Adit Ventures Q2 2020 Review & Outlook

July 21,2020

Reports

Shelter from the Storm

"Courage will now be your best defense against the storm that is at hand”  
JJR Tolkien - Return of the King

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The second quarter of 2020 was one for the ages, as equities rebounded sharply from the COVID-19 crash in March. Responding to both unprecedented fiscal & monetary stimulus, record low interest rates and awash in liquidity, global capital markets snapped back, NASDAQ leading the way, up over 30%[i], for the quarter. The price of oil, after seeing future contracts dip into negative territory,[ii] doubled. The Fed bought over $2.1 Trillion in bonds[iii], while openly discussing buying ETF’s and equities. Jobs came back with over 7mm+ created in the quarter, with 4.8m jobs created in June alone[iv], as America works to battle COVID-19 economic damage. Do not bet against the US economic strength is the clear message Adit sees. Courageous investors who kept their positions or added to quality names opportunistically earned strong returns. Investors who panicked and sold due to fear were left behind. Fundamentals matter today more than ever, as COVID has accelerated secular trends in the economy. Watch economic activity in core industries: autos, healthcare, housing & technology.  

   chart 1

Amidst these historic actions, it is important to remember the 10mm people worldwide[v] affected by COVID virus, and the human tragedy this represents. These people & their families remain in our prayers, as do the 3 million Americans infected[vi]. While the medical systems in the developed world appear to be managing the burden of caring for these patients, with hospital beds, ventilators, PPE and other facilities, there is not yet a vaccine. However, as we published in March, April, May & June - over 150 drug companies worldwide[vii] are pursuing such treatments, in conjunction with public health officials, which Adit sees ultimately succeeding in bringing this disease under control. From Amgen, AstraZeneca, Gilead, GlaxoSmithKline, JNJ, Lily, Merck, Moderna, Pfizer, Regeneron, Roche, Sanofi, to Vaxart & Vir[viii] there is a relentless effort to solve the COVID pandemic. Immunizing 6 to 7 billion people globally will take time, and the results of several successful company’s efforts, Adit believes.

Today as the economy begins reopening, the incidence of infection is growing rapidly- with states like California, Florida, and Texas seeing daily new cases of tens of thousands - each. Many states are, in fact, rolling back the reopening process: bars closed & dining rooms still empty, with only “to go” orders. Schools everywhere are looking forward to a fall opening and deciding how to navigate the delicate balance between providing education, and public health concerns. This is not a new dilemma, as society has long wrestled with public health issues, but never more so than today, in an “information age”, technology leads the way.

chart 2chart 3

Technology continues to lead the way, with big data analysis tools assisting in identifying, isolating, and tracking the disease and outbreaks globally. Digital healthcare tools are allowing patients to access healthcare in a contact-free, efficient fashion while Cisco networks & servers provide information management tools to allow remote workers digital connectivity in unprecedented numbers. Hospitality, restaurants, transportation, and other travel related companies remain mired in uncertainty today, with rising bankruptcies causing concerns for many.

 

Bonds hit record low yields in the first half, with the 10-year as low as .38%[ix] as central banks cut interest rates dramatically to provide economic stimulus. Adit estimates the global stimulus at over $20 Trillion, with no end in sight. No one has ever anticipated much less experienced such a tidal wave of global cash. There will be implications down the road, no doubt, but today economic data appears to be surprising to the upside. Employment numbers are improving with autos, housing and consumer spending leading. The question is how long will this last and at what level of growth is sustainable? GDP estimates range from 0 to 15% as economists are operating with little historic references available. Uncertainty breeds opportunity in Adit’s eyes.

The IPO market has improved dramatically with 66 deals going public[x], and names such as Lemonade (Adit portfolio investment), Kingsoft Cloud, and Zoominfo technologies[xi] being quite successfully launched & well received by markets. Renaissance IPO Fund rose over 70%[xii] in the quarter for example, hitting a new all-time high right after the July 4th weekend.

chart 4

Adit sees its fundamentally-driven, thematic portfolio performing well in the second half, and well into the decade ahead, driven by capital flows into AI, Big Data, Cybersecurity, Digital Healthcare, Fintech, IoT, EdTech, nutrition/wellness and other sectors.

