Adit Ventures Q1 2021 Quarterly Letter

May 4,2021

Reports

GROWTH EQUITY INVESTING

Q1 2021 QUARTERLY LETTER

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“Like it or not, we live in interesting times. They are times of danger and uncertainty, but they are also the most creative of any time in the history of mankind.”[i]

- Robert F. Kennedy

The first quarter brought record highs in the markets, with the S&P 500 gaining 6.2%, up by over 80% from last year’s March lows[ii]. Continuing strong performance is expected as we witness an economic reopening across the world, and as major population centers continue scaling up vaccinations. In the US, positive vaccine news, now consistently averaging over 3 million doses per week, drives continued optimism.  This is evident in the nearly $570B cascade of cash flowing into global equity funds over the past five months[iii][iv]. Bond yields rose rapidly midway through the quarter, as the prospect for inflation spiked yields sharply higher. Industrial commodities like copper, lumber, oil, platinum, and real estate all rose in value[v]. Adit’s fundamental approach of investing alongside long-term secular themes performed well across all eight economic sectors. Adit is proudly distributing about 10 million shares of Palantir to our investor-partners. Airbnb & SoFi shares will also be distributed later this quarter. We appreciate your support as Team Adit is honored to serve you, in our stewardship of your capital. Referrals are the highest form of compliment and the driver of our growth alongside the results we generate for your capital. The current economic environment is a fundamentally sound time to increase exposure to our strategy.

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Adit Ventures portfolio companies simply had a spectacular quarter. The year began with the exciting January 7th announcement of Social Capital Hedosophia’s acquisition of Sofi, which Adit purchased in Q4 ’20. Led by former Goldman banker & Twitter COO, Anthony Noto, Sofi has grown dramatically in his 3-year tenure there, and marks Adit’s 10th liquidity event. Klarna, a Stockholm-based fintech company had dramatic growth of 160% in US app installs alone, seeing its valuation triple from $11B to $31B[vi]. Meanwhile Affirm and Coinbase went public in robust IPOs. The tide is clearly changing when the CEO of JP Morgan writes “Fintech is an enormous competitive threat”—marking a sharp pivot for an iconic leader in the financial services world on the blockchain/crypto/digital scene from skeptic to seer[vii]. Blackrock, Morgan Stanley & Northern Trust all jumped on the bandwagon providing clients access, advice, and custodial crypto services[viii].

In the weeks ahead, we will see Palantir report earnings for Q1’21 on Tuesday, May 11[ix]. Following this, we will see Airbnb report earnings on Thursday, May 13[x]. Per the company’s S-1, Airbnb’s lock-up will expire on Monday, May 17.  Robinhood is likely to unseal its confidential IPO filing in May for their long-awaited IPO.

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The “SPAC-Attack” continues with more capital raised in Q1’21 than in all of 2020 ($87.9B vs. $83.4B). Adit completed its initial SPAC on January 13th, 2021, raising $240m on the New York Stock Exchange (ADEX.U)[xi]. Adit remains optimistic about the educational technology sector, we have already seen great results in the space with one strategic exit, but we believe the best is yet to come. Now with $200B+ of SPAC capital across 300+ vehicles, owners of private companies enjoy new ways of generating liquidity. We believe this means capital can now be grown & compounded for better returns as the velocity of change and innovation remains unprecedented in our minds’ eye. This confluence of powerful trends—supercharged by massive liquidity and stimulus in the trillions from governments—means growth potential. Adit invests for growth, and we remain constructive on the outlook for the foreseeable future. Adit’s strategy benefits from these current economic conditions.

Economic fundamentals look solid as US GDP was up ~6% in Q1’21[xii]. Current estimates see US real GDP growth hitting nearly 7% or higher for 2021—which would reflect the highest growth rate in a calendar year since 1984[xiii]. Autos, Basic Materials, Capital Expenditures, Consumer spending, Housing and even Manufacturing enjoy major uptrends, with global levels of stimulus far larger than expenses associated with World War II even including the rebuilding of Europe[xiv]. While Europe is behind the US in both economic stimulus & vaccinations, the economy is improving all over the globe Adit believes.

The capital spending cycle is key to sustainable long-term growth Adit believes and a central focus of our analysis. This could provide a 3–5-year growth spurt in an area which has seen slower investment levels, than in previous spending cycles. A key focus on the Biden administration, and one shared by countless others, is to not only invest in updating our aging infrastructure but also in the novel infrastructure that will drive tomorrow’s economy.

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Digital Infrastructure is the group of foundational technologies and services necessary to the information technology capabilities of a nation. By extension, digital infrastructure is essential to the economic success and quality of life of a modern nation. The pandemic has underlined just how important digital infrastructure is in the modern world. As the world demands ever-greater connectivity and the ever- increasing parabolic growth of new data, it will require trillions in investment in the digital infrastructure needed to ensure a functional, resilient, stable, and secure economy. Adit is currently preparing to launch our Adit Digital Infrastructure Fund that will aim to capture the growth of this long-term secular necessity through investments focused on 5G infrastructure, Electric / Renewable Vehicle infrastructure, robotics logistics, and more. By investing in the infrastructure of the new digital and clean energy economy, Adit Digital Infrastructure can combine the downside protection of real assets with the high-growth, high return potential of new technologies essential to our future.

