As promised, you can now get daily charts of interest from The Investment Ecosystem Twitter feed, if you follow such things. And make sure to share the Fortnightly with others!
Less-private funds
It seems that every issue could have something about new rulemaking by the Securities and Exchange Commission. Proposed adjustments to the private fund reporting requirement, which had been telegraphed, have now been released. You can read the three-page fact sheet or the 236-page proposed rules.
Of course, there were plenty of articles about the proposed changes. One in the Financial Times was headlined, “Investment industry welcomes SEC efforts to reform private equity fees.” It summarized the positives for investors that the changes in transparency would bring, but not everyone saw the need:
The American Investment Council, the lobbying body that represents the private equity industry, said its members were already “working closely” with investors.
Eyes on venture capital
The high-flyers of the stock market have been wobbly of late, raising concerns about venture capital. It is coming off of a dramatic period that in many ways eclipses the craziness of the dot-com era.
It’s an opportune time for Abraham Thomas to write a Substack posting (only his second), “Minsky Moments in Venture Capital.” He starts by reviewing Minsky cycles and the illusion of safety that they engender before the fateful moment starts the cycle spinning in the opposite direction.
As Thomas notes, “venture capital seems an unlikely candidate for Minsky dynamics to take hold.” The conditions don’t appear to apply.
But, “Startups are marked up faster than ever. Rounds are closed faster than ever. Funds are deployed faster than ever.” Maybe the compressed timelines are the key consideration:
Does the compression of timelines in venture change the distribution of terminal outcomes for venture-backed companies?
On that question, the jury is still out. It’s not obvious to me that accelerated markups change the power-law dynamics of venture portfolios. Markups change the journey of a business, but do they change the destination?
If the answer is yes, then there’s no Minsky dynamic at play; what we’re seeing is a rational evolution of the venture industry. Maybe startups are truly less risky now; maybe the market truly has matured. More capital, lower returns, safer investments.
If the answer is no, then venture is very possibly in a Minsky boom, and we’re just waiting for the moment when it turns into a Minsky bust.
(Speaking of busts, CB Insights has updated its list of “Startup Failure Post-Mortems.” Which is your favorite of the “397 goodbye letters and investigative takedowns” that are included? Quibi? Quantopian? Quixey?)
The NMS Exchange
Each year, NMS Management publishes an “Investment Bulletin for the Endowment & Foundation Community,” featuring articles on a variety of topics from practitioners working within those types of organizations.
The latest edition includes these stories:
Is China VC Now “Uninvestable” . . . or Primed for the Intrepid?
Should Institutions Invest in Crypto?
Investing in Change: Racial Equity in Financial Services
Team Building in Sweatpants: Setting Culture in a World of Remote Work
Mentoring: A Responsibility to the Investment Industry
The Inflation Snowball
Studying the effect of emotions on culture
Wharton professor Sigal Barsade passed away on February 6. An obituary in the New York Times said she studied “how emotions, not just behavior and decision making, shape a workplace culture, and in turn how they affect an organization’s performance.” Barsade identified the importance of organizations assessing their emotional environments — and individuals finding a culture that suits them: “Being in the wrong place can take an emotional toll.” An article about her in the Wall Street Journal emphasized the importance of “emotional contagion” in the workplace, ending with Barsade’s belief that “emotions aren’t noise, they’re data.”
Other reads
“Underestimating the Red Queen: Measuring Growth and Maintenance Investments,” Michael Mauboussin and Dan Callahan, Counterpoint Global. “This topic is important because you can anticipate a company’s growth only if you understand how much capital the company spends on growth versus maintenance.”
“Delegated Risk-Taking,” Tim Kroencke and Carolina Salva, SSRN. In some countries, defined contribution plans look like this: “i) the contributions of the beneficiaries are pooled and professionally managed, ii) the individuals cannot choose the financial intermediary, or the investment strategy and risk profile, and iii) financial risks may be born by the individuals.” Studying that structure in Switzerland: “Our results suggest that delegated risk-taking results in portfolios of risky assets that are difficult to reconcile with classic financial theory.”
“Do Performance Fees Truly Align Hedge Fund Manager Interests with Allocator Interests?” Jonathan Cornish, Portfolio for the Future. “Performance fees represent a ‘heads I win, tails you lose’ proposition for managers.”
“Asset Allocators Are Mired in Bureaucracy — But They Don’t Have to Be,” Christopher Schelling, Institutional Investor. Thoughts on governance, leadership, investment process, and decision making.
“The hidden leverage of stock-based compensation,” Jamie Powell, Financial Times. Another generation discovers the consequences when the stock option flywheel unwinds.
“Back to Earth or Temporary Setback? Revisiting the FANGAM Stocks,” Aswath Damodaran, Musings on Markets. An update of the market leaders, including one-line valuation stories. (A video is at the bottom of the posting should you prefer that.)
“Analytics transformation in wealth management,” Anutosh Banerjee, et. al, McKinsey. “Wealth managers are finding success with two approaches (serving “clients across the wealth continuum on a flat-fee advisory basis” and embracing “personalization aligned to client life stages and goals”) [that are] “achievable only with advanced capabilities in data and analytics.”
“Are Cryptoassets Tulips or Dot-coms?” Douglas Elliott, Oliver Wyman Forum. Which camp are you in: the Dismissive, the Active Opponents, the Pragmatists, or the Supporters?
“2021 Investment Management Fee Study,” Callan. A look at fees across the main traditional manager categories, showing the trend in the ranges of published fees and actual fees, along with the degree of manager concentration (of the total fees) in each category.
“The ten best books for thinking clearly about statistics,” Tim Harford. The author of The Data Detective highlights some other books to check out.
Molecules wanted
“This is a molecule crisis. We’re out of everything. I don’t care if it’s oil, gas, copper, aluminum, you name it, we’re out of it.” — Jeff Currie, global head of commodities research for Goldman Sachs.
A (really) long bond
On June 30 of last year, the Republic of Austria sold a hundred-year bond. The yield is less than a half percent higher now than it was at issue, but look what’s happened to the price — down over 30%, and 47% from its peak fourteen months ago. The current duration is 62, and if rates rise to 2.5% over the next year, the bond will decline from around 74 to 40. (We’ll provide an update when we’re halfway to 2120.)
Postings
Two recent essays:
“We Need Some New Terminology (Part 2).” The first chapter of this two-part series dealt with the confusing names for investment advisors — and the significant differences among firms that fit under that regulatory description (at least in the U.S.). This edition tackles an even tougher semantic challenge: What is passive investing?
“When Does Scale Impede Returns (and When Doesn’t It)?” The general belief is that big is bad when it comes to returns; is that the case? Some examples to consider.
All of the content published by The Investment Ecosystem is available in the archives.
Published: February 20, 2022
To comment, please send an email to editor@investmentecosystem.com. Comments are for the editor and are not viewable by readers.