TECH NEWSLETTER NOVEMBER 2023

MaGiC Tech Newsletter – November 2023 Edition

Dear MaGiC Investor,

We are pleased to present the Tech Newsletter for November 2023, providing you with valuable insights into the tech industry and MaGiC investments.

RECENT NEWS

Apple investors face $340 billion hole as woes mount: A drumbeat of bad news for Apple Inc. is casting doubt on the argument that the world’s most valuable company is immune to risks related to economic turbulence. Tepid sales in China for its new iPhone models have fueled concerns about Apple’s ability to justify its pricey valuation and avoid a streak of four consecutive quarters of falling revenue — which would be its worst run since 2001. That’s as the company grapples with political tensions with China and overheating devices, while KeyBanc this month became the latest firm to downgrade the stock.

India's Tata Technologies valued at $6.4 bln after smashing debut: Shares of India's Tata Technologies settled nearly three-fold higher on their trading debut on Thursday, 30th Nov 2023, valuing the first Tata Group company to go public in nearly two decades at 532.64 billion rupees ($6.4 billion). The Tata Motors' unit, which provides engineering and technology services to auto, aero and heavy machinery makers, beat the valuation of its peers like KPIT Technologies and L&T Technology Services. Tata Technologies' listing-day gains were also among the best since 2021-end, according to LSEG data and analysts.

Google DeepMind AI reveals potential for thousands of new materials: Google DeepMind has used artificial intelligence (AI) to predict the structure of more than 2 million new materials, a breakthrough it said could soon be used to improve real-world technologies. In a research paper published in science journal Nature on Wednesday, the Alphabet-owned AI firm said almost 400,000 of its hypothetical material designs could soon be produced in lab conditions. Potential applications for the research include the production of better-performing batteries, solar panels, and computer chips.

TikTok joins Meta in appealing against EU gatekeeper status: TikTok joined Meta in appealing against the "gatekeeper" status under the Digital Markets Act (DMA), an EU law that brings in tougher rules for tech companies and makes it easier for users to move between competing services. Meta challenged the "gatekeeper" designations for its Messenger and Marketplace platforms, but did not appeal against the status for Facebook, Instagram and WhatsApp.

US ECONOMIC OUTLOOK

In November, the Federal Reserve held the target range for the federal funds rate steady at 5.25%-5.5% for the second consecutive time. This decision reflects the policymakers' dual focus on reining in inflation to reach the 2% target while avoiding excessive monetary tightening. Chairman Powell, during a press conference, indicated that the September dot-plot, which showed the majority of participants forecasting one more rate hike this year, might no longer be accurate. Powell emphasized that the FOMC has not discussed any rate cuts yet, with their primary focus on whether additional rate hikes are needed. The Fed is closely monitoring the cumulative impact of previous rate increases, the time lags associated with monetary policy's effects on the economy, and developments in both the economy and financial markets. Source: Federal Reserve.

Inflation slowing steadily:

Federal Reserve Chair Jerome Powell, speaking at Spelman College, noted a gradual slowdown in inflation, highlighting that consumer prices, excluding volatile elements, rose at a 2.5% annual rate over the past six months. Powell expressed caution against prematurely concluding that the Fed's benchmark rate is sufficiently high to combat inflation fully. He discouraged speculation on potential rate cuts, emphasizing the Fed's careful and forward-moving approach. The upcoming Fed meeting is expected to maintain the current interest rate, reflecting a commitment to stability.

On the inflation front, Powell acknowledged the easing trend, with October's inflation at 3%, the lowest since spring 2021. Core prices, excluding food and energy, rose 3.5% year-on-year, and monthly price changes indicate a steady reduction in inflation. Powell's remarks reflect a nuanced evaluation of inflation dynamics, reinforcing the Fed's commitment to monitoring the situation closely without committing to immediate policy shifts.

US PRIVATE MARKET OUTLOOK

Earlier quarters saw a continued surge in public technology equity prices (particularly in AI or AI-adjacent technology names); however, this pricing activity has yet to fully flow through into the private market beyond a select handful of companies. For private firms that have not raised venture capital funding rounds during the last 18 months, the “best case” scenario has been continued trading at either flat pricing or marginal discounts to their prior 2020/2021 venture round prices. Meanwhile, trading for many companies in the private secondary market has been at levels as low as 50% to 80% below their prior funding round price.

