Author: Mike

A CDO for Secondaries?

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A year or so ago I floated the idea of an index fund for EM private assets.

What if there were an asset manager that could agglomerate a sufficient pool of capital through a publicly listed vehicle (e.g., a super-SPAC) to go out and purchase — in whole or in part — scores of PE-backed companies across EM?

Would a diversified portfolio — at scale — provide better risk-adjusted returns than existing public and private equity funds? 

My bias had been toward equity.

But what if the answer is debt? 

And not just any kind of debt, but securitized debt?

 * * *

Andrew Lo — Director of the MIT Laboratory for Financial Engineering — recently gave a fascinating lecture on new funding models for biomedical innovation as part of the Markus’ Academy series of webinars at Princeton’s Bendheim Center for Finance.

Lo argues that, whilst we’re living amidst a revolution in a variety of ‘omics’ (e.g., genomics, proteomics, microbiomics), to actualize and commercialize scientific and medical advancements, we need a revolution in economics — particularly in how we finance innovation.

At first glance it might seem like an odd proposition.

Even if U.S. venture is exhibiting a ‘diversity breakdown,’ biopharma companies are sitting on $1.5 trillion in ‘firepower’ to fund transactions.

Isn’t there enough funding available already?

Lo asks us to ponder whether it’s worth making a $200m investment in something with the profile of a single anti-cancer compound (i.e., 5% probability of a positive payoff after 10 years of R&D). If successful, annual profits would be $2B / year for 10 years (a present value of $12.3B).

At a 95% failure rate, investing makes little sense.

But Lo points out that if you could invest in 150 programs simultaneously (totaling $30B of capital), the probability of 3 successes out of 150 attempts is 98.18%, and the Sharpe ratio increases from 0.02 to 0.34.

* * *

What if we translate this idea to the EM private markets index?

Would we see:

  • A lower cost of capital for EM companies?
  • Longer runways for value creation?
  • Higher risk-adjusted returns for investors?
  • Lower fees?
  • Greater liquidity (e.g., coupons)?

I don’t know.

But I wonder: maybe — maybe — the solution for the artisanal industry of EM private markets is diversification and massive scale?

— Mike

Viktor Shvets on The Great Rupture

In the latest episode of the Portico Podcast, I speak with Viktor Shvets, a global strategist at Macquarie, and the author of the deeply thought-provoking book The Great Rupture, which investigates the past and interrogates current trends to probe the question: do we need to be free to be innovative, prosperous, or even happy?

You may want to grab a pen and some paper to take notes for this episode because Viktor is a polymath who will engage your brain in some important — and at times, unsettling — thought experiments.

Viktor and I discuss:

  • Why he wrote a book that looks for lessons in the 12th to 15th Centuries to guide us through the next two decades;
  • Whether the ‘operating system’ of open markets, property rights, and open minds that generated prosperity in the past is in retreat — and even if it were, would it matter;
  • The confluence of the information and financial revolutions, and how these two forces are hollowing out the core frameworks of society;
  • The state’s usurpation of the free market and what it means for capitalism and commercial banking;
  • The prospects for emerging markets in an era of de-globalization and the importance of EMs’ non-tradable sectors;
  • Whether universal basic income might liberate people from scarcity and empower them to live lives of their choosing.

But there is so, so much more.

Check it out on Apple Podcasts | Google Podcasts | Spotify

Does PE Investment in Healthcare Benefit Patients?

No.

  • “Our estimates show that PE ownership increases the short-term mortality of Medicare patients by 10%, implying 20,150 lives lost due to PE ownership over our twelve-year sample period. This is accompanied by declines in other measures of patient well-being, such as lower mobility, while taxpayer spending per patient episode increases by 11%.”
     
  • “We find that going to a PE-owned nursing home increases the probability of taking antipsychotic medications — discouraged in the elderly due to their association with greater mortality — by 50%.”
     
  • “We find that PE ownership leads to a 3% decline in hours per patient-day supplied by the frontline nursing assistants who provide the vast majority of caregiving hours and perform crucial well-being services such as mobility assistance, personal interaction, and cleaning to minimize infection risk and ensure sanitary conditions. Overall staffing declines by 1.4%.”
     
