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)

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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.

Is EM PE Dead?

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.