What is particularly intriguing about the present state of private market pricing is the somewhat unexpected glass ceiling that is suppressing companies’ valuations far below the revenue multiples at which their public counterparts are currently trading. This is due in part the often discussed “private-to-public pricing lag”. This lag has historically been between 3 and 6 months, but we are now approaching a year since the Nasdaq bottomed in October of 2022, with no discernable recovery in broad private market pricing. The duration of this lag is unprecedented.

We have theorized a few possible causes for this lag:

1) Thin trading volumes in private secondary markets. Thin volumes may result in longer time-frames for price increases (or decreases) to occur. For instance in public markets,companies may see 1% of their active float change hands in a given day, whereas a private issuer may only see 1% turnover in a given year. This lack of transactional activity dramatically slows the flow-through of price movement. Trading activity plummeted in FY2022 and while there are some tiny green shoots, transactions volumes are approximately 25% of what they were in 2021. Notably, in public markets, thin trading volumes tend to be associated with more volatility and less efficient price discovery. However, in private markets, since the vast majority of trades are individually brokered, volatility may be artificially minimized while inefficient price discovery remains.

2) Exceptionally high (and still increasing) sell-side pressure. Shareholders at privately-held technology firms are now approaching the 20th month of the IPO freeze that began in early-2022. Many of these shareholders have been seeking liquidity throughout the entire period but, as the extended IPO freeze drags on, many deferred expenditures are becoming increasingly urgent. This is particularly true for employee shareholders who may rely on liquidity to fund major life events and goals. Bid pricing has remained repressed but desperate sellers have been increasingly willing to entertain low-ball bids. We are still far from bid-ask parity at the secondary market level and we see no signs of imminent changes to these conditions.

3) General confusion on market directionality paired with a more sophisticated buyer cohort in private markets. After a precipitous increase in interest rates since the beginning of FY2022, U.S. GDP growth has remained positive for four straight quarters. This growth continues to surprise economists that had initially predicted a late-2022 recession followed by updated predictions of a Q1 2023 recession, and so on and so forth. It seems that one of the only plausible explanations for this divergence from expectations is the extraordinary balance sheet health of the American consumer that has allowed spending to remain robust in the face of severe inflationary forces. Nonetheless, there are still persistent signs of potential instability. For instance, the 10yr/2yr spread on U.S. treasuries has now been inverted for more than a year, and the 10yr/3m spread is the most inverted ever observed (since the FRED dataset inception in 1982). While yield curve inversion does not guarantee a recession, it has preceded all 10 recessions since 1955. As such, more sophisticated investors, well-aware of this relationship may delay significant private asset purchases pending normalization of the yield curve.

In short, the private secondary market remains favorable to buyers, with the large majority of private asset values remaining repressed and sell-side pressure gradually building. We anticipate this dynamic to continue in the short term (3 – 6 months) and could be extended to the mid-term (6 – 18 months) if public markets see more volatility over the coming quarters. However, it is important to note that, historically, once a clear positive trend in public growth equity pricing emerges, private market pricing tends to rapidly bridge the valuation gap and often overshoot to the upside.

PE Activity Trends Q3 2023:

PE saw a substantial slowdown in H2 2022-H1 2023 with 17% fewer deals across all industries and 27% lower valuation multiples compared to the previous period. S&P Global Market Intelligence data suggest that the majority of these challenges came from “misalignment between buyer and seller,” meaning buyers came into the M&A process believing their company should be valued closer to where it was 18 months prior rather than adjusting to the current realities of the market. There was also a lower appetite for risk on the part of PE firms given rising interest rates and deflated consumer confidence.

Most PE deal activity appears to have taken place within the tech sector, which is typical, and tech’s share of deal activity has remained relatively constant throughout the economic downturn. PE’s continued interest in tech in Q3 2023 isn’t surprising, given the sector’s earning potential and concurrent boom in generative AI and clean energy technology.