  • “A puzzle is why nursing homes are attractive targets given their low and regulated profit margins, often cited at just 1-2%. Using CMS cost reports, we find that there is no effect of buyouts on net income, raising the question of how PE firms create value. There are three types of expenditures that are particularly associated with PE profits and tax strategies: “monitoring fees” charged to portfolio companies, lease payments after real estate is sold to generate cash flows, andinterest payments reflecting the importance of leverage in the PE business model (Metrick and Yasuda, 2010; Phalippou et al., 2018). We find that all three types of expenditures increase after buyouts, with interest payments rising by over 300%. These results, along with the decline in nurse availability, suggest a systematic shift in operating costs away from patient care.”

Bain’s Global PE Report

A few highlights from the year in review:

  • Global buyout deal value reached $592m (up 8% yoy) whilst deal count declined by 24%;
     
  • ~70% of U.S. buyouts were priced above 11x EBITDA whilst ~80% of deals are leveraged 6x or greater; and,
     
  • The number of global buyout exits appears to have fallen below 1,000 — the worst year since 2009.

Hugh MacArthur and Mike McKay ask: Have classic buyout funds run their course?

When I look at the data points highlighted above, I think the answer will turn out to be a resounding ‘yes.’

MacArthur and McKay point to the rise of specialist funds, carving out space for a discussion on the evolution of Vista’s strategy, among other things.

Look. Buyout firms absolutely need a differentiated value proposition.

But in a world of capital superabundance, the average buyout firm offers declining utility as an allocator of capital.

Governance

Speaking of Vista.
 
By now you will have heard that Vista’s founder, Robert Smith, struck a non-prosecution deal with the U.S. government in which he admitted to evading taxes for 15 years.
 
There are some lawsuits alleging mismarked assets and self-dealing.
 
Amidst all the talk about ESG, do institutional LPs value good governance?
 
In the case of Vista, one seems to. Several don’t.
 
But it’s a much bigger question (Abraaj: Redux 👀).

Do institutional LPs actually do their homework on larger funds?
 
Or are the investment teams too cozy with their contractors?

Zhou Xiaochuan and the eRMB

Caixin / Nikkei Asia published an important article from former PBOC governor Zhou Xiaochuan on the landscape for a digital renminbi. This is a space worth watching.

From the Bookshelf

Human history is indeed filled with endless possibilities; and the Renaissance saw this more clearly than either classicism, Catholicism or the Reformation. But it did not recognize that history is filled with endless possibilities of good and evil. It believed that the cumulations of knowledge and the extensions of reason, the progressive conquest of nature and (in its later developments) the technical extension of social cohesion, all of which inhere in the “progress” of history, were guarantees of the gradual conquest of chaos and evil by the force of reason and order. It did not recognize that every new human potency may be an instrument of chaos as well as of order; and that history, therefore, has no solution of its own problem.

— Reinhold Niebuhr, The Nature and Destiny of Man: Volume II. Human Destiny (Charles Scribner’s Sons: 1964)

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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. 7: Viktor Shvets on The Great Rupture

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In this episode of the Portico Podcast I speak with Viktor Shvets, a global strategist at Macquarie, and the author of the deeply thought-provoking book The Great Rupture, which investigates the past and interrogates current trends to probe the question: do we need to be free to be innovative, prosperous, or even happy?

You know, when I started this company, I laid out three philosophical principles for its ethos: intergenerational equity; value creation > value extraction; and intellectual curiosity — particularly a belief in the importance of contextual and interdisciplinary thinking and open exchange. 

As you’ll hear, Viktor’s comments deftly navigate these three principles.

You may want to grab a pen and some paper to take notes for this episode because Viktor is a polymath who will engage your brain in some important — and at times, unsettling — thought experiments.

In today’s conversation, Viktor and I discuss:

  • Why he wrote a book that looks for lessons in the 12th to 15th Centuries to guide us through the next two decades;
  • Whether the ‘operating system’ of open markets, property rights, and open minds that generated prosperity in the past is in retreat — and even if it were, would it matter;
  • The confluence of the information revolution and financial revolution, and how these two forces are hollowing out the core frameworks of society;
  • The state’s usurpation of the free market and what it means for capitalism and commercial banking;
  • The prospects for emerging markets in an era of de-globalization and the importance of non-tradable sectors across EM; 
  • We even talk about Andrew Yang and the possibility that universal basic income might liberate people from scarcity, and empower them to live lives of their choosing.

