The Future is Now!
On Saturday May 30th, NASA astronauts Robert Behnken & Douglas Hurley flew on SpaceX’s Crew Dragon spacecraft, lifting off on a Falcon 9 rocket from Florida’s space coast, the first manned U.S. launch since 2011[i]. This new era of human spaceflight comes when the terrestrial world is in the grip of the worst is in the grip of the worst pandemic in modern times: over 5.5mm COVID-19 infections, with a death toll approaching 500,000[ii]. As most of our 50 United States reopen, the virus spread is accelerating in Brazil & other parts of Latin America, Africa and on the Indian Subcontinent. While China claims no new cases, public health experts globally discount the veracity of these claims, and their honesty throughout the entire spread of the Coronavirus.
As Americans celebrate Memorial Day weekend, epidemiologists, labs and scientists at over seventy pharmaceutical firms globally, race to develop tests, therapeutics, and yes, vaccines. Private sector and public health initiatives have largely resolved the shortage of necessary “PPE” goods such as face shields, gloves, gowns, masks, reagents, swabs and ventilators. Thousands of commercial testing facilities & laboratories are processing tests so as to provide us additional data points on antibody, spread and progressing towards “Herd Immunity” as other common flu-like virus’ are managed. Technology titans Apple, Facebook, Google & Microsoft are now offering tracing apps on mobile phones to assist us in the fight against the novel Coronavirus. This global alignment of vast resources & skills appear to be gaining an edge, in this epic battle.
Economically, COVID-19’s carnage is evident in unemployment levels of 15% & over 25mm million people unemployed, in the United States alone[iii]. However, the “green shoots” of growth clearly can be seen as businesses reopen, employees return to work, shoppers buy goods & services and people seek to return to some semblance of their lives before COVID-19.
Public equity markets in Q2 bounced 35% off the March lows[iv], with broad benchmarks, like NASDAQ, within 5% of all-time highs[v]. Please note markets anticipate future growth, while economist recount past data points, so wise investors seek to anticipate this. Since one can’t drive well using the rear-view mirror, perhaps one shouldn’t manage assets looking backwards. Adit looks ahead at revenue growth, seeing earnings driving valuations higher.
Adit believes the future is now, as long-term secular trends such as AI/ML, big data, cloud, cyber, digital health, ed-tech, FinTech, immunology, IoT, mobility, nutrition & space are impacting lives daily & driving capital flows. Technology is helping mitigate impacts of COVID-19: Helping employees & students be productive from home, enabling accurate testing, tracking & treatment for exposed populations, accelerating drug development & production to name a few tangible examples. We expect to see video conferencing, virtual reality & drone delivery ahead.
Furthermore, as Adit shared in Q1, best entry points for investing is during recession, according to Cambridge. The Kauffman Foundation Research Reports “The Economic Future Just Happened” & “Entrepreneurs & Recessions: Do Downturns Matter?” concludes some key facts.
- Recessions do not prevent business formation & do not negatively impact survival. Fact: 57% of today’s fortune 500 were founded during recessions[vi]: IE: Google, Salesforce
- Competitive pressures lessen, after recession, as ineffective, less productive firms die.
- Unemployment, by definition, opens up deep motivated pools of human capital, driving new business formation. As Plato elegantly said, “Necessity is the mother of invention”.
This fact can be seen below as the record number of business formed after the great depression in the ‘30s, in the’ 80s, after ‘01 dot.com bubble & after ’08 – ‘09 Great Recession.
Fortune 500 Businesses Founded by Decade
Drilling into data now, we see massive government stimulus, in the US Federal Reserve expanding its balance sheet to over $7T[vii]. Money supply growth is off any historic scale, at multiples of the last recession, which is net positive, and portends well for future valuation of financial assets, if history is any guide. Congress, no stranger to spending money, has provided over $6T of stimulus[viii], including the CARES & PPP programs, with materially more already in process. The U.S. Treasury, led by former Goldman Sachs banker Steven Mnuchin, has also provided industries like airlines, hotels and restaurants hundreds of billions of dollars in loans.
Overseas the Chinese Central Bank has provided trillions in liquidity across its array of tools. Japan and Europe have also provided massive aid packages in unprecedented size over these past five months. Adit estimates stimulus, thus far, north of $22T, or an amount larger than the entire annual GDP of the United States. Unprecedented viral pandemic calls for unprecedented fiscal stimulus, and this process is clearly underway.
Given recent experience in ’08, US banks remain solid, despite possible write-offs related to energy, hospitality & retail likely ahead as not all survive in any downturn. Furthermore, the housing market, which triggered massive losses in ’08 – ’10, is less vulnerable today. Underwriting standards are more rigorous, there is far less supply, and interest rates are lower than ever in history. In fact, many rural real estate markets today are seeing increased demand due to the attractiveness of low density living today.