Legacy positions show our approach has “Legs” with Spotify at all-time highs with the “Shared economy” theme playing out nicely. Big Data analysis firm Palantir filing to go public later this quarter[xiii] will illustrate Adit’s value-driven approach in spades. Adit has seen 7 of its 18 total positions experience liquidity events including Snap, Spotify, Lyft, SharesPost, Lemonade & soon Palantir, after our initial GoPro transaction in 2013. Given the fundamental strength of Klarna, Decision Sciences, Airbnb, Flexport, Netskope, Cohesity, SpaceX and Rubrik, among other holdings, Adit expects to see many more in coming years as investors find relative value.

Activity in the private market is strong, but the valuations have taken longer to rebound, than have the public markets. Adit remains bullish on selected private companies at reasonable valuations, with strong fundamentals, led by deeply experienced, talented management teams with character, discipline & integrity. Our 10-step process gives us confidence in both the qualitative & quantitative measures of value as Adit invests for growth, both now & by looking forward.

chart 5

Team Adit is pleased to announce the hiring of Jon Cholak, a talented Venture professional with over a decade of experience in early-stage investing, and a top-decile performance record. Expect to hear more details about the Adit-Genesis in the months ahead. Based in Austin, Texas, Jon brings Intel, Deloitte, and USAA experience to our talented team of 9 professionals. Please stay tuned for our upcoming investor calls in July on Palantir, and Adit Genesis philosophy, portfolio construction, and the research process.

Adit is fortunate to have two top-shelf summer interns joining Adit as well: Sam Knowlton, from Richmond College, as well as Nicolo Pisoni, returning from Georgetown University. Adit’s industry-leading, thought-leadership continues with upcoming papers being published by Adit Managing Director Mike Block on Educational Solutions & Technology, as well as an upcoming 3-part series on “The Cloud Ecosystem”. Please visit our website www.aditventures.com regularly as we post articles weekly on all our portfolio companies, private markets & growth equity. Innovation is accelerating as “Necessity is the Mother of Invention” as we quoted just last month in our update to investors

In conclusion, the world is in a dynamic mode of change. Economies globally are adjusting to new realities in logistics, supply chains and across all their operations. Adit sees tremendous opportunities in these challenging times, as disruption means the intelligent, nimble, thoughtful long-term investor can truly benefit. While the near-term outlook remains uncertain, the outlook over the next several years is positive with earnings & GDP estimates increasing. Consumer confidence is improving, and while the upcoming presidential election promises to be messy with potential volatility to the markets, as traders say, “The trend is your friend.” Much as we have seen with COVID-19, long-term economic growth will be back in ’21/ ‘22 and well into the decade ahead. COVID-19 is a crisis with a finite term, as vaccines will be found in time. Economic growth is returning, people will travel again both for business and leisure, and people will return to restaurants, sporting events & theaters. As we like to say at Adit, these are “when” not “If” questions for us to ponder. Adit’s answer: Invest for Growth. Focus on fundamentals & valuation.

Please feel free to reach out anytime to Team Adit for additional information or ask us any questions. We welcome the opportunity to share our thoughts with you and learn more about one another. Happy summer. Wear your mask, Wash your Hands. Keep the Faith in the Triumph of the human Spirit - now & always.

Happy Investing –

Eric Munson & the Team at Adit Ventures


[i] https://www.cnbc.com/2020/06/30/stock-market-live-updates.html

[ii] https://www.reuters.com/article/us-global-oil/oil-price-crashes-into-negative-territory-for-the-first-time-in-history-amid-pandemic-idUSKBN2210V9

[iii] https://m.economictimes.com/markets/stocks/news/fed-puts-floor-under-bond-buying-sees-zero-rates-through-2022/articleshow/76308113.cms

[iv] https://www.bls.gov/web/empsit/ceshighlights.pdf

[v] https://www.wsj.com/articles/coronavirus-latest-news-06-28-2020-11593340722

[vi] https://www.npr.org/sections/coronavirus-live-updates/2020/07/08/888625893/3-million-cases-coronavirus-continues-to-surge-across-u-s

[vii]https://www.businesswire.com/news/home/20200529005207/en/COVID-19-Drug-Vaccine-Pipeline-Status-Report--

[viii] https://www.businesswire.com/news/home/20200529005207/en/COVID-19-Drug-Vaccine-Pipeline-Status-Report--

[ix] https://www.foxbusiness.com/money/10-year-treasury-yield-record-low

[x] https://www.renaissancecapital.com/IPO-Center/Stats

[xi] https://www.iposcoop.com/last-12-months/

[xii] https://www.renaissancecapital.com/IPO-Center/Stats

[xiii] https://www.businesswire.com/news/home/20200706005622/en/Palantir-Announces-Confidential-Submission-Draft-Registration-Statement

 

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.

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