"Change is inevitable. Change is constant.”
Q1 ’20 was a historic period in the markets as the COVID-19 caused investors to sell. As we warned in early February, the pandemic created massive uncertainty across the globe, and shut down the most populous areas of the US, and many other countries around the world. Equity markets declined by 34%, a month after hitting new highs, the S&P 500 ending down 21% , with the energy sector down a stunning 53% .
The price of oil dropped 38% , in less than a week, with OPEC bickering and demand evaporating, as consumers stayed home to fight the pandemic. While it is still early in what will likely be an epic battle, it appears the curve is flattening, with growth in new cases declining, as the chart below illustrates. All of us can only pray that this is the case, as this black swan event surprised the entire world, challenging all prior assumptions.
Bonds rallied sharply as interest rates plunged to historical lows, with the yield on the 10-year dropping under .50% , as global central banks flooded the market with liquidity to limit the economic damage of the virus.
The Federal Reserve, for example, cut its target rate to zero , and announced a series of liquidity injections, in the trillions of dollars, including open-market purchases of corporate, municipal and even ETF securities without limit, unprecedented in its history.
The short-end of the US Treasury market briefly saw negative yields, as investors sought certainty & safety. The velocity of the decline was savage, crushing many investors, causing the NYSE to impose trading halts, in four of six trading sessions , for the first time ever, since their creation after ’08 financial crisis.
2020 Performance: SPX (White), Brent Crude (Green), US 10 Yr (Purple)
Congress approved the CARES Act Economic Relief Plan, a historic $2.25 Trillion dollar aid package designed to provide cash directly to those affected by the government-imposed shutdown of the economy. Expect to see more government packages coming soon, with talk of infrastructure and other supports to provide economic stimulus to the country, and to the world.
Consumer confidence plunged with ten million people filing unemployment claims in the last two weeks of March alone. Expect to see more shockingly bad headlines on both the economic & pandemic fronts in the month of April. Adit believes the pandemic, while hard to predict, will be defeated in time. The question remains, when and how much damage will damage will it do, as it runs its course.
Economic activity is not completely absent, however deeply disrupted. As consumers flocked to buy essentials like cleaning supplies, groceries and healthcare items in massive quantities, and online shopping quickly became the main source of goods, versus bricks mortar stores.
Retailers voluntarily shut down, furloughing millions of workers, while closed restaurants are estimated to be losing $225 billion over the course of this quarantine period . Airlines saw Q1 revenue declines of 60% to 90% as transportation , for all but essential services and workers, ground to a halt. Working from home became the accepted practice, and shares of companies capitalizing on this trend, like Zoom Video Communications, soared.
The economy is diversified across various sectors, as below, and while many are severely impacted by the pandemic and ensuing shutdown, others clearly may benefit. Internet usage for the millions of people sheltering in place is at record levels and rising still.
US Quarterly GDP Growth (2010-2020)
Many of the long-term, secular trends Adit invests alongside, like online shopping, streaming and working from home, have rapidly accelerated, with profound implications for investors everywhere. The internet of things, digital healthcare, augmented reality, big data and AI are becoming mainstream, as we believed they would, unfortunately under tragic circumstances.
Adit sees these trends and others, continuing to gain acceptance, as delivering medical care using technology tools, like Teladoc, simply makes sense. Data analysis software, like Palantir’s, is now in high demand as companies rebuild supply chains, healthcare organizations look for answers on the spread of the virus and governments everywhere seek to understand the problems ahead to solve. Palantir, in fact, will record stellar results this year, as pandemics, like terrorist attacks in years past, drive sales and services for their suite of software products. Palantir proactively sent a dozen teams of engineers to countries, governments and organizations seeking assistance in this crisis, remaining active, here and abroad, in the battle against the novel Coronavirus. Adit is proud to be a Palantir shareholder, now & always.
Klarna, a Swedish-based Fintech company, has seen broad acceptance of its payment technology tools, after launching in the UK & US in ‘19, as the most-popular application in finance averaging 37,000 new app downloads every day. Retailers, already under pressure prior to the virus, are also embracing their tools. We expect their revenue growth to remain strong.
