Daily Musings

Evening all

headlines are buzzing with talk of secondary sale discounts as close to USD 3tn in PE capital is tied up in aged assets that are due to materialise. Seems PE firms like buying hotels so much, they have turned into Hotel California themselves.

While I check out and PEs do not seem to leave, I share my musings.

Cheers
Philip

Today’s Stories

• Lots of smaller funds are struggling to raise LP commitments. And mega caps are continuously pushing to raise larger and larger funds. Within this mix one VC sticks out. Benchmark. Bill Gurley’s shop just raised another USD 425m fund. Small for US standards and a firm with that branding. But that’s what the firm does. High conviction. Small funds. With that motto the firm also just raised its first founders fund. USD 175m. This is private capital coming from the partners at the firm. With that much skin in the game conviction is not a question. Would imagine their performance sheet is pretty unicorn-y for partners to triple down like that.

• Mubadala Capital just closed private equity fund No. 4 @ total commitments of USD 3.1bn. Ahead of the initial target size of USD 2bn. Focus will be on generalist mid market. Though investments in the likes of Gabi and Wefox may expose them well in the Insurance space.

• Morgan Stanley raised USD 2bn for tactical value fund No. 2. Tactical value meaning: Credit, hybrid, and non-control equity investments. In short: Mostly structured products

• Solar space power. May come to a galaxy near you. Seems simple enough to understand. Large satellites. Solar panels. No nights, clouds or particles in space to block sun rays (the dream of any sunscreen company). But like many things this does not come cheaply. Feasibility and cost studies by the ESA estimate that to cover ⅓ of Europe’s energy needs may cost hundreds of billions. Target timing some time mid century. But the physicist turned Robinhood co founder, Baiju Bhatt, seems to have different plans. He now launched Aetherflux His approach is to launch satellites in lower orbits. First satellite to launch 12-15 months from now. If this low cost demonstrator works the plan is to launch a constellation of satellites. Would imagine this can then attract govvy contracts

Chart Art

The US has the magnificent seven. Germany doesn’t need seven. Glorious 5 are enough. SAP, Siemens, Deutsche Telekom, Allianz and Munich RE. +32% this year. Outperforming the DAX by a solid 16% margin.

A topic I can’t seem to get enough of. Treasury Yields. The 10Y is rising further. Seems though that not only inflation expectations are pushing the yield. As real yield figures are markedly elevated. But the FED lowered rates. What seems counterintuitive at first may or may not make more sense after my explanation:

• Lower benchmark rates should in principle lower yields. This may happen across the maturity curve but it may also not. The shorter end - specifically the 2 year - tends to react most analogously to benchmark rate changes.

• The long tail tends to be driven by market expectations on inflation, fiscal deficits and overall the risk premium

• Sticky Inflation erodes purchasing power. Investors will require higher yields to be compensated.

• The fiscal deficit can in part be reduced through effective fiscal regimes - often this just translates to tax. But dominantly looming deficit tends to mean the state will borrow. While this can mean less Money chasing goods - I.e. lower inflation - the main result tends to be the need to entice investors and offer a higher coupon on the issued paper. In tandem, the price of the issued notes lowers and by inverse the yield climbs.

• Also noting that generally a higher deficit is associated with higher risk premia - the spread above benchmark rates should rise

So where are markets?
No definite answer but some scribblings below. Lots of data that looks risk additive:

Excl. the top decile of companies profits in US are flat. Excluding the top 50% profits are drastically declining. Adding that an increasing share of Russell 2000 Cos are looking at negative earnings.

Unemployment has been rising even excl. the states that have been impacted by the recent Hurricanes, while the Michigan survey suggests broad based economic deterioration that is more dire than traditional employment figures suggest.

Inflation expectations are sticky and high