Looking forward, Adit sees the balance between growth in earnings versus inflationary pressures being the governor on the speed of the recovery. Interest rates on 10-yr treasury bond rose 83 basis points in in Q1, from under 1% to over 1.7%, fastest rise since 1984[xv]. This caused some volatility, but Chairman Powell eased the markets mind by kindly stating the Fed will allow for “transitory inflation.” In effect saying they will allow the economy to overshoot the near-term targets so as to get the overall economy moving including hospitality, leisure, restaurants, services & travel, all covid- crippled in ’20. Energy too rose as consumption increased, and the prospects continue to look very positive. Real Estate also gained in popularity in the pandemic as people sought safety, seclusion, and serenity. Home prices rose across the country, particularly in rural areas[xvi]. We believe cities will come back in time, with vaccines becoming more prevalent. With current vaccination rates, we can cover much of the US population in pretty short order.

Venture capital performed well in the quarter with several large IPO’s, M&A is active & direct listings / SPAC buyers all adding to the liquidity opportunity. Large VC funds announced record raises in the multiple billions of dollars. Private Equity and VC dry powder, nearly at $2T, continues to grow with more money being raised & returned[xvii]. This is a healthy and “virtuous-cycle” ecosystem wherein capital returned is multiples of the prior raised, so people may invest more. In fact, venture investments totaled nearly $73B in the first quarter, with all of Adit’s 8 themes: AI/Big Data, Cloud/ Cyber, Digital Infrastructure, IoT, EdTech, Fintech, Shared Economy, and Health & Wellness were well represented in the totals[xviii]. Adit seeks to identify fairly valued, fundamentally sound firms, led by deeply experienced management talent & backed by the persistently top-performing early-stage venture firms. This is what we do for all of Adit’s clients across our investments.

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Digital transformation is driving economic activity as innovation continues to accelerate. Dynamic change across consumer spending, educations, healthcare & services means 80% of the economy is simply being revolutionized. Adit sees this trend lasting through the decade, based upon previous patterns. The paradigm shift is happening now, and Adit’s portfolio holdings have seen this powerful uptrend improve their current revenues, as well as portend for strong incremental growth for the next several years. Voice-actuated computing, software and data analytics are soon to be more effective tools for consumers, just as payment technology and telemedicine are now standard across the world. It is difficult to see these shifts while in the middle of it, but clearly change is in the air & here for the foreseeable future.

Adit recognizes this fact, and sees powerful secular growth driving the market to record highs throughout the course of this year. Government regulation and monetary policy could slow the growth, much as the SEC did to the SPAC market by requiring additional disclosure language around the accounting treatment of options on April 12th, 2021[xix]. Adit welcomes disclosure and sees transparency as an essential tool in the box for investors to learn with.

Adit invests in great management teams leading great companies with great businesses. These next generation of leaders: Brian Chesky (ABNB), Alex Karp (PLTR) and others display great character, ethics and integrity as well in their leadership. Please read letters on these & Adit’s other companies on our website in conjunction with this information. The ESG and impact criteria lead many investors to focus on a total return approach, as Adit does, whereby we seek to make good returns by investing companies that deliberately grow their business in conjunction with making the world a better place.

Adit seeks to invest for growth & is itself growing to better serve our clients. I am pleased to announce Adit Genesis I launched last quarter, and is now making investments in seed, A, and B stage companies. Please contact us for additional information as there are some very interesting newer companies therein. Genesis Link

Adit is proud to share that as we continue to grow so is our team. We added several key team members to assist in your positive customer service experience. Una Kenny joined Adit as an Operations Associate and we are happy to report that we have hired a Chief Operating Officer. Please see all the team’s brief bios here. Adit remains focused on becoming a better performing venture manager, rather than just becoming a bigger venture manager. Adit will not be raising a multi-billion-dollar fund. In fact, Adit is closing the flagship Adit Growth Equity III Fund to new investors on 6/30/21 as a means of managing our growth. We remain committed to proving you a well-diversified portfolio across select themes changing the world for the better, while generating robust returns. Smaller funds tend to generate better results. Adit has eight figures of its own capital invested across all our funds, SPV’s and ADEX.U, our SPAC.