But there is so, so much more.

This is a good companion to my interview with Tom Burgis in Episode 4 on The Rise of Kleptocracy, and the topic of corruption comes up a couple times in this episode, so you should check out Episode 4 if you haven’t already. 

And I’ve also included links in the show notes that will point you to a few additional readings that Viktor and I discuss, including some of my own writings over the last decade that have marinated over some similar themes.

I hope you enjoy the conversation.

This podcast was recorded in February 2021.

Learn more about Viktor and the book.

Buy The Great Rupture at Amazon, Barnes & Noble, IndieBound, Waterstones.

Books and articles referenced include:

Some of Mike’s writings on the themes discussed include:

New Frontiers

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A review of the accounts reveals that Covid-19 drove a 60% decline in Portico’s revenues compared to our 3-year average.

Oof.

Not keen to repeat that gut punch.

Onward.

I’ve been thinking about the mission that animated me to launch Portico ~5 years ago: closing the finance gap through the creation and dissemination of knowledge.

As it says on our website:

Though the world is awash in capital, a variety of bottlenecks inhibit its flow to productive users of financing — particularly in markets where capital is a relatively scarce factor of production.

I conceived of the finance gap through the prism of geography, in large measure because that’s where my journey started.

However, there are other “markets” where capital scarcity is a pernicious problem.

At its core, Portico helps carve out channels so that financial capital can flow to productive enterprises that increase the general welfare.

As we step forward into 2021, we’re going to adopt a more expansive view of this problem.

The approach is two-pronged: expanding the market for our existing services; and creating a separate business that can address our mission at scale.

* * *

Expanding the market for our existing services

Though we will still serve long-term investors and entrepreneurs in emerging and frontier markets, we will target two additional “markets” where capital is relatively scarce:

  1. Science — I discussed the gamification of U.S. venture capital back in 2019, placing a spotlight on the evaporation of funding for life-sciences innovation.

    Advancements in deep science push humanity forward and enhance well-being.

    Yet, the superabundance of capital chasing software startups is contributing to a “diversity breakdown” in venture investing.

    We’re excited to be starting the year working with Europe- and U.S.-focused VCs investing in leading-edge science.

  2. Enabling infrastructure — We’re targeting opportunities with companies that are addressing the “variety of bottlenecks” mentioned above.

    The priority bottlenecks are currency risk management, liquidity solutions / secondaries, and pipeline development.

* * *

Creating a separate business

It is manifest that a new model is needed for providing risk capital to entrepreneurs, particularly — but not exclusively — across Africa, Asia, and Latin America.

Businesses need long-term, equity / equity-like financing.

Investors want faster liquidity.

And legacy capital market solutions have proven inadequate to the challenge.

I think an answer lies in crypto and the tokenization of assets.

Look. There’s a lot of nonsense in the crypto space, and many of its boosters are delusional, petulant children.

Be that as it may, crypto offers a refreshingly open design space that could enable new configurations of economic exchange.

I’m still in learning mode and am wrestling with new ideas and business models. 

But I think crypto has the potential to distribute wealth creation and capture more broadly than our current system.

And that is needed urgently.

Stay tuned!

Alla prossima,
Mike

Jake Cusack on Frontier & Fragile Markets

In the latest episode of the Portico Podcast, I interview Jake Cusack, co-founder and Managing Partner of The CrossBoundary Group — a firm that unlocks private capital for sustainable growth and strong returns in underserved markets.

I first reached out to Jake ~10 years ago, after he and one of his co-founders published a study on entrepreneurship and private sector development in Afghanistan. 

That initial contact kicked off a series of conversations on how to harness markets and mobilize private capital to build businesses in frontier and fragile markets — the overarching topic of this episode.

