us recommit to Portico’s mission in a holistic manner — creating and disseminating knowledge on the full array of market intelligence, financial, operational, and human capital pain points that individuals and firms face.

But candidly, I wonder whether our stated mission is work that no longer needs to be done.

Is it the case that new knowledge is needed to close the finance gap? Do information asymmetries constitute the critical chokepoint?

I have my doubts. 

The information landscape has diversified in important ways over the last five years, making it easier than ever for people to glean knowledge on new markets.

But I’m also chastened by a statement that an LP recently said to me, “most investors aren’t very bright.”

What’s the point in producing content for people who don’t want to think too hard or act independently?

If scale providers are what global capital seeks, it’s silly to create knowledge when the demand is for advertorials.

And yet, I get the sense that there are humans who are eager for insightful perspectives on global private markets, and useful knowledge that will help them build their businesses.

So, I am asking for your feedback.

I’m exploring the idea of a subscription offering that provides a fulsome menu of differentiated, interactive content (audio + text + visual).

The subscription would also offer opportunities for subscribers to engage directly with industry leaders and subject matter experts, and to shape Portico’s research agenda.

I’m being deliberately light on specifics, but what do you think? 


Simon Clark on Arif Naqvi, The Key Man

In the latest episode of the Portico Podcast, I speak with Simon Clark, a reporter at The Wall Street Journal and the co-author of The Key Man — the summer’s must-read book about Arif Naqvi and the downfall of The Abraaj Group.

The Key Man is an absolutely riveting book. It has the pace of John Carreyrou’s Bad Blood, but with an unbelievable cast of credulous characters who fell for a fantasy.

I had four pages of questions for Simon, and while we clearly don’t get to everything on my list, I think you’ll agree that this is an enlightening conversation that tells us much about the manufacture of social capital, and the failures of the world’s most prestigious firms to do an ounce of work.

Check it out on Apple Podcasts | Google Podcasts | Spotify

Ray Dalio, Sage, Says: To Understand China, You Need to Understand China

Two years ago, Bridgewater Associates Founder and co-CIO Ray Dalio took to The YouTube to impart his thoughts on why you should probably invest in China.

I shared it at the time because I thought his analysis was stupid, notably his theory about investing behind rising ‘Reserve Currency Empires’ (i.e., Dutch, British, American, and Chinese).

Back then, I wrote:

[O]ne of these empires is not like the other.

Hint: in three of these, the batons were often brought out to protect the interests of capital. In the other, they’re often brought out for other reasons. 

It’s such an obvious point that I didn’t think it needed to be said.

Well, after the recent DiDi hubbub and CCP decision to outlaw profits for education companies, Ray took to LinkedIn to share some incisive commentary:

To understand what’s going on you need to understand that China is a state capitalist system which means that the state runs capitalism to serve the interests of most people and that policy makers won’t let the sensitivities of those in the capital markets and rich capitalists stand in the way of doing what they believe is best for the most people of the country. Rather, those in the capital markets and capitalists have to understand their subordinate places in the system or they will suffer the consequences of their mistakes. For example, they need to not mistake their having riches for having power for determining how things will go.

Look, Ray’s stating the obvious after the fact.

But you need to understand that what Ray’s telling you — even if he’s not saying it — is that China has become uninvestable.

Forget about past performance.

The direction of travel has changed.

There are opportunities elsewhere, in countries where your capital is valued, and where you can finance infrastructure, products, services, and technologies that increase human dignity and wellbeing. 

Adapt and go find them.

As the sage, himself, says:  

[Y]ou need to understand that the global geopolitical environment changing leads to some changes.  

Stablecoins, CBDCs & ZK Proofs

Around the time Ray was saying investors should probably invest in China, this newsletter explored the possibility that a digital currency might replace the dollar as the world’s reserve currency.

Gary Gorton (Yale) and Jeffery Zhang (Federal Reserve) have written a fascinating paper on the systemic risks of ‘stablecoins’ and the prospects for a central bank digital currency (‘CBDC’). 

I believe a U.S. CBDC is inevitable.

The questions that follow are:

  1. Does the CBDC take the form of (i) a token, or (ii) a citizen’s deposit account at the Federal Reserve?
  2. How do you protect privacy?