MAGIC USA PORTFOLIO UPDATE

Magic USA’s tech portfolio now stands at 20 ventures across Enterprise hardware, Enterprise software, HealthTech, CyberTech, ConsumerTech, Energy, Robotics, Augmented Reality, Autonomous Vehicle, RetailTech and AgriTech.

We continue to engage with investment managers and companies to keep a close watch on cash burns and other health parameters. Below you will find a selection of updates from the portfolio:

1. Proof Fund III:

PROOF FUND III had invested in a portfolio of around 15 companies yet and targeting to invest in another 25-30 companies more over the next 5-6 years. PROOF invests in the unfilled pro rata rights of small cap VCs that no longer have the capital to follow on in the subsequent financing rounds of their best investments.?

Almost all the companies are performing financially very well with more than 50% of the companies are expected to be turned EBITDA positive in next few quarters. Almost all companies have funds available with them to sustain for more than 1 year.

2. Arcadia

Arcadia, founded in 2013, digital utility technology data platform that integrates with almost all power utilities in the United States and offers an online dashboard that allows home owners to monitor electricity usage track bills make clean energy choices and automate energy savings.

In June, Arcadia announced it had acquired community solar provider Oregon Shines. With this transaction, Arcadia becomes the largest manager of community solar projects in Oregon. Arcadia is the only player to have a presence in every community solar state. The Company views AI as a significant opportunity and is taking a proactive, comprehensive approach to AI integration. Arcadia has established a dedicated working group, supported by representatives from various departments, to identify opportunities for implementing AI.

3. Captiv8:

Captiv8 is the leading market place and platform, bringing hundreds of top consumer brands and their marketing agencies together with the 100B creator economy of 50M independent content creators, curators, social media influencers, bloggers and videographers across Substack, Youtube TikTok, Instagram, Pinterest, Shopify, Patreon, Twitter, Facebook and other platforms.

?Captiv8 is prioritizing cashflow, deliberately opting for a more measured growth strategy to achieve profitability, and the Company believes that it has enough cash on hand to reach that goal. The Company earned the #1 Gold Award for Best Influencer Marketing Technology at the Influencer Marketing Awards (IMAs), for its Creator Affiliate Suite.

4. BrightInsight

BrightInsight, is the leading regulated digital health platform (SaaS), purpose built for bio-pharma and MedTech. It is designed to optimize and improve results from regulated drugs, devices and software through integrated data and actionable insight in order to enable customers to drive increased patient adherence and engagement.

In May, BrightInsight won the Frost & Sullivan 2023 Best Practices Award for Global Healthcare IoT Company of the Year. The award is bestowed upon companies that exhibit excellence in growth strategy and implementation within their field. It acknowledges a high degree of innovation in products and technologies, along with resultant leadership in customer value and market penetration.

5. data.world

data.World , founded in 2016, has built one of the only modern catalogs for data and analysis delivered in a cloud-native Software as a Service (SaaS) way.

data.world launched new automation and automation-driven workflows to dramatically accelerate the delivery of governed data across enterprise teams. The announcement introduces the third class of AI-driven bots on the data.world Data Catalog Platform. The data governance-focused Eureka Bots join the data discovery-focused Archie Bots and DataOps-focused BB Bots to address the most pressing challenges to working effectively with data, automating data management processes, and delivering governed data for AI.

6. TechSee

TechSee uses Machine Vision and augmented Reality powered by smartphones to help remote tech support experts quickly.

TechSee launched a new project to develop its next-generation Generative Multi Sensory AI, and is already oversubscribed with customers interested in participating so they can transform their contact centers to use less manpower than required today. The company also launched its Visual Journeys Editor, the world’s first visual studio for scalable development of computer vision models for applications.

7. Equiam Fund III:

EQUIAM Fund III is targeting portfolio of 30 pre-IPO, U.S. based, Series B+, venture-backed private technology companies with respective valuations greater than US$250 mn, the majority of which are greater than $1 bn.

During Q3 2023, EQUIAM formally closed on two transactions: Signifyd (Fund position #13) and Snaplogic (Fund position #14). They were able to enter both positions at significant discounts to their prior funding rounds, but more importantly, they entered at discounts to each firm’s public comparable set also.

If you have any further questions, please contact the Investor Relations team at [email protected]