Jake and I discuss:

  • His journey from the Marine Corps to founding CrossBoundary;
  • The critical role that investment facilitation plays in creating investable pipeline;
  • The rationale for CrossBoundary’s expansion from an advisory firm to a group that also manages investments;
  • The suitability of the traditional private equity model in frontier markets;
  • Recruitment, and how to inculcate a shared culture across a globally dispersed footprint;
  • CrossBoundary’s recent initiative to open source its approach to project financing mini-grids;
  • And much, much more.

 Check it out on: Apple Podcasts  |  Google Podcasts  |  Spotify

Grab Bag

From the Bookshelf

For this is your home, my friend, do not be driven from it; great men have done great things here, and will again, and we can make America what America must become.

 — James Baldwin, The Fire Next Time (Vintage: 1993)

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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. 6: Investing in Frontier & Fragile Markets

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In this episode of the Portico Podcast I speak with Jake Cusack, co-founder and Managing Partner of The CrossBoundary Group, a firm that unlocks private capital for sustainable growth and strong returns in underserved markets.

I first reached out to Jake about 10 years ago after he and one of his co-founders published a study on entrepreneurship and private sector development in Afghanistan.

That initial contact kicked off a series of conversations on how to harness markets and mobilize private capital in order to build businesses in frontier and fragile markets, which is the overarching topic of this episode.

In today’s conversation, Jake and I discuss:

  • His journey from the Marine Corps to co-founding CrossBoundary with a couple classmates from Harvard;
  • Why investment is a better tool for development than the provision of grants;
  • The critical role that investment facilitation plays in creating investable pipeline;
  • The rationale for CrossBoundary’s expansion from an advisory firm to a group that also manages investments
  • The suitability of the traditional private equity model in frontier markets;
  • Recruitment and how to inculcate a shared culture across a globally dispersed footprint;
  • CrossBoundary’s recent initiative to open source its approach to project financing mini-grids;
  • And much, much more.

There are loads of links below that will take you to the articles, books, and reports discussed in the episode, as well as other resources of interest.

These include CrossBoundary’s research studies with IFC on private equity in fragile and conflict-affected situations in Sub-Saharan Africa, their recent report on scaling up investment in Africa in the Covid-19 era with the Tony Blair Institute for Global Change, and many others.

If you’re interested in their open-source initiative for mini-grids, the team will be sharing term sheets for the project finance contracts, as well as a template model, on 15 February — so take a look and take action if this is in your area of interest.

This is a great companion to my interview with Roger Leeds in Episode 2 on Private Equity & Development. So, if you missed that interview, I invite you to visit the archive and give it a listen.

And if you’re feeling motivated after listening to Jake, then navigate to crossboundary.com/careers to peruse their job openings.

I hope you enjoy the conversation.

This podcast was recorded in January 2021.

CrossBoundary resources referenced in this episode include:

Books and articles referenced include:

You may also find some of Jake’s writing below:

The Decade of Digital Assets

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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)

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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 2020, all rights reserved.

Ep. 5: Weijian Shan on Leverage and Turnarounds in Asia

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In this episode, I speak with Weijian Shan, the chairman and CEO of PAG — a leading Asia-focused alternative investments firm with ~ $40 billion of assets under management.

Prior to PAG, Shan was a co-managing partner of TPG Asia (formerly known as Newbridge Capital).

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 reforms had 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.

I reached out to Shan after finishing Money Games because — in addition to providing one of the few narratives to detail a private equity transaction from sourcing through exit — I think his book offers tremendous insights into the art of private equity deal-making, and I wanted to explore some of the themes it raises.

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.

Shan’s thoughtful comments prompted me to rethink some of my own analyses and assumptions. I really enjoyed this conversation, and I hope you will, too.

This podcast was recorded in December 2020.

Ep. 4: The Rise of Kleptocracy

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In today’s episode I speak with Tom Burgis, an investigations correspondent with the Financial Times, and author of two courageous books: The Looting Machine: Warlords, Tycoons, Smugglers and the Systematic Theft of Africa’s Wealth and the recently released Kleptopia: How Dirty Money is Conquering the World.

I strongly encourage you to buy copies of Tom’s books, read them, and share them with others.

Why?

Because as you’ll hear in this podcast, the themes his books cover constitute an existential threat to democratic institutions and governance — and the rule of law — globally.

They’re absolutely riveting yarns, full of intrigue and consequences.

