I'm No Economist #15: ?? Will I Ever Be Optimistic Again?

I started deep diving into macroeconomics in 2018-2019. I was introduced to Bitcoin and was interested in learning more about the long-term effects of Quantitative Easing. Then, the pandemic hit and it all came crumbling down. Which made me even hungrier for macroeconomics knowledge.

I love macroeconomics and the social dynamics that shape it. Which levers are pulled, by which incentives, and the consequences of human action.

But since then, I haven't been able to identify how the economy is going to recover. All news I read is about how this is getting worse. The headlines that get to my email inbox, my social media feeds, and the reports I'm offered are all about how we're imminently f*cked.

I talk to friends with more experience than me, that have been through different economic cycles - in Brazil and abroad - and I can't understand their optimism. How they're always seeing the light at the end of the tunnel.

I press “end call” or go home thinking that I might be wrong. I can't sleep thinking I'm not prepared for the end of times. I have to prepare.

But thinking about how bad things are has a terrible psychological effect on one's life. You miss opportunities.

I'm biased. I have to accept that. I have to change that. That's it.

As a personal exercise, I decided I'm going to look for a positive spin in everything I read - even if it doesn't look like that.

This starts today.

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Welcome to a brand-new edition of I'm No Economist ??

I'm No Economist is a newsletter about global investment trends.?

Here you'll read research digests and updates on what's going on in Venture Capital, Private Equity, and Global Macroeconomy - all subjects I'm fascinated with and have strong opinions about.

Click here and share I'm No Economist with your friends and stay up-to-date with the latest trends in the money world ??

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Tech Is Deflationary: Who Would've Thought, huh? ??

I've been reading reports on the state of the private market fundraising for the year 2022. I'm a macro investor, and that means that reading these reports helps me build my mid and long-term positions.

I have to say that I'm happy to see that most of the things I started writing about last year are becoming more and more apparent. For example the rise of infrastructure and real assets investments. We're seeing record fundraising for infrastructure, particularly renewable energy.

But I'm curiously pleased to see that I was wrong about some others - a nice way to say I'm not always right. Who would've known, huh?

Some things that I thought were just hype are happening. Things I never wanted to add to the things I read every week are actually more than a fad.

My interest was always in trying to tame inflation and how to position for Quantitative Easing. More experienced investors, particularly those on the edge of innovation already knew the best way to do that is with tech.?

You may know what I'm talking about by now. The main thing I thought was just a fad is AI.

I wrote back in June 2022 that software ate the world but already spat it out. But I ignored Moore's Law and thought it would take way more time to see it happen.

I've been seeing this chart a lot on my social media feeds of how many people are needed at S&P companies to generate $1 million in revenue and it's bonkers!?

A little caveat, though. A very interesting discussion on Twitter involving the author of the first chart led to a CPI-adjusted version that told a similar story but was not as impressive.?

Even with the CPI-adjusted version, we can see a ~30% increase in productivity from 1986 to 2020. Then the pandemic happened and skewed the number of employees back to 6-7. Which is still an important increase in productivity in 35 years.

This made me wonder where the next productivity revolution is coming from, and I think it could be a number of things. As a libertarian, I always hope it'll come from less government: financial decentralization, fewer subsidies for the king's friends, fewer taxes, etc. But I don't keep my hopes up in that department.

In Brazil, we're seeing the government scrape for new revenue everywhere. From betting websites taxation to fuel increases. And trying their best to reduce their debt by decreasing interest rates. Yes, decreasing interest rates in this climate. Unbelievable.

So, my source for optimism has to come from how the private sector, especially the private market investors are taking their businesses. There is good news.

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The Case For The Private Market ??

From 2010 to 2020, the private market has seen a 237% increase in AUM ($3.2tn to 8.9tn). Since 2020, it has already increased to north of $10tn. Looking forward, the worst case scenario says $11.2tn in AUM in just 4 years from now.

I think about private because things have been tough for public equities. Morgan Stanley's earnings expectations started tanking again, and IPOs are getting back to levels similar to 2010-13. That's no surprise given the many macroeconomic headwinds:

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Winners & Losers ??

Now, although it's been a decade of huge growth for the private market, it's not every manager that's going to generate returns for their LPS. There are certain asset classes, firms, and types of managers that will be able to leverage this unique moment.

Asset Classes ??

The sell-off of the 2022 public equity markets did not impact VC and PE managers so much. These managers are taking their time to mark down their portfolio companies - something that is likely going to start happening with the slowdown in earnings of publicly traded companies around H2 2023.

Even inside of the asset classes, different stage-focused funds are going to see their portfolio’s Net Asset Value (NAV) change differently.

Firms that focus on early-stage are also likely to be successful in the current private market environment. Companies in this stage have seen and will still see significant growth in the near future. Something I reported in the last edition of I'm No Economist .

Experienced Vs. Emerging Managers ??

Additionally, with a natural LP skepticism during bear markets, managers with a strong track record of generating returns in private markets are more likely to successfully fundraise in the current climate.

In 2022, the share going to firms with more than 3 funds increased. While emerging managers were able to take a 39.6% share of capital raised in 2021, this number dropped to 22.4% in 2022. Meaning that 83% of all capital raised in 2022 went to bigger firms, with more experienced managers.

The good news is that, when zooming into VC, the share going for more experienced managers did increase, but at a smaller rate. Emerging VC managers tend to have an edge among traditional private investors and were responsible for 33,2% of the $169.8bn raised in 2022.

?Geographies ??

It is worth noting that the concentration of capital raised in North America may raise some concerns. In 2022, North America was responsible for 78% of the total capital raised (specifically inside Private Equity). This is mainly due to the impacts of the Ukraine-Russian war that made fundraising drop 55% YoY in Europe.

This does not necessarily mean that the situation is catastrophic. But, it is important to consider the implications of this concentration, especially in terms of access to resources. I think that a deeper analysis should be conducted to really understand the magnitude of this concentration.?

Until then, I'll take a positive spin on it. Venture Capital is the asset class where the “Rest of the world” is more significant. That will probably include Latam which is not specified, but I reckon there's something to it:

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Food For Thought ??

I believe we'll see an important headwind in the next decade or so. In more established, mature markets this is already happening.

Even then, however tough it is, or however shitty governments are - because they are, I don't think it bears discussion - humanity thrives in moments of difficulty. We're inherently innovative.

I'm seeing the light within the private market, especially with innovators going for infrastructure, AI, and increased productivity in general - and that makes me more optimistic.

I'm hoping this is a sign of more experience and calm, and stillness. There's always a way.

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Share I'm No Economist With A Friend ??

I'm No Economist is a newsletter about global investment trends.?

Here you'll read research digests and updates on what's going on in Venture Capital, Private Equity, and Global Macroeconomy - all subjects I'm fascinated with and have strong opinions about.

Click here and share I'm No Economist with your friends and stay up-to-date with the latest trends in the money world ??

Talk soon,

L.