On question 1, the deposit account could enable new, powerful tools for the Fed to achieve macroeconomic objectives (e.g., helicopter money), but at the risk of totalitarian-level control over who can spend how much on what, and where and when they may do so. Not ideal!

On question 2, you could imagine a spectrum from the digital yuan (where the state sees all) to a cryptographically secured, anonymous digital cash. The key unlock for the latter is the advance of zero-knowledge (ZK) proofs.

If you’re keen to learn more, you should read this piece by Aleo co-founder Howard Wu, and Ben Laurie’s paper Selective Disclosure.


Things to Watch

Nasdaq Private Market
Very interesting development in the secondary market for shares of private companies: Nasdaq, Silicon Valley Bank, Citi, Goldman Sachs, and Morgan Stanley announced a joint venture to spin out Nasdaq Private Market and create a standalone liquidity venue. 

If you know anyone at Nasdaq who would like someone to help build this out across EM, please send them my contact info. I have data. Thx. 🙂

The Wall Street Journal reports that the number of blank-check companies targeting EM has tripled to reach 60 (⁓12% of the U.S. total).

As someone who put forward the idea of a super-SPAC as a liquidity solution in EM private markets, I must say that the prospects for disastrous governance outcomes are legion.

Wall of Shame

Advent International SPAC faces $800M loss (Bloomberg).

From the Bookshelf

“You’ve come to us just in time Scheisskopf. The summer offensive has petered out, thanks to the incompetent leadership with which we supply our troops, and I have a crying need for a tough, experienced, competent officer like you to help produce the memoranda upon which we rely so heavily to let people know how good we are and how much work we’re turning out. I hope you are a prolific writer.” 

“I don’t know anything about writing,” Colonel Scheisskopf retorted sullenly. 

“Well don’t let that trouble you,” General Peckem continued with a careless flick of his wrist. “Just pass the work I assign you along to somebody else and trust to luck. We call that delegation of responsibility. Somewhere down near the lowest level of this coordinated organization I run are people who do get the work done when it reaches them, and everything manages to run along smoothly without too much effort on my part. I suppose that’s because I am a good executive. Nothing we do in this large department of ours is really very important, and there’s never any rush. On the other hand, it is important that we let people know we do a great deal of it.”

— Joseph Heller, Catch-22 (Scribner’s: 1996)

# # #

The information presented in this newsletter is for informational purposes only. Portico Advisers does not undertake to update this material and the opinions and conclusions contained herein may change without notice. Portico Advisers does not make any warranty that the information in this newsletter is error-free, omission-free, complete, accurate, or reliable. Nothing contained in this newsletter should be construed as legal, tax, securities, or investment advice.

Copyright © by Portico Advisers, LLC 2021, all rights reserved.

Ep. 10: Simon Clark on The Key Man

This episode features an interview with Simon Clark, a reporter at The Wall Street Journal and the co-author of The Key Man — the summer’s must-read book about Arif Naqvi and the downfall of The Abraaj Group.

Most listeners and followers of Portico will be familiar with the background of the Abraaj story. But if you’re not, I’d recommend that you go back and listen to Episode 8.

But even more, I’d recommend you purchase a copy of The Key Man for yourself (USAUK). It’s an absolutely riveting book; it has the pace of John Carreyrou’s Bad Blood, but with an unbelievable cast of credulous characters who fell for a fantasy. 

In today’s conversation, Simon and I discuss:

  • The origins of Abraaj, some of its early transactions, and the oft-asked question: where did they get their money?
  • Abraaj’s acquisition of Aureos and how it unlocked the firm’s ability to scale.
  • The manufacture of social capital — the people and firms who testified to the greatness of Arif and Abraaj, seemingly without conducting an ounce of due diligence.
  • The Karachi Electric deal.
  • The $6B mega-fund.
  • The promise of impact investing.
  • The necessity of greater transparency in private equity.
  • And much more.

I had four pages of questions for Simon, so we clearly didn’t get to everything on my list — and candidly some of the unasked questions may be better over a pint.

But do yourself a favor and grab a copy of the book.

I hope you enjoy the conversation.

This podcast was recorded in July 2021.