And my hope is that if more people read Tom’s work, then we’ll stand a better chance of resisting the precipitous slide into kleptocracy that endangers us all.

Courage is contagious.

My discussion with Tom covers:

  • The dots connecting The Looting Machine and Kleptopia.
  • The story of Mukhtar Ablyazov — a Kazakh billionaire whom some say is a freedom fighter, some say is a fraudster, and some say maybe he’s both.
  • The complicity of U.S. and UK professional services firms in facilitating the activities and laundering the funds and reputations of kleptocrats.
  • Some mistaken assumptions behind the ‘convergence’ thesis.
  • How citizens can keep Kleptopia in check and revivify democracy.
  • John Kenneth Galbraith’s notion of ‘the bezzle’ and where ‘the bezzle’ is biggest now.
  • And, what the rise of Substack and the proliferation of journalists going solo or direct-to-consumer imports for the future of investigative journalism.

I’m fired up about this episode, and I hope you will be, too.

If you enjoy the Portico Podcast, please share it with friends, colleagues, and / or your connections on social media. Thanks!

This podcast was recorded in November 2020.

Ep. 3: Fintech & Financial Inclusion

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In the third episode of The Portico Podcast I speak with Monica Brand Engel — a co-founding Partner at Quona Capital, a venture capital firm focused on fintech for inclusion in emerging markets.

If you’ve looked into EM fintech, you’ve probably come across Quona and their portfolio companies.

For example:

  • Sokowatch in East Africa, a working capital provider and last-mile distributor of fast-moving consumer goods to informal retailers;
  • Coins in the Philippines, a mobile, branchless, blockchain-based platform that provides unbanked and underbanked customers with direct access to basic financial services (and which was acquired by Go-Jek in 2019);
  • Or Konfio, a digital banking and software platform for SMEs in Mexico, which received a $100m investment from Softbank as well as a $100m secured credit facility from Goldman Sachs last year.

I was excited to get Monica on the podcast because she has built a career in two of the most compelling themes around: financial inclusion and financial technology.

Our discussion opens with her walking us through her career trajectory. We then talk about the convergence between philanthropic and commercial investment across emerging markets; the commonalities and idiosyncrasies across the markets in which Quona invests; the quality of fintech entrepreneurship in EM; the prospects for technological and business model innovation to migrate from emerging markets to the United States and Western Europe; and the biggest obstacles fintech startups encounter as they attempt to scale, among other topics.

I hope you enjoy our conversation.

This podcast was recorded in October 2020.

Is EM PE Dead?

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When Portico launched four years ago, I asked “Is Emerging Markets Private Equity Dying?”

There’s no need to ask the question anymore.

It’s dead.

You don’t have to take my word for it — the DFIs are telling us so.

For instance, Clarisa De Franco, Managing Director for Africa Funds, Funds and Capital Partnerships with CDC Group, recently told PEI:

I also think we will see fewer new funds emerge as fundraising becomes challenging and consolidation plays out. Our strategy now is two-fold: continue our engagement and innovation with teams that are addressing specific market inefficiencies (including first-time teams) and to back strong-performing existing GPs, with fewer new managers than previously because we believe that will help create a stronger industry that can focus on both financial and developmental outcomes.

Or, look at IFC’s recent report on EM PE funds in the era of Covid-19:

Fundraising in EMs is expected to become more challenging in the next two to three years, especially for funds targeting small and midsize companies. These funds will struggle to survive, while larger and more established funds will be less impacted but still need DFI support. The composition of the Limited Partner (LP) base in EMs will shift, with international institutional investors being constrained in their asset allocations to EMs. The life cycle of funds will see a lengthening in light of longer fundraising cycles and longer investee holding periods due to challenges in achieving exits.

(Also, Actis is eschewing the traditional PE model in favor of hard assets.)

Will there be traditional PE fund managers that raise capital in EM?

Of course.

But a vibrant, growing industry?

Forget about it.

There are capacity constraints, and there are different structures for investing in EM private companies.

Work on a Portico Pivot™️ is underway. 

* * *

 I recently recorded a podcast episode about private equity in Russia. I hope we get to release it.