SpaceX, the leading company in satellite and Space Exploration, continues to move forward with its ambitious Starlink network of low orbit satellites and NASA contracts to service the space station, and other initiatives. Expect to see more positive news out of them this quarter. There is little impact from COVID-19 to this company from our perspective today. The services sector, one of the largest parts of the US economy, will be changed forever, but it will return to growth in time, as society looks for solutions, and consumers seeks to satisfy their needs.
Our thoughts & prayers go out to all those afflicted with COVID-19, and condolences to those who’ve lost family & friends to the virus on behalf of all of Team Adit. We adhere to medical advice provided by the authorities and are working remotely providing you updates such as these. On behalf of all of us at Team Adit, we are deeply thankful for the dedication & hard work of our healthcare workers on the front lines of the pandemic.
Adit seeks to share insights with you on the opportunities ahead. Statistically, Adit sees the equity market decline of 34% from peak to trough representing the average decline of a bear market over the past century. The velocity of this decline, perhaps augmented by the speed of information in today’s world, electronic trading and ETF’s, was just simply unprecedented.
Given the fact that the global capital markets look at future activity, one is left to contemplate how and when the market will begin anticipating a recovery. Adit cannot time the market, as no one rings a bell at the top or the bottom unfortunately. Adit believes in using history as guide, however, and notes the best returns from venture capital in the past century have all come while investing in a recessionary period, as seen in the chart below.
Adit believes in taking a long-term approach in owning shares in companies with solid revenue growth, good balance sheets and strong management teams who provide great goods & services, with favorable trends in their business and society. These portfolio holdings will perform well over the three to five years which is how long Adit typically owns a position.
Many consumer facing companies have been negatively impacted in the short-term, like Airbnb, who has been a responsible corporate citizen, providing refunds to renters, and creating a $250mm fund for their hosts, to offset their loss of income, as well as a fund to assist owners in paying mortgages, taxes, and utilities among other expenses. People will once again travel, enjoying unique experiences as before. Airbnb will resume booking reservations in the future, no doubt. The company publicly announced a 16% decrease to its internal valuation measure, known as the 409-a, which is the value it grants options to its employees. We see this as another example of the company proactively responding to the circumstances and acting responsibly, consistent with their track record over the past decade.
With $3B+ in cash, and Silver Lake & TPG as top-tier investors supporting them in their business, this dynamic company remains a “When” question, not an “If”. Adit is proud to be an Airbnb shareholder as their management has been a good steward to all of its constituencies: its customers, employees, shareholders and to all the communities it serves. We believe a successful liquidity event, be it in ’20 or in ’21, will occur as Adit remains confident in Airbnb’s business model & management team. Airbnb provides many cost-effective solutions across the entire economic spectrum and continues to be a cost-effective solution for renters and tenants alike. Besides, using an Airbnb is likely preferable given the ability to remove oneself from larger public areas, like convention hotels. Airbnb’s best days remain ahead as it will return to favor once the COVID-19 crisis runs its course.
In conclusion, Adit sees continued market volatility near-term, as economic uncertainty remains high. Team Adit has 100+ years of combined principal investment experience, and has navigated the crash in ’87, running a levered technology hedge fund, and survived. We lived through currency issues, panics & scares in the 1990’s, survived 9-11, despite losing family & too many friends. We survived the ’08 financial crisis and we will survive this one as well. Adit manages diversified growth equity portfolios, now more attractive than ever, in an uncertain environment.
Our companies have cash, revenues and real opportunities to do good, while generating good returns. Our 10-step, proprietary investment approach emphasizes risk mitigation, providing equity exposure, with a low correlation to the public markets. Despite the death & destruction left by the virus, we see opportunities for investors to generate strong returns over the ensuing economic recovery, whenever it begins. According to Benjamin Disraeli, “The secret of success in life is for a man to be ready for his opportunity when it comes.” If history is any guide, this is an opportune time to invest in venture and growth equity. Please check out www.aditventures.com as we publish articles about our portfolio. Consider giving us a call to discuss your investment objectives today. We welcome the opportunity to assist you in growing your portfolio.
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.
v 2020 Pantheon Macroeconomics