GROWTH EQUITY INVESTING
Q2 2021 QUARTERLY LETTER
“Without continual growth and progress, such words improvement, achievement, and success have no meaning."
- Benjamin Franklin
Record Quarter for Venture Capital:
With multiple back-to-back liquidity events, deliveries of reports, some share transfers, and key deliverables did not occur as quickly as in prior years. Adit has doubled staff and retained Carta to improve, remedy, and streamline these bottlenecks. Given Adit’s rapid growth in assets, liquidity events, and distributions we recognize the need to increase capacity to continue provide excellent service. I am pleased to announce Eric Lazear has joined Adit Ventures as our Chief Operating Officer. Bringing 20+ years of institutional experience, Eric will focus on improving & refining Adit’s investor-partner experience, in our own “digital transformation”. Please see Eric’s bio attached in the attachment link at the end. Expect more news on Adit’s growth as we develop better ways to manage, deliver, and communicate our reporting and returns.
Q2'21 Public Markets:
Public markets hit record highs in Q2’21, with the S&P 500 up 8.5% and NASDAQ Composite up 9.7%[ii]. The 10-year yield reached a recent high of 1.74% in March, and subsequently dropped 29 basis points by the end of the quarter—both moves spooked equity markets, interestingly enough[iii]. Equity sectors waxed & waned depending upon market sentiment. The cyclical, “reopening” names like autos, chemicals, energy, and materials shone in parts, while the defensive value names also gained ground. Despite recent quarters of underperformance, growth took back the lead from value stocks—with technology leading the charge in the large growth sector in part due to stronger than expected earnings[iv]. In US markets, volatility fell to its lowest level since 2019, steadied by the Fed signaling they will maintain interest rates into 2023[v]. Economic data remained strong as job creation, consumer spending in autos, housing and infrastructure growth drove estimated GDP growth of 7.8% for Q2’21[vi]. The IPO market had a landmark quarter, with 113 IPOs raising $39.9B, marking the “busiest quarter for IPOs in over two decades”[vii].
Adit investors benefitted from several of those liquidity events this quarter as shares of Palantir and AirBnB were distributed out. SoFi shares will be going out in July, bringing the market value of AGE and AGE III market distribution values (as a proportion of total capital invested) to 68% and 22% respectively, in our first several years of investment results—ranking us among the top-quartile per Cambridge Associates.
SPAC Market Overview and Outlook:
Adit Ventures remains active in the PIPE and SPAC marketplace. Overall, SPAC activity slowed (due to the accounting rule changes announced one day before annual 10-Q updates were due), after beginning the year at a record pace. These administrative disclosure issues effectively ground new issuance in the U.S. to a halt, as service providers across the ecosystem scrambled to amend & restate previous filings, as well as complete the requisite new filings. This backlog is now completed, and new issuance has begun again. Business combinations or “De-SPACing’s” continue apace. SPAC issuance in Asia & Europe is accelerating and Adit expects this trend to continue. SPACs are here to stay.
(From CB Insights: State of Venture Q2 ’21 Report[viii])
Adit remains confident that Adit EdTech Acquisition Corporation (NYSE: ADEX) and other quality SPACs with competent sponsors, will perform sound diligence and consummate accretive deals for shareholders. However, the EdTech sector has seen dramatic changes in valuation related to Chinese regulatory controls, diminishing the near-term attractiveness of these assets, particularly in Asia. Being opportunistic has been a hallmark of Adit’s investing and we remain vigilant in identifying great companies across all economic sectors to generate continued, robust returns for our clients.
Record M&A Activity:
Meanwhile, M&A activity outside of SPACs is approaching record territory as YTD exits have nearly eclipsed 2020—less than seven months into the year. Globally M&A activity had another record-breaking quarter with $1.5T of Q2’21 deals—in the United States, Q2 volumes were up 440% YoY with $699B worth of M&A deals[ix]. The confluence of corporate cash, SPACs, strategic buyers, and general liquidity seeking deals is driving this trend. Given these fundamental structural factors, Adit expects this trend to continue going into the second half of 2021 and well into the roaring 20’s decade ahead.
