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? 

—Mike


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.

#cryptoisthefuture


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. 🙂

EM SPACs
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.

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.

And:

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.

New Frontiers

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)

# # #

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.