People are selling stuff in private markets
One of the “secrets” of large funds – sovereign wealth and pension funds as well as the larger hedge funds – is that they make a lot of private market investments which are basically illiquid and then are marked up at an arbitrary rate. Meaning, even if your common stock investments go down, you can still mark up your private market investments by 10% or whatever. This is a really helpful if you are managing a portfolio: maybe you call it “uncorrelated alpha” – 60% of your chips may be down, but that allocation to private markets means you may see a positive return or a less-bad return. Private market investments have become ever-larger in the last decade or two, as founders got what they wanted: funding and a valuation, and investors got what they wanted: a steady stream of returns. The risk is basically the same risk that is posed by investing in highly liquid hyped-up stocks (Tesla, etc) – once the consensus that company A is worth X changes, and everyone tries to cash out – well, we’ve seen that movie before.
So we noted with interest in today’s FT that Tiger Global – the massive fund founded by Chase Coleman – is looking at cashing out of some of its $40B portfolio of privately held companies. It includes stakes in Stripe, Bytedance and Databricks. Could it be that the private market is starting to see the tide coming in? When you sell stakes in a private company you do it on the so-called “secondary market”, and that market has surged in recent years – dealing worth $105B were struck last year, which is five times the value of similar transactions a decade ago. That’s a lot of illiquid stock being bought and sold! Tiger Global is a “big boy”: we wonder, once the “big boys” start throwing out their toys from the sandbox, what is the read-through for the private market as a whole? Howard Marks, the billionaire founder of Oaktree, is thinking the same. He points out that the credit extended to the private market “arena” is +$1.5 trillion. That’s the other part of the equation: in an era of cheap credit funds went out and took out loans to buy into these illiquid companies. The amount of credit extended has grown exponentially. Look at the chart below (also from the FT).
If you are Marks it is a good time to be a lender: there’s no doubt a bunch of loan books containing private market loans will become discounted as lenders seek to cash out – it’s a similar quagmire to the SVB dilemma: capital generating a really low yield and the need for a higher yield if the “liquidity” button is pressed. It’s an interesting time. This is not to say that private markets are bad. They serve a purpose. It’s that gravity hasn’t met private market valuations yet. Growth in the private market has continued unabated, as the chart below from McKinsey shows.
The problem is that “private markets don’t like to go down” (we’re borrowing the phrase from Matt Levine). If you are a fund that invests mostly in private markets, you charge high fees because you are protecting against the chop of normal returns – you can have a chart which basically is smooth and goes up: allocators like this! If you are, say, a Silicon Valley unicorn, and you want to raise some money, you want to raise that at a higher valuation than your previous fundraising round. If you’re the investor you don’t want that valuation to go down either, because you’d have to write-down your return as well. If you are a loss-making tech company you probably are burning money and would make more. In the previous environment, you could call up Mayoshi Son at Softbank and he’d cut you a cheque. Now money is expensive and people like Mayoshi Son are less free with their money, and founders (and investors) are loathe to raise money at a lower valuation. On top of that, you’ve got funds like Tiger worried about the environment for private markets, so they’re trying to get out. What do you do? You can do a “structured offering” where you essentially offer preferred shares to investors in the latest funding round, but the general idea is the same – avoid write-downs at all costs. With Tiger selling down, the die is cast.
Consumers have less cash than they used to
The last quarter gave us a pretty mixed bag of results – some weakness in consumer discretionary categories, but continued spending on services + travel. Now here’s an interesting chart. Household savings increased during Covid – there was QE propping it all up, and then as consumers started to get out of lockdowns they “revenge spent” like crazy. Now the consumer has net-negative excess household savings. They have spent down! This is worth thinking about, we think, and wondering what the read-through is for companies in the next quarter. We’re not making any hard-and-fast assumptions; Apple outperformed this quarter and LVMH and Hermes continue to sell a lot of luxury goods. But it’s an interesting chart.
Misc
Weak trading up date from The Warehouse – +10% sales at the Red Shed but -3% sakes across its other divisions.
Noting more bankruptcies and liquidations – the company behind Harvey Norman Commercial in NSW has been placed into liquidiation.
Looking forward to a good slate of earnings from Xero, Aristrocrat, Goodman Property Trust, Ryman and more. Looking for UK sales numbers/customer attrition for Xeroin the UK.
Noting +111k new migrants in NZ YoY — expecting modest residential growth as a result.