(From CB Insights: State of Venture Q2 ’21 Report[x])
Heightened M&A and the 431 SPACs with $117B searching for deals bodes well for equity owners like Adit and our investor-partners, as we are minority-shareholders of 38 businesses across all our funds[xi]. Several Adit portfolio companies have in fact seen accretive bids, and we will provide full details once these deals are finalized. The M&A process is difficult, as dynamic capital markets and corporate egos can create volatility in addition to normal day-to-day work stress. Nonetheless, Adit expects continued liquidity events across both early- and late-stage companies—put this into the “Quality Problem” category. We see at least three other events likely in the coming 6 months, with more likely to follow as activity remains high. This is a bountiful environment for Adit’s investment strategy.
Adit Invests Thematically Across Strategic Sectors:
FinTech companies had an especially busy quarter, as global FinTech funding reached a new high of $34B in Q2 ‘21. According to CB Insights, nearly one of every four (22%) dollars raised this quarter went into a FinTech deal[xii].
Adit’s FinTech theme is clearly working as investors eschew legacy financials in favor of their more dynamic, tech-equipped contemporaries. The public trading debuts of FinTech names like Coinbase, Marqeta, and UpStart reflected this exuberant demand, as shares popped 52%, 13%, and 47% on the first day, respectively[xiii]. Of course, this enthusiasm was not contained to the IPO market. Adit portfolio companies Forge, Klarna and SoFi have all seen material increases in value.
SoFi successfully completed its SPAC combination with IPOE—the fifth Chamath Palihapitiya SPAC vehicle[xiv], opening at a $17B market cap—up from Adit’s $4.7B entry point last year. We expect SoFi to return to the $15B+ valuation range once the share distribution is complete and quarterly earnings become the focus of the stock. Adit’s price target for SoFi in 2022 remains north of $35 per share. Please do not sell into the distribution softness in the share.
Last but not least, Adit expects Robinhood Markets to list before the end of summer at a valuation greater than $40B. Robinhood’s S-1 implied that 50% of all brokerage accounts opened from 2016-2020 were opened on Robinhood, cementing the company’s role as the beginner’s brokerage app[xvi]. Controversy aside, such growth is impressive. Adit sees upside in this transaction going forward.
The EdTech market saw a similarly busy quarter, driven by a plethora of acquisitions and public listings. In the beginning of the quarter, we saw Coursera (NYSE: COUR), one of the world’s largest education technology platforms, make its public market debut, commanding a $7bn valuation on $290M in sales[xvii]. PowerSchool, a leading education software platform, filed an S-1 nearly a month later with ambitions of listing at a $3bn valuation[xviii]. Assuredly, this activity was not limited to the U.S: The public market debuts of Zhangman Education (NYSE: ZME), Thinkific (TSE: THNC), and Kahoot (OSL: KAHOT) reflected the public market’s affinity for alternative mediums of education. Furthermore, the rapid increase in EdTech activity indicates that online education is here to stay. The blockbuster merger between 2U and edX, a platform of over 30 million students globally, suggests future consolidation in the education technology marketplace[xix].
The current dynamics of the EdTech market present a fruitful environment for Adit’s EdTech theme: Esme Learning, a leader in the professional education marketplace, launched three new courses in Q2 ’21, with additional courses and academic partnerships to be announced in the second half of 2021. Adit remains ebullient about Esme Learning as we see dramatic growth in their business ahead. Stay tuned for strategic announcements about this dynamic leading-edge company very soon.
Chinese regulators have clamped down on Chinese education companies recently, depressing valuations across the globe. Adit remains optimistic that this long-term secular theme of digital learning remains intact despite near-term volatility. Adit takes a 3–5-year time horizon on all of its investments, as disruption—while challenging—also means opportunity.
