Adit Ventures Q2 2019 Review & Outlook

July 10,2019

Reports

“It is not the strongest or most intelligent who will survive but those who best manage change”

Charles Darwin – Origin of the Species c. 1859

Change seems to be the theme this year, as there were many in the first six months of 2019. 2019’s second quarter saw both a market correction in April, following strong returns in the first quarter, as well as many indices hitting new highs as the 2nd quarter ended, with expectation of new trade talks between the United States and China. Overall both stocks and bonds gained, with the S&P 500 up over 18% and the US Aggregate Bond ETF up over 5.8% in the first half of the year. Adit believes there are additional gains ahead in our thematic portfolio of fundamentally-based private companies as the capital markets remain robust. Bitcoin, Gold and Oil also rose in the quarter as Middle-East tensions increased and investors sought safe havens. We expect to see new highs in the stock market in the 2nd half of 2019.

The 10-year Treasury traded below 2% yield for the first time in several years, as uncertainty on global trade is creating a “Wall of Worry” for investors. While the Conference Board’s consumer confidence index fell in June to 121.5, its lowest reading since September 2017, it is still optimistic by any measure. The economic tone softened slightly, both domestically & overseas, as U.S. job growth slowed in May in the United States, but June was stronger. This economic recovery is now officially the longest in US history. Recoveries end not from old age, but from Federal Reserve mistakes and political meddling – both of which are distinct possibilities in the current environment. We don’t see a recession this year as likely.

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The shifting of supply chains from China into other parts of southeast Asia has created a global pause, causing the Federal Reserve to pivot from a tightening mode to a more accommodative posture. Europe had record heat, and further economic deterioration, after a series of elections that saw the Greens and other Liberal groups gain, while the two main groups, the center-right European People’s Party & the center-left Social Democrats, both lost ground in the European Parliament as turnout rose to its highest levels in 20 years, 50.95% across its 28 member states. EC’s Spring ‘19 forecast is for +1.2% growth in the euro region, with Germany & Italy barely positive. Inflations remains subdued at 1.2%, so we see continued support from the European central banks ahead.

China lowered its GDP target growth rate to 6% - 6.5%, while providing stimulus to offset liquidity issues stemming from the failure of Baoshing Bank, the first seizure of a Chinese bank in 20 years. This is a model for other potential banks in need of assistance, may provide investors comfort in the long run that the issues will get resolved. Trade is the key here, a discussion which has yet to be resolved.

While Adit sees Sino-US tensions continuing for several decades, we believe there can be a deal, likely to be concluded within 2019. Adit remains constructive on our portfolio of companies, as we see strong fundamentals, robust capital inflows and increasingly plans for liquidity across many of our names. Lemonade Insurance, one of our positions in the Adit Growth Equity portfolio, recently hired Goldman Sachs and JP Morgan Chase to take them public - more details to follow, once they are formally announced. Lyft is now trading back in the mid-60’s, and other deals such as Beyond Meat, Zoom, Slack, Chewy and Pinterest all added to a surge in new issue activity. In fact, 62 deals in the quarter raised $25 billion, a 5-year record. Based upon continued fundamental strength, investor demand from an average IPO gain of 30%, there is more to come. Consumer goods & technology led the performance results. Overall tone is optimistic, but not euphoric, as poorly marketed and positioned deals don’t fare well. This is not a replay of the ‘99 Dot.Com bust as companies today are staying private longer, with real revenues.

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Adit sees AirBnb as a likely direct-listing candidate in Q4’19/Q120. We believe Palantir is also likely to list in 2020 as it is seeing serious traction in marketing its Foundry software both in the commercial and government segments. There are nine other companies in the Adit Growth Equity portfolio, and we look forward to speaking with you further about them. In aggregate, the portfolio is 95% invested as of June 30th. Portfolio is composed of 90% domestic and 10% international, with an average revenue growth rate of 42%, little or no debt, a broadly-based, rapidly-scaling client base, led by a talented management team. The average age of these companies is 10+ Years, generating positive cashflow & growing revenues.

Recent travels across the US and overseas shows us that selected growth opportunities outside of Silicon Valley, as well as from our historic partners. Spotify, which was sourced out of Sweden, proved our investment process. We have recently returned from Scandinavia after seeing several interesting firms. Southeast Asia is another high growth area, which is benefitting from the US-Sino trade tensions, offering us potential growth equity opportunities. Finally, the European slowdown also provides us ample opportunities to obtain shares of quality firms at attractive prices Growth equities will continue to perform well in our opinion, given the fundamental strength of their businesses, and an increasingly diversified blend of earnings across different currencies & geographies. Thematically, we remain bullish on AI, AR/VR, Autonomous Vehicles, Big Data, Biotechnology, Cybersecurity, Digital Healthcare, Education, Genomics, Internet of Things, Space and other unique technology solutions to citizens and civilization’s needs. Given the ubiquity of the internet, seen across 10 billion smart devices globally daily, Team Adit shares a feeling that a paradigm shift is underway, and the next platform for computing is soon upon us, offering us 5G communication services and more. Expect to see more facial recognition tools on handheld devices, vastly improved voice activation, improved audio technology & increasingly powerful AI applications across multiple channels. While it is difficult to know what exactly the “New, new thing is”, we believe it is not far away. Apologies to Michael Lewis. As always, we remain vigilant in exploring new companies, concepts, ideas and thoughts, attending and speaking at dozens of conferences worldwide every year. Look for more announcements on our growth soon, as we launch our new website late in Q3.

Yes we see more changes ahead. Dag Hammarskold, the nobel-price winning Swede, who was the 2nd secretary general of the United Nations, won the Nobel Peace prize, posthumously, in 1961. One of my favorite quotes by him is about change: “To change is to grow, and to have changed often is to have grown much.” No doubt there will be some big surprises and disappointments. We remain convinced our firms will be the beneficiaries of these opportunities by embracing change, and our portfolios will benefit accordingly. As investors, our job is to adapt to change, and grow in our experience. Adit can help you.

Our website has recent articles about Adit’s portfolio companies, and themes we invest within. Please visit www.aditventures.vc Note: Details on Adit’s 5th anniversary event TDB, but save the date: October 17th! Please feel free to contact us further questions. Embrace change, Happy Summer & Happy Investing.

Eric Munson & the Team at Adit Ventures

 


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