August 5th (Macro-environment)

Greetings all,

It is Friday, August 5th, and the week has come to a close! As per usual, I will survey the headlines from the Venture Capital/Private Equity Industry and then pivot to entertain a brief discussion on the macro-backdrop of the global economy. But first, an excerpt from the great Austrian economist Ludwig Von Mises, "The worship of the state is the worship of force. There is no more dangerous menace to civilisation than a government of incompetent, corrupt, or vile men. The worst evils which mankind ever had to endure were in?icted by bad governments. The state can be and has often been in the course of history the main source of mischief and disaster." (Von Mises, Human Action) I excerpt this quote in order to remind everyone that the state, and in modernity the 'nation-state', is often the perpetrator of disastrous events because they are the only organisation in the World which derives its' revenue from involuntary exchange. Conversely, every other organisation has to derive its revenues from voluntary exchange, the consensual participation of buyer and seller in a transaction which actually benefits both parties.

U.S. employers onboarded approximately 528,000 jobs?last month, helping the economy recover the 22 million jobs lost early in the pandemic, as employers fought for labor?despite a contraction?in economic growth. The jobs recovery?required 2? years and included a portion of the first half of the year when payrolls scaled faster than any other post-World War II period that also included the beginning of an economic contraction. The unemployment rate fell to 3.5% last month, a half-century record also witnessed just before the pandemic in early 2020, the Labor Department reported on Friday. Stocks closed slightly lower?and bond yields gained ground on Friday, with the tech-saturated Nasdaq Composite suffering the steepest declines. The labor-force participation rate, or the percentage of adults working or seeking employment, fell down to 62% in July from 62.2% one month ago. While the economy has regained all the positions it dropped since February 2020, there are still 623,000 fewer people in the labor market, a factor that has?increased wages?due to a demand for workers that far exceeds the supply of available workers. Wage growth was stronger than economists projected in July, with average hourly earnings wages 0.5% from June and 5.2% from a year ago.

Private equity fund performance remained strong through the end of 2021 despite macroeconomic factors disrupting global markets. However, analysts anticipate a contraction could be on the horizon. PE funds yielded a robust one-year performance, with a 46.6% gain through Q4 2021, as fundraising performance (led by mega-funds, vehicles sized at $5 billion or more) excelled. However, analysts anticipate these numbers to decline in the following quarters, demonstrating the impact of inflation and rising interest rates. Meanwhile, PE capital-raising totals are poised to mark new record highs, as firms are currently in what analysts are describing as the most congested capital-raising environment in recent memory. Real estate funds also performed exceptionally well through 2021. The asset class delivered a 24.8% annual IRR through Q4 2021, its best growth rate since Q2 2011. And while preliminary data reveals real estate fund performance may decelerate in the near future, affected by a volatile market in 2022, firms are still able to acquire real estate funds.?Blackstone, for instance, is closing a $30.3 billion real estate fund, which would be the largest ever in the sector of PE funds. Analysts project an increase in real estate performance as workers repopulate offices, in-person retail activity resurfaces and skepticism of metropolitan living subsides, but overall, analysts anticipate the asset class to yield markedly lower returns than it did in 2021.

While many sectors are experiencing funding deceleration as the recession persists, European healthtech is poised for another record year. So far in 2022, startups in the vertical have accumulated $3.7 Billion, according to PitchBook data, constituting over 67% of the $5.3 billion raised last year. European healthtech investments increased exponentially with the onset of the pandemic, which demonstrated the globe's vulnerability to pandemics. Aging populations globally and the capacity for innovation in a highly outdated sector suggests a downturn is not likely. The amount of capital raised for European healthtech has also been stabilised by numerous mega-rounds. The largest deal this year was a $509 million?Eurazeo-led investment in the digital medical platform?Doctolib.

Elsewhere, Corporate Venture Capital firms have significantly accelerated their participation in VC deals with their involvement in global rounds rising by 462.5% in the ten years prior to 2021. Firms like?Coinbase Ventures?and?GV?have become some of the most active investors in VC deals in recent years. But as a new contraction sets in, many investors are pondering if the recent past will resurface yet again. "Everybody's hurting, so of course CVCs are pulling back, but they are behaving more similarly to their institutional peers than ever before,"?Touchdown Ventures?President Scott Lenet observed. "A few will quietly 'press the pause button,'?but they are not abandoning ship like they did in previous downturns." Thus far, the data indicates that Corporate Venture Capital firms are consolidating quicker than traditional VC investors but not wholly abandoning the asset class. In Q2 2022, CVCs engaged in roughly 2,170 deals worth a combined $53.1 billion, according to PitchBook data, a full quarter drop of 18.9% and 33% respectively. In comparison, the number of rounds closed including traditional VCs saw a full quarter drop of 10.3% over the same period.

Lastly, I will offer a brief commentary on the macro-environment we find ourselves in. We are witnessing, as global citizens, a highly confusing time where economic activity at least in the United States has contracted for two consecutive quarters but simultaneously the job market is as robust as it has been in 40 some years. How can we make sense of this dynamic: 40-year high inflation of 9.1% (which is a conservative estimate by the Commerce Department) + 40-year low unemployment rate + 2 consecutive declines in GDP each quarter + the ongoing war in Ukraine. My method for attempting to place all these events in their proper context is to consider first how we arrived at this juncture, which appears to be the excess liquidity still circulating through the economy & financial markets. Such liquidity was provided by the U.S. Government via the Fed buying government bonds (debt-based financial instruments) in the open market, while the unemployment rate skyrocketed and businesses closed due to stay-at-home orders issued by that same U.S. Government in response to the COVID-19 pandemic. As the quote I excerpted earlier from Von Mises clearly describes, nation-states are often the perpetrator of the most cataclysmic catastrophes and it is no different here. While I cannot attribute total responsibility to our legislature's deficit spending activities, we must recognise that government spending is the most urgent problem we need to address at the current moment. As the Fed is attempting to exponentially reduce the size of its balance sheet by the end of this fiscal year, we must scrutinise our elected officials' actions as they have habitually and perpetually increased our debt portfolio such that the approximate global debt-to-gdp ratio is 4-1. In other words, we as a species consume four times more than what we produce. This must stop and we must resolve ourselves to facilitating fiscally responsible legislation.

As always, please message me directly on LinkedIn or via email if you have any queries concerning InvestHub or Konzortia. We are currently in the process of completing intense full-stack development of InvestHub and cannot comment in-depth on our progress so far, but rest assured we will have new updates ready for you all by next week sometime.

With gratitude,

Will