Adit Alumni continue to prosper both here in the USA and overseas. Cole Kennelly (Summer 2017 intern) has founded Volmex Finance, one of the first implementations of decentralized volatility strategies, which just received an investment from DeFi Technologies. Cole Charney (Summer 2018 intern) has risen to Equity Research Associate at Deutsche Bank, while Joachim Schelde (Winter 2018 intern) has started as an investment analyst at Scale Capital in Copenhagen. Sam Knowlton (Summer 2020 intern) has recently launched his own hedge fund Foster Cove Capital Partners. Finally, Ryan Hallenback (Winter 2020 intern) is finishing up his Notre Dame career as a consensus All-American Defender on the Notre Dame Men’s Lacrosse Team. These people helped shape our firm and we appreciate them & salute their achievements. Most importantly, we learned many things from them. Notre Dame Lacrosse is winning using its defense, and investors should take note. Adit is also proud to note that of our 22 portfolio positions over 70% are now investors with Adit and we appreciate their contribution. We believe this is a great time to invest, however there are no shortcuts. Investors must do the homework on every investment they make, read the documents, do the research, and maintain a long-term approach in a diversified portfolio. Adit strives to provide you with all the information we have to allow you to make informed decisions and intelligent allocations of capital. On behalf of all of us here at Team Adit Happy Spring and Happy investing. Wishing you and your families continued good health and abundance.

Sincerely,

Eric Munson & Team Adit

 

SpaceX launch dates in June:

  • June 3: A SpaceX Falcon 9 rocket will launch a Dragon cargo resupply mission (CRS-22) to the International Space Station. It will lift off from Launch Complex 39A at NASA's Kennedy Space Center in Florida. 
  • June 17: A SpaceX Falcon 9 rocket will the U.S. Space Force's fifth third-generation navigation satellite for the Global Positioning System(GPS 3 SV05). It will lift off from Space Launch Complex 40 at Cape Canaveral Space Force Station in Florida, in a three-hour launch window that opens at 6 p.m. EDT (2200 GMT). 

 

Team Adit Summer Reading List:

  • How to Lead: Wisdom from the World's Greatest CEOs, Founders, and Game Changers by David M. Rubenstein
  • Legacy - Story of the All blacks.
  • Social Physics: How Good Ideas Spread— The Lessons from a New Science by Alex Pentland
  • Peace, Poverty and Betrayal: A New History of British India by Roderick Matthews
  • Margin of Safety by Seth Klarman
  • Zero to One by Peter Thiel
  • Legacy: What the All Blacks Can Teach Us About the Business of Life by James Kerr
  • Lifespan: Why We Age—and Why We Don’t Have To by David A. Sinclair PhD
  • Principles: Life and Work by Ray Dalio
  • Originals: How Non-Conformists Move the World by Adam Grant
  • The Splendid and the Vile: A Saga of Churchill, Family, and Defiance During the Blitz by Erik Larson

[i] https://www.goodreads.com/quotes/8026708-for-the-fortunate-amongst-us-the-fourth-danger-is-comfort

[ii] https://www.winthropwealth.com/market-commentary/q12021-market-review-and-outlook/

[iii] https://www.cnbc.com/2021/04/21/covid-19-cases-deaths-vaccinations-daily-update.html

[iv] https://www.cnbc.com/2021/04/09/investors-have-put-more-money-into-stocks-in-the-last-5-months-than-the-previous-12-years-combined.html

[v] World Bank Commodity Markets Outlook April 2021: https://www.worldbank.org/en/research/commodity-markets

[vi] Klarna Year End 2020 Financial Results https://www.klarna.com/international/about-us/corporate-governance/investor-relations/

[vii] https://www.cnbc.com/2021/04/07/jpmorgan-chase-ceo-jamie-dimon-why-fintech-is-a-big-threat-to-banks.html

[viii] https://www.cnbc.com/2021/03/17/bitcoin-morgan-stanley-is-the-first-big-us-bank-to-offer-wealthy-clients-access-to-bitcoin-funds.html

[ix] https://finance.yahoo.com/news/palantir-announces-date-first-quarter-200500269.html

[x] https://investors.airbnb.com/press-releases/news-details/2021/Airbnb-to-Announce-First-Quarter-2021-Results/default.aspx

[xi] https://www.businesswire.com/news/home/20210114006003/en/Adit-EdTech-Acquisition-Corp.-Announces-Closing-of-Upsized-240-Million-Initial-Public-Offering

[xii] https://conference-board.org/research/us-forecast.

[xiii] https://russellinvestments.com/us/blog/us-economic-growth-forecast-mwir

[xiv] https://www.bloomberg.com/opinion/articles/2021-03-11/stimulus-checks-biden-s-war-on-covid-demands-wartime-spending

[xv] https://www.nasdaq.com/articles/march-first-quarter-2021-review-and-outlook-2021-04-01

[xvi] https://nationalmortgageprofessional.com/news/76679/home-prices-increase-percent-2021

[xvii] https://www.axios.com/private-equity-record-assets-management-e2989af0-d1d6-4227-857d-55cb655debf4.html

[xviii] https://news.crunchbase.com/news/na-startup-funding-on-fire-in-q1/

[xix] https://www.sec.gov/news/public-statement/accounting-reporting-warrants-issued-spacs

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.