Steadily increasing housing prices also provides the consumer confidence to spend, which is evident from solid earnings by Home Depot, Lowes & in the home improvement sector. Healthcare & information technology spending also remains strong. Food and consumer staples are consistently strong and even more so today. Clorox and Proctor & Gamble are prime examples of these trends, which provide us some comfort.
Private Equity today enjoys the results of the longest economic expansion in history: robust returns, many clients & record amounts, $1Trillion+, of dry-powder to invest in deals. As the chart below displays, this cash means companies have an ability to tap into these reserves, albeit with lower valuations, to survive the downturn and thrive in future quarters. This is exactly what Airbnb did in April, when it borrowed $2B from Silver Lake, TPG, Blackrock, Oaktree, Benefit Street & key other “smart-money” folks. Adit Ventures joins them in their optimism for the future as we too see robust returns from investing now. Airbnb removed the existential threat to their business, buying 3 years of runway, until the travel economy improves so they can generate meaningful revenues soon. People will travel via Airbnb we believe & soon.
Finally, markets provide investors a means to invest now in return for future cash flows. With the uncertainty of the COVID-19 lockdown, uncertainty reigned supreme, so prices dropped as investors fled “risk assets”. Adit invests for growth; companies with growing customers & revenues, improving margins, increasing scale across multiple sectors. In a slow-growth/no-growth economy, these firms are more appealing than ever.
Adit sees exciting opportunities in many sectors today, just as the large name-brand firms, to invest now on favorable terms, potentially generating returns in years ahead. As Brian Chesky, Airbnb’s CEO said on a call with Silver Lake after the deal, “The past sixty days were like 60 months, 60 quarters, perhaps even 60 years, in accelerating trends in the business world.” Secular trends like AI/ML, Big Data, Cloud, Cyber, FinTech, Digital Healthcare, Mobility and more are firmly entrenched, and moving ahead faster than before. “Adapt or perish” is a quote from Charles Darwin’s Evolution of the Species which Adit takes to heart investing in companies who’ve been adapting using technological services & tools with great success. Today we see more opportunity than ever in the wake of the pandemic’s dislocation, as the future is now.
Wishing you & family continued good health. Please look at the new opportunities ahead with Adit, as we continue working on your behalf providing access, diligence and insights on trends and technologies to you, our trusted investor partners.
As always, we wish you happy investing, now & always.
Eric Munson & the Team at Adit Ventures
This is not an offer to purchase securities. Any offer to purchase securities is made to selected investors and must be made in accordance with all local and federal securities regulations, and by a private placement memorandum. All the information provided is deemed to be accurate and obtained from reliable sources. However, there can be no assurances that the information herein is correct. All investors should make their own investment decisions in conjunction with accountants, advisors and or counsel. Please refer to our Limited Partnership Agreement and Private Placement Memorandum for complete disclosure about each of our special purpose vehicles (each, the “Fund”). There is a risk supplement specific to each individual company which includes information on each of the emerging growth equities we invest in, outlining the issues facing the firms. All information herein reflects the opinions of Adit Ventures, LLC.
The portfolio companies identified do not represent all of the investments made or recommended for the Fund. It should not be assumed that investments made in the future will be profitable or will equal the performance of the investments in this list. Past performance does not guarantee future results. Additional information, including (i) the calculation methodology; and (ii) a list showing the contribution of each investment to the Fund’s performance during the quarter will be provided upon request.
The graphs, charts and other visual aids are provided for informational purposes only. None of these graphs, charts or visual aids can of themselves be used to make investment decisions. No representation is made that these will assist any person in making investment decisions and no graph, chart or other visual aid can capture all factors and variables required in making such decisions.
Any projections, forecasts and estimates contained in this document are necessarily speculative in nature and are based upon certain assumptions. In addition, matters they describe are subject to known (and unknown) risks, uncertainties and other unpredictable factors, many of which are beyond the Fund’s control. No representations or warranties are made as to the accuracy of such forward-looking statements. It can be expected that some or all of such forward-looking assumptions will not materialize or will vary significantly from actual results. Accordingly, any projections are only estimates and actual results will differ and may vary substantially from the projections or estimates shown.
References to market or composite indices, benchmarks, or other measures of relative market performance over a specified period of time are provided for information only. Reference or comparison to an index does not imply that the portfolio will be constructed in the same way as the index or achieve returns, volatility, or other results similar to the index.
This presentation is strictly confidential and may not be reproduced or redistributed in whole or in part nor may its contents be disclosed to any other person without the express consent of the General Partner.