Buy The Key Man |  USA  |  UK

Follow Simon on Twitter

Hands-on Value Creation

Blackstone is a principal beneficiary of the consolidation of alternatives / private markets. It stewards $649 billion in assets under management.
According to its 10-Q, Blackstone collected $1.18 billion in management and advisory fees (net of fee reductions and offsets) in the first quarter of 2021, with the Private Equity segment accounting for 35% of the total ($406M).
The firm generated $36 million in incentive fees in Q1.
Institutional investors (and their consultants) often say that they allocate to managers based on their prior performance and ability to drive operational value add.
When it comes to performance, some of Blackstone’s funds are publicly available on the CalPERS website:

You could also scroll through Washington SIB’s portfolio overviewor CalSTRS’ to see whether and how the performance figures differ.

It’s hard (for me) to square the fees paid with the performance delivered … but I also don’t have the problem of finding a place to invest $500M.

(Though Portico happily accepts donations if you’d like to give us $500M to play with … you can check back in 10 years and see how we did).

Alternatively, maybe Blackstone employs its value-creation capabilities to build strong, sustainable businesses, thereby effectively de-risking each investment.

(The firm seems to be so great at this that it has confidence buying the same portfolio companies multiple times … sometimes after a bankruptcy, e.g., Extended Stay America).

This is how Blackstone markets itself:

Great leadership teams are critical for success. Blackstone’s operating partners and network of operating executives work directly with CEOs and their senior teams to improve operating performance, strategy and governance.


Environmental, Social and Governance principles have been integral to Blackstone’s corporate strategy since our founding. We are committed to responsible investing practices and incorporate them into everything we do.

Comforting language befitting a “safe pair of hands.”

Which is why the F-1 prospectus of Oatly — a Swedish oat milk company that received a $200M investment from Blackstone, Oprah, et al — made me laugh out loud:

What a joke.

— Mike

Greg Bowes on The State of EM Private Markets

In the latest episode of the Portico Podcast, I speak with Greg Bowes, Co-Founder and Managing Principal of Albright Capital — a global investment firm with expertise in special situations, infrastructure, infrastructure services, and real assets — about the state of EM private markets.
The label ‘variant perception’ gets bandied about quite a lot, mostly as nonsense. But Greg has a different view on EM private markets than most of the managers I’ve met, and I thought he’d be a great guide to walk through where the industry is in the summer of 2021.
Check it out on Apple Podcasts | Google Podcasts | Spotify

Grab Bag

  • Fred Wilson on the globalization of venture capital investing (avc)
  • $900 billion in Chinese government guidance funds (FT)
  • Ludovic Phalippou interviews Simon Clark about The Key Man (link)
  • Golden Gate Ventures and INSEAD report on Southeast Asia exits (link)
  • Benedict Evans on e-commerce as logistics (link)
  • B3 (🇧🇷) tests crypto platform for startup funding (link)

From the Bookshelf

Has the world become so topsy-turvy that a living creature, whom the gift of reason makes divine, believes that his glory lies solely in possession of lifeless goods? Other creatures are content with what they have; but you, who are godlike with your gift of mind, seek to embellish your surpassing nature with the grubbiest of things, and in so doing you fail to appreciate what an insult you inflict on your Creator. He sought to make the race of men superior to all earthly things, but you have subordinated your dignity to the lowliest objects. For if every good belonging to an individual is truly more valuable than the person to whom it belongs, then on your own reckoning you men rank yourselves below the tawdriest things, when you pronounce them to be your goods. Such an outcome is fully deserved, for the status of man’s nature is this: it excels all other things only when aware of itself, but if it ceases to know itself, it falls below the level of the beasts. This is because lack of self-knowledge is natural in other living creatures, but in humans is a moral blemish.

 — Boethius, The Consolation of Philosophy (Oxford World’s Classics: 2008)

# # #

The information presented in this newsletter is for informational purposes only. Portico Advisers does not undertake to update this material and the opinions and conclusions contained herein may change without notice. Portico Advisers does not make any warranty that the information in this newsletter is error-free, omission-free, complete, accurate, or reliable. Nothing contained in this newsletter should be construed as legal, tax, securities, or investment advice.

Copyright © by Portico Advisers, LLC 2021, all rights reserved.

Ep. 9: The State of EM Private Markets

One of the questions I’ve often pondered since founding this business is: is emerging markets private equity dying? 

That literally was the name of the first study I published when I launched the company in 2016, and I — perhaps naively — thought that drawing attention to some of the industry’s problems might catalyze people to action.

