War in Ukraine, Inflation, interest rates “spiking to the moon”, supply chain imbalances, and the resulting Market volatility…it’s all enough to make one’s head spin. I thought it might help to review and address some of these, which I see as “noise”, and specifically why Private equity, later stage equity projects, and pre-IPOs might serve as more of a protective “Cocoon” and simultaneously providing exceptional upside potential.
Let’s take each Market and Macroeconomic event one by one, with a focus on financial opportunity. Hopefully by the end, you will be feeling better.
• Ukraine: As terrible as this is, war always brings some silver linings with it with an eye on profit opportunities. Some beneficiaries of this would include energy companies (Oil & Gas), Cyber and data mining companies, Defence & Security companies, and logistic companies. Oggi , our strategic alliance and sister firm, had been able to assist their clients with positions in Palantir Technologies, before public listing, who is a direct beneficiary of the conflict and any government involvement. In addition, Palantir’s consumer division is also growing at incredible rates, showing non-correlation to macro events. That’s the point in this asset class: not even negatively correlated…but NON-correlated to the general market and economic conditions. Oggi, , is also instrumental in a Security firm called Valentis. Again, looking for that non-correlation to the overall market, and levelling out the peaks and valleys, as there will always be a need for security.
• Interest rates: We need to first establish a baseline for interest rates. After years of low interest rates, let’s look at what a neutral environment would be and by definition: The neutral rate of interest, sometimes called the natural rate of interest, is the real (net of inflation) interest rate that supports the economy at full employment/maximum output while keeping inflation constant. It cannot be observed directly. We can look historically. Except for the last 15 years (post the 2008 financial crisis) the market for the 10-year U.S. bond stayed over 4%. The upper ends were 8% with some short-term spikes to 14%. I think it is safe to say that even with the market anticipating higher rates and building this in…that a 3.2% rate (on the 10-year bond) is still not only accommodative but low.
• One last point is that in 1981…Inflation was at this same level and the Fed’s Chief/ Volcker pushed rates to 20%! Today, it’s anticipated that with two more rate hikes…the Fed Funds will be at 1.5%. This means REAL rates are still NEGATIVE (accounting for inflation)! Do we have an Overreaction in the market? A Temper tantrum? You have to just cover your ears and close your eyes.
• Supply chain: All the interest rates in the world will not produce more chips, couches, or widgets. After the COVID lockdowns, incredible demand has been built up in everything from travel, homes, and cars. You cannot sell something if you don’t have the raw materials to make it. Hence if you have 10 people trying to buy the same item…prices will go up. One thing I know is that eventually supply will meet demand. It’s a law of nature. Eventually, I believe that this will work itself out.
• Market volatility/repricing of valuations: How high is high? Good question, I know. When money is cheap, values of stocks get “bid up” to unreasonable levels. But like the old saying ” what goes up can go down”, eventually prices seek reasonable levels. Another rule is that prices will over-shoot. This is true on the way up and on the way down. Why? Because prices are determined by Humans (even automated systems help add to the volatility). Humans have emotions. Fear and Greed are powerful motivators. This too shall pass.
• Private equity projects and firms poised to go Public (Secondary listings)
This is the sandbox we play in. For Private equity, Oggi looks for companies that are post revenue and with positive EBITDA (earning money!), and also must have a clear and distinct advantage. We negotiate for value and bring these projects to our group. In addition, we look for the firms that want to be coachable…. believe it or not…many are not. Entrepreneurs have massive egos, and they refuse to “take stock” that not every management team have all skill sets. We look to add value and help drive the firms to scale. We view this as “firm ground”.
When it comes to securing positions for our group in Pre-IPO’s, it’s a totally different scenario. This is called the Secondary Market. We want to find the Unicorns, and we want only the most exciting firms…but in this case we are dealing with pre-existing investors. The people or entities that have taken the early risk and have been in there, sometime for years. They have been in there from the tough days and were compensated with dramatically lower entry prices reflective of the company’s value at that point. Now it is their “pay-day.” Many do not want to take the extra few months of waiting or the risk of the listing not being well received. They want the “sure thing” of a firm price now. Like the seller, the buyer wants to take advantage of a slightly lower controlled price now, without fighting for the position closer to “public offering.”
Again, when it is good for all parties, it is a good deal. We also view this as “firm ground”.
So, in closing, know that we have been here before. The 1987 stock crash, the Dot.com bubble, 2008 financial crisis. The Sun will rise tomorrow, the birds will chirp. For the people that have “dry-powder” …i.e. risk capital on the side lines…there are bodies and blood in the streets. There are opportunities that would not normally be available. As the legendary investor, and “Oracle of Omaha”, Warren Buffet says…”be greedy when others are fearful”.
There is always firm ground…you just have to look!
Statements made are the opinions of Grace Century, FZ LLC and not a solicitation or endorsement of any kind.