Space & Internet of Things (IoT):
SpaceX added $1.16B in additional funding, valuing the company at over $78B, as they launched 11 missions, even taking Astrocast’s 5 nano satellites up last month[xx]. Adit remains very constructive on the outlook for space, and the space economy altogether. Astrocast is currently pursuing a direct listing on the EuroNext Growth in Oslo. Adit led the private round and is participating in the direct listing alongside strategic investors Airbus Ventures, Palantir Technologies, and Thuraya at an 150MM CHF valuation. Adit sees replacement costs of this asset at over 500MM CHF and believes public markets will recognize this fact in time. In addition, strategic buyers have expressed interest in the company. Please see our SpaceX and Astrocast letters in the attachment link at the end for more details on these exciting space names, as things are literally taking off! Adit makes no promises as to management achieving its objectives, because after all this is, in fact, rocket science. AGE, AGE III, and Genesis all own shares of Astrocast.
(Morgan Stanley Research, “Space: Investing in the Final Frontier)[xxi]
Health & Wellness:
Our early-stage vehicle, Adit Genesis, is off to an incredible start and we are very optimistic about the portfolio’s prospects ahead. The fund has generated huge momentum, assembling a portfolio of 13 quality, high-growth companies in the first four months since the fund’s official launch. From the portfolio, we expect 6 “up rounds” in the second half of 2021 and two potential liquidity events. We will be sending out more information regarding AANIKA Biosciences, which is revolutionizing product tracking and tracing via microbial tags. Please read through the Genesis updates we added to the attachment link at the end to learn more about these exciting companies and the developments they have made in Q2’21. Adit Genesis’s next closing is 9/30/21.
Adit sees at least three more liquidity events in our growth portfolio likely in the next 12 months, with 3-6 more exits to follow within the subsequent 12 months as activity and liquidity levels remain high. Software businesses like Netskope (up Round +168% vs ’20 [xxiv]), Cohesity (up 50% from Q1 Employee Tender[xxv]) and Rubrik all are solid businesses with ample room for growth.
Combined with government & private spending on infrastructure, Adit expects to see these longer-term spending plans to dampen any short-term volatility as the rapid consumer rebound continues. Adit has optimism for a multi-year expansion ahead, since this bull market really just began anew in 2020.
The Biden Administration’s $1.2T infrastructure bill served as another economic cornerstone of the second quarter. This bill, which follows nearly $5T in fiscal relief since March 2020, is geared towards alleviating the structural and productive deficiencies found across our domestic economy[xxvii]. Most notably, the White House has placed a strong emphasis on national defense, with $1.2bn specifically earmarked for border security and modernization[xxviii]. Adit believes this package rings bullish for Decision Sciences, as increased scrutiny on border infrastructure will accelerate the deployment of the company’s systems, propelling growth in both domestic and international markets.
Amidst the busiest quarter for IPOs came the largest Chinese listing on a U.S. exchange since Alibaba’s $25bn listing 2014. Indeed, Didi Chuxing’s $68bn debut on the NYSE commanded considerable demand, trading up as high as 19% intraday[xxix]. However, the subsequent drawdown in DiDi shares reflected the market’s uncertainty surrounding corporate governance in Chinese stocks, prompting investors to reevaluate their international equity exposure. Of course, this was not the first instance in which the Chinese Communist Party had meddled with a private business. In April, Chinese regulators halted what would have been the world’s largest IPO, as Ant Financial’s novel lending practices drew heightened scrutiny from party officials. The fallout from both Ant Financial and Didi Chuxing demonstrate the benefits of investing through a holistic, sustainable lens. That is, while enticing, new companies may tell stories underscored by mercurial growth, there is plenty of alpha to be captured through a disciplined investment process. Adit invests for growth with quality companies and top-tier management teams in opportunities without excessive regulation and restrictions.
Eric Munson & Team Adit
Attachment Link: https://app.box.com/s/3p6at7ppxp6xeis1cxb0ts240bx5c4hv
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