Adit Ventures Q4 2019 Review & Outlook

January 15,2020

Reports

Decades Past, Present and Future
 

 

Adit Q42019 Review and Outlook

2019 provided investors solid returns across many asset classes. Led by a resurgent technology sector, the S&P 500 gained 28.9% while NASDAQ rose over 38%1. Bonds also gained as interest rates dropped to record low levels, with the Federal Reserve cutting interest rates three times in the second half of 2019.

President Trump signed the USMCA agreement and announced China had agreed to a “Phase I” trade deal adding to the improving economic fundamentals seen around the globe. 

US IPO Market-1

Central banks in Asia, Europe and the United States continued providing monetary stimulus in various ways across the board. The net result was the 4th best performing decade for stocks in history. Adit believes the decade ahead holds tremendous potential as well.


US IPO Performance

Given this backdrop, and generally positive earnings from most sectors, the equity markets hit new highs. In fact, the various equity indices hit new highs 33 times in 2019, as the prospects for continued economic expansion in the decade ahead looked increasingly favorable.

Investors continued to be optimistic as Holiday retail spending rose +3.4%2 versus a year ago, led by increased online sales, which are now nearly 15% of overall consumer spending. Housing looks good, helped by solid employment growth with November recording 266,000 new jobs3. Farmers and commodity investors cheered the initial wave of Pork & Soybean orders placed by China in December and the overall economic sentiment remains positive across most economic sectors.

The IPO Market, characterized as “Broken” in the press, saw an average gain of approximately 20% in 2019, slightly below the historical averages of the past three decades. This “Broken” market saw the largest IPO’s in history occur in December as ARAMCO raised over $29b, valuing the company at $1.75 trillion4.

The shares traded up over 14% in the two days after this IPO, the maximum allowable limit in the Saudi market, making it the most valuable company in the world. Subsequently, several other IPO’s went out with good results so the “Won’t Work” hangover is hopefully behind us, as the markets go into 2020. We expect to see robust IPO activity in ‘20 with Airbnb likely doing a direct listing in Q2.

Fundamentals matter, as Adit has believed since its inception, so we remain constructive on this company and the others in our diversified portfolio of Growth Equity names. Please reach out for additional information or come to our website www.aditventures.com to learn more about Adit, our approach, people, philosophy and portfolios.

Venture Capital and Private Equity remain attractive asset classes given the potential robust return profile, and the lack of yield on bonds. Assets increased as the fundraising activity increased in 2019 to record levels. Dry powder is over $2.5 trillion in both PE & VC given the proliferation of mega-funds north of $5B in size5. Softbank continued to wrestle with the fallout from WeWork, and while Vision II will likely get done, it isn’t easy explaining away the irrational exuberance of valuations with many of their portfolio companies announcing layoffs.

While there are pockets of excess in both private & public markets, there also is logical, rational thinking displayed in analyzing relative valuations. The failure of WeWork is a positive sign that there is investor discipline left. This dynamic also reduces the crossover buyers in the growth equity sector as many mutual fund firms no longer play ahead of the public offerings post-WeWork debacle.

IPO MegaRounds

Expect to see continued positive momentum for the economy, and thus the markets, although we believe we are overdue for a market correction of 3% - 5%. Hard to know what, when or how it will occur, but it likely will, when investors least expect it. When complacency comes calling, corrections follow, generally. Adit believes this will represent a major buying opportunity as we see tremendous opportunity in the decade ahead. See Adit’s “Ideas of a Decade” in February!

This coming decade promises to deliver on the potential of the decades past, with 5G networks providing seamless streaming of calls, music, videos and more, AI combined with Big Data to actually provide real-time networks enhancing productivity and results-driven searches among other things.

With companies taking longer to go public, Adit’s thematic investment process remain of paramount importance: AI/ML, Big Data, Cloud, Cyber, Defense, Digital Healthcare, Education,, IoT, Logistics, New Media, Shared Economy, and Space all remain solid drivers. The coming wave of innovation, building on the decades of past achievements of technology pioneers, is allowing firms to provide superior experiences to business, consumers and society.

The voice-actuated computer models will be greatly improved in years ahead, with smart buildings, autonomous vehicles, drone delivery, and robotic services becoming commonplace. Nanotechnology and quantum computing offer glimpses of potential solutions to seemingly intractable problems today. Progress in communications, connectivity and more will continue to drive progress in many areas, as Adit is publishing thought leadership pieces monthly in 2020. Massive dislocation in agriculture, food, nutrition & wellness as well as education offer Adit two new areas of opportunity. Expect to see Adit’s research on these dynamic investment themes.

We remain positive on the decade ahead, despite the conventional wisdom being negative on the outlook. Perhaps the surprise might be that things continue to progress better than expected, and the results surprise everyone, even the naysayers.

Only time will tell. Adit remains focused on our fundamental approach of buying good businesses, at a fair price, and monitoring their progress, reporting it to our clients in an ongoing basis, and being opportunistic by allocating capital to gifted entrepreneurs with a good team, and a thoughtful approach to growing businesses that have a purpose and serve a broad constituency of clients, community, employees and shareholders. Happy New Year to you all. Happy investing we say, confident in the knowledge that Adit’s best days are still ahead. May happiness, health & abundance fill our days in the decades to come.

Sincerely,

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.

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I.   https://www.nasdaq.com/articles/2019-review-and-outlook-2020-01-07


II.  https://www.reuters.com/article/us-usa-holiday-shopping-mastercard/record-online-sales-give-u-s-holiday-shopping-season-a-boost-report-idUSKBN1YT0PQ


III.
https://www.cnbc.com/2019/12/06/us-nonfarm-payrolls-november-2019.html


IV. https://www.nytimes.com/2019/12/06/business/energy-environment/saudi-aramco-ipo.html


V.  https://www.ft.com/content/2f777656-9854-11e9-9573-ee5cbb98ed36