During the conversation, the guest and I got to talking about the transition from the Soviet Union to what came after, and how generations experienced the shift differently. For instance, people aged 40+ often had difficulty adjusting to new conditions, while younger people benefited from a lack of habits and legacy thinking that communism had engrained in the older generations.

The discussion reminded me of a passage from Sebastian Haffner’s Defying Hitler. Recalling events in Germany in 1923, Haffner wrote:

The old and unworldly had the worst of it. Many were driven to begging, many to suicide. The young and quick-witted did well. Overnight they became free, rich, and independent. It was a situation in which mental inertia and reliance on past experience were punished by starvation and death, but rapid appraisal of new situations and speed of reaction were rewarded with sudden, vast riches.

Speaking of Weimar, the feeling that the United States is on the cusp of a crucible is palpable.

It’s banal to say that Covid-19 has been an accelerant for long-standing trends, but in the last couple of months it feels as if the fissures have broken open.

Perhaps it’s the paranoia of a c. 40-year-old American who fears getting caught flat-footed, but the international system that has defined my existence is gone, and it’s not going to be reclaimed.

The urgency to adapt is acute.

 * * *

If you are a U.S. citizen, please vote in this year’s election.

Election Day is Tuesday, November 3rd.

The website www.vote.org is helpful for finding out which voting options are available in your locality (e.g., early in-person, absentee by mail), and locating your polling place. 

Vote!

Alla prossima,
Mike

Asia

Two recent pieces on private equity in Asia caught my eye. 

1.McKinsey & Company interview with Baring Private Equity Asia Founding Partner Jean Eric Salata.

Insightful take on the deepening of the Asian market — not only in terms of the strategies and sectors that attract investment, but also in terms of the evolution of human capital and the professionalization of asset management firms. Particularly thoughtful on the necessity of infusing digital capabilities throughout one’s operations and the investment cycle.

2. BCG report on The Promise for Private Equity in Asia-Pacific. 

There’s not much new in it, candidly, but it rightly points out the heterogeneity of investors in private markets, and it has a useful data nugget: “As of 2018, China, India, South Korea, and Thailand all ranked in the top 10 countries globally for number of family-owned businesses with market capitalization of over $250 million.”

While Portico has been cautious on investor exuberance toward mega-cap Asia and China-dedicated funds — and we watch the dogpile into Jio / Reliance Retail quizzically — the region is core.

On this point, Benedict Evans put out a thought-provoking essay on “The End of the American Internet.” Upwards of 90% of internet users are outside of the United States; China and India have 5x as many smartphones as the USA; and, the “RoW” (largely China) accounts for nearly half of global venture investment.

Someplace Else

The placement agent Eaton Partners conducted an LP Pulse Survey in September. They asked LPs which region is home to the best private market opportunities. 

The verdict: 

  • North America — 68%
  • Europe — 18%
  • Asia — 14%
  • “Someplace else” — 0%

Josh Lerner on U.S. Venture

One of the assertions I put forward last year is that the institutionalization of U.S. venture capital is leading to less innovation.

Josh Lerner and Ramana Nanda published a paper over the summer that argues a similar point. In short:

Three issues are particularly concerning to us: 1) the very narrow band of technological innovations that fit the requirements of institutional venture capital investors; 2) the relatively small number of venture capital investors who hold and shape the direction of a substantial fraction of capital that is deployed into financing radical technological change; and 3) the relaxation in recent years of the intense emphasis on corporate governance by venture capital firms.

Stash

Sometimes it’s fun to contemplate the embedded assumptions amongst the venture community.
 
For instance, Anish Acharya at Andreessen Horowitz wrote a blurb about Stash, a fintech startup that enables people to earn fractional shares as a reward when they use the Stash debit card at a merchant (i.e., you get a slice of Starbucks stock when you purchase a pumpkin spice latte or whatever).
 
Acharya believes bringing the ‘intelligent default’ to the 401(k) — making it opt-out as opposed to opt-in — is “one of the biggest forces for financial progress.”
 
Oodles of assumptions about financialization, ‘nudge’ psychology, etc.
 
Anyway, Stash is positioned as a way to help regular people build wealth … by spending their money. (There’s a monthly fee of $1 to $9, btw).
 