To put some figures on it, between 2010 and 2015, the number of growth equity funds achieving a close had declined by more than 30%, and fund vehicles greater than or equal to $1 billion in size grew from 40% to 60% of all capital raised. 

So capital was consolidating in fewer, larger managers — mostly in Asia — while at the same time the number of first-time funds holding a final close had been declining by 10% each year. And the development finance institutions were exacerbating the trends, committing to more Funds IV+ than to Funds I, II, or III.

Did things change? 

Suffice it to say that last October I put out a newsletter that reframed the question to: is EM PE dead?

So, I wanted to bring on someone who could speak to the state of EM private markets. 

That guest is Greg Bowes, Co-Founder and Managing Principal of Albright Capital — a global investment firm with expertise in special situations, infrastructure, infrastructure services, and real assets.

The label ‘variant perception’ gets bandied about quite a lot, mostly as nonsense. But Greg has a different view on EM private markets than most of the managers I’ve met, and I thought he’d be a great guide to walk through where the industry is in the summer of 2021.

In today’s conversation, Greg and I discuss:

  • Should investors even be investing in EM private markets?
  • The impact of currency depreciations on performance and whether investors should hedge.
  • The shortcomings of the traditional approach to EM private equity and whether it magnifies the impacts of adverse cross-currency movements.
  • The problem of herd behavior.
  • The importance of sound deal structuring in EMs.
  • And much more.

I’ve included some additional readings in the show notes, so dive in if you’re keen to learn more. 

I hope you enjoy the conversation.

This podcast was recorded in June 2021.

Learn more about Albright Capital at

Portico Advisers resources referenced in this episode include:

Sign up for Portico Perspectives.

The Winner-Take-Most World

Did you know that KKR said it collected $1.4 billion in management fees last year?

And that its annual income from management fees has grown by $710m since 2015?

It blows my mind.

Hats off to the team for executing a bold growth strategy.

But … it just seems like a waste of money, doesn’t it?

The firm collected $6.2B in management fees between 2015-20.

The bulk of that likely flowed to individuals with a low marginal propensity to consume. 

(Comp and benefits accounted for ~70% of expenses between 2018-20, according to the latest 10-K).

And it also flowed to a firm with a low marginal propensity to invest. 

(Based on the historical financials accessed via Koyfin, the firm’s MPI [= ΔI / ΔY] was actually negative comparing 2015 to 2020; it averages out to 0.11 between 2016-20).

What boggles the mind is there are allocators at large institutions who have no compunctions about handing a growing amount of pensioners’ savings over to mega-cap firms, largely to pay the latter’s employees to show up to work.

It’s not as if this is hidden knowledge. It’s laid out in public filings. For instance, here’s KKR’s segmented revenues for 2020:

What an amazing business.
(Note that the management fees in the chart are provided on a GAAP basis, and the $1.4B figure cited at the top is based on a KKR presentation featuring recast, non-GAAP financials).

* * *

When I see KKR’s $710m increase in annual management fees, I can’t help but think about several clients that are raising funds and could invest that money in wealth- and health-creating companies. 
Alas, these firms aren’t on many LPs’ radar screens because their fund sizes are “sub-scale.” Or they require too much legwork. Or they’re so “risky” that it makes more sense to pay a toll to KKR (and / or Apollo / Blackstone / Carlyle, etc.) than to use it as callable capital.
Look. This isn’t just about KKR. They’re a premium brand for a reason.
But the specific case is useful for what it tells us about private markets and the world more broadly.
And that is that we’re in a winner-take-most economy.
The inequalities across multiple vectors have been getting worse for a long time.
Just look at this chart from Morgan Stanley global strategist Ruchir Sharma (source):

I believe the consolidation of capital in fewer, large-scale managers is leading to less innovation and more sclerosis. And I think the incentive structures at large LPs and GPs are broken, contributing to poisonous outcomes.

It’s all a bit evocative of Matthew Klein and Michael Pettis’s Trade Wars Are Class Wars, which argues that international trade conflicts are a direct result of domestic inequality. Namely, “a conflict between bankers and owners of financial assets on one side and ordinary households on the other.”

It’s unsustainable.

— Mike

The Caesars Palace Coup

Speaking of mega-cap buyouts, I have a summer book recommendation: The Caesars Palace Coup by Max Frumes and Sujeet Indap.