At first glance, this seems like a good idea. Rather than points or cash back, why not acquire a fraction of a share of stock?
 
But if you think about it for a minute longer, you’ll realize that it ‘nudges’ consumer spending toward large, publicly listed companies, leaving smaller, privately held businesses in a lurch.

From the Bookshelf

The boy thought he smelled wet ash on the wind. He went up the road and come dragging back a piece of plywood from the roadside trash and he drove sticks into the ground with a rock and made of the plywood a rickety leanto but in the end it didnt rain. He left the flarepistol and took the revolver with him and he scoured the countryside for anything to eat but he came back emptyhanded. The man took his hand, wheezing. You need to go on, he said. I cant go with you. You need to keep going. You dont know what might be down the road. We were always lucky. You’ll be lucky again. You’ll see. Just go. It’s all right.

I cant.

It’s all right. This has been a long time coming. Now it’s here. Keep going south. Do everything the way we did it.

You’re going to be okay, Papa. You have to.

No I’m not. Keep the gun with you at all times. You need to find the good guys but you cant take any chances. No chances. Do you hear?

I want to be with you.

You cant.

Please.

You cant. You have to carry the fire.

I dont know how to.

Yes you do.

Is it real? The fire?

Yes it is.

Where is it? I dont know where it is.

Yes you do. It’s inside you. It was always there. I can see it.

Just take me with you. Please.

I cant.

Please, Papa.

I cant. I cant hold my son dead in my arms. I thought I could but I cant.

You said you wouldnt ever leave me.

I know. I’m sorry. You have my whole heart. You always did. You’re the best guy. You always were. If I’m not here you can still talk to me. You can talk to me and I’ll talk to you. You’ll see.

Will I hear you?

Yes. You will. You have to make it like talk that you imagine. And you’ll hear me. You have to practice. Just don’t give up. Okay?

— Cormac McCarthy, The Road (Vintage: 2006)

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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 2020, all rights reserved.

Ep. 2: Private Equity & Development

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When I decided to launch the podcast, I wanted today’s interviewee — Roger Leeds — to be one of the first guests. And I wanted to explore the theme of private equity and its role in private sector development in emerging and frontier markets.

A bit of background may be helpful.

15 years ago or so I was working for the Department of Defense on strategies to address a variety of intractable issues.

For one such issue, I was the youngest member of an interagency team working with senior civilian and military commanders in Baghdad and Kabul on interior ministry and police reform.  U.S. policymakers had dubbed 2006 the “Year of the Police,” but as the year passed by, the results trickled in; and I grew increasingly skeptical about the ability of the United States to effect positive and enduring change in Iraq. 

Moreover, when viewed in a broader perspective of state-building, counterterrorism and U.S. national security objectives, I became convinced that the only viable long-term solution was to drive investment into the region, create jobs and, over time, generate licit opportunities for people to feed their families.

So, it was off to grad school to study economics and finance, where I serendipitously learned about something called private equity and how it could drive private sector development in emerging markets.

Roger Leeds taught that course. He had a profound influence on me when I was a student at the Paul H. Nitze School of Advanced International Studies (SAIS), and his positive influence endures to this day.

Roger worked as an international financier for 25 years before joining the faculty at SAIS. After working as an investment banker at Salomon Brothers, Roger was at the forefront of the development of the emerging market private equity industry, not only as a senior staff member at the International Finance Corporation, but also as a private equity investor, and as the co-founder of the Emerging Markets Private Equity Association (EMPEA).

Roger is the author of Private Equity Investing in Emerging Markets: Opportunities for Value Creation — the seminal book on the topic, which I encourage every listener to pick up and read.

In our discussion today, we talk about the structural drivers that make private equity a useful investment strategy in emerging markets, and how it is qualitatively different than the leveraged buyout model that is prevalent in the United States and Western Europe.

We also talk about the hollowing out of mid-market PE funds in emerging markets and why it’s a problem, the story of local currency PE funds in China, and his work with Francis Fukuyama on the Leadership Academy for Development, among other things.

I hope you enjoy our conversation.

This podcast was recorded in July 2020.

Buy Roger’s book directly from the publisher, or via Amazon, Barnes & Noble, IndieBound, JD.com, or wherever fine books are sold.