It’s a riveting telling of the rapacious actions of Apollo and TPG, and the combative restructuring of Caesars Entertainment. 

A taste:

Too many people — and often twenty- and thirty-something-year-old men trying too hard to prove themselves as tough guys — private equity and hedge fund alike, were fighting merely out of vanity. Most of these funds took money from identical pensions — Texas Teachers, CalPERS, CalSTRS. These fights to the death just moved money from different pockets of the same investors.

Mobile Money Metrics

GSMA has released its Mobile Money Metrics portal.
Given the vital and growing role that mobile financial services play globally, this is a terrific resource not only to glean insights on the scale of mobile money accounts, agents, and transactions by geography, but also the names of services in each country. 
It’s awesome. Check it out.

The Abraaj Fiasco

I wanted to experiment with a different format with the Portico Podcast, and decided to revisit my writings on the Abraaj fraud scandal as they were happening in real time a few years ago.

It’s hard to overstate the impact Abraaj’s governance failures had — and continue to have — on EM private markets. Give it a listen and let me know what you think.

Persistence in PE / VC Performance

fresh look at the persistence of PE & VC funds using Burgiss data.

From the Bookshelf

For decades, the U.S. Treasury’s approach to international finance was driven largely by what made sense for major American commercial and investment banks and the owners of financial capital. The interests of everyone else in the economy were largely ignored, if not outright opposed by counterproductive commitments to maintain a strong dollar. This was always justified on the grounds that deregulating capital and increasing its mobility would lead to the best possible outcomes.
The resulting increases in wealth, they explained, would inevitably trickle down to all Americans — never mind that international capital flows are far more likely to be driven by speculation, investment fads, capital flight, and reserve accumulation (often for mercantilist purposes) than by sober investment decisions about the best long-term uses of capital …
The world’s rich were able to benefit at the expense of the world’s workers and retirees because the interests of American financiers were complementary to the interests of Chinese and German industrialists. Both complemented the interests of the wealthiest throughout the world, even from the poorest countries. The modern surplus countries do not need colonies to absorb their excess production because they can work with bankers, their willing collaborators in the deficit countries.
The perverse result is that deepening globalization and rising inequality have reinforced each other.

— Matthew C. Klein and Michael Pettis, Trade Wars Are Class Wars (Yale University Press: 2020)

# # #

The information presented in this newsletter is for informational purposes only. Portico Advisers does not undertake to update this material and the opinions and conclusions contained herein may change without notice. Portico Advisers does not make any warranty that the information in this newsletter is error-free, omission-free, complete, accurate, or reliable. Nothing contained in this newsletter should be construed as legal, tax, securities, or investment advice.

Copyright © by Portico Advisers, LLC 2021, all rights reserved.

Ep. 8: The Abraaj Fiasco

I wanted to experiment with a different format for this episode and share my writings on the Abraaj fraud scandal as they were happening in real time a few years ago.

Now, for those who don’t know Abraaj, it was one of the largest — and probably the flashiest — private equity firms dedicated to investing in emerging markets. It was spearheading a big push into impact investing and was marketing a $6B fund when it collapsed in insolvency under allegations of fraud.

There are a few reasons why I wanted to revisit my articles:

  • First, the founder of Abraaj — a man named Arif Naqvi — had been fighting a battle in UK courts to avoid extradition to the United States. He lost that fight earlier this year.

  • Second, there’s a book coming out in July called The Key Man: The True Story of How the Global Elite Was Duped by a Capitalist Fairy Tale by two reporters at The Wall Street Journal — Simon Clark and Will Louch. I’m keen to bring them on the podcast to discuss the book and I wanted to provide some context in the hopes that one or both of them will join me in a few months’ time.

  • Third, the Abraaj story is a useful prism for seeing the world as it is — unvarnished. As you listen, I encourage you to think about how social capital, branding, and reputation are manufactured; how an industry that talks about due diligence did little to none; and the credulity that money buys.

So, there will be four parts to the story I share today. The first three were from the FebruaryMarch, and April 2018 editions of Portico’s much-beloved, monthly newsletter, Portico Perspectives.

The final part comes from the July 2018 edition.

As noted, this is an experiment, so please let me know what you think about the format and content. 

This podcast was recorded in April 2021.

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