“…the line between public and private markets continues to blur.”
Fed's 'fake it till you make it'
// Another phrase that needs to be retired amongst startup land is ‘fake it till you make it.’ It sets the wrong precedent and every now and then people will take that mindset to the extreme and tiptoe the line of legality. Over the long run though, it rarely works out.
The past couple of months the Federal Reserve has been pushing its own unique style of ‘faking it.’ Through massive monetary stimulus, including open-ended asset buying and near-zero interest rates the Fed has instigated ~50% rally from March lows where earlier in the week the S&P 500 was trading at 21 times next year’s profit estimates of $150 a share. (Quick disclaimer, I do think the Fed has saved us from an event that could have been much much worse. But by doing so, the rules of the game have been changed.)
While Robinhood and retail traders have rushed into the market, the ‘smart’ people have been scratching their heads. John Tudor Jones talked about eating ‘humble pie’ while Stanley Druckenmiller called the V-shaped economic recovery a “fantasy.” You know things are weird when CNBC starts questioning a strong market. Jim Cramer expressed concern about the stock market’s recent rally getting too far ahead of the economy’s recovery and asked where all the sellers were. He even gave examples of stocks that traders were “gunning.” It’s hard to have faith in this type of market.
In truth, it’s ‘the same as it ever was.’ The current financial environment is very similar to the market post-financial crisis. As is the conversation. It’s more obvious now, but it wasn’t back then. Hedge funds and traders were shorting the market not believing in the speed or strength of the economic recovery. Like today, they underestimated the size and influence of the Fed and failed to recognize that game transmuted from checkers to chess.
Because they were frustrated, or because they were poor sports, some of these funds took their ball and decided to go play somewhere else — the private markets. It’s a place that felt familiar. You could find alpha, you could make sense of valuation, and you didn’t have to worry about if your computer was faster than your competitor.
It’s no coincidence that the private markets ballooned in size when the Fed stepped in 2009. And in regard to the current market, mirroring the previous crisis (but on an expedited timeline), the migration of the herd of investors will continue into these markets in search of greener pastures.
Need to Know
// Everyday investors may soon be able to get a piece of private equity action.
Private Equity Eyes $400B Windfall From U.S. Retirement Savers (FT)
‘The U.S. labor department, which governs 401(k) retirement accounts, said private equity could be used within the professionally managed funds on offer to savers, such as target-date funds which invest in multiple asset classes. The retirement accounts were not cleared to offer private equity funds directly, meaning private equity managers can only expect to access a portion of the $6.5T 401(k) market — but they could still gain as much as $400B in new assets, Evercore analysts projected.’
‘The new rule will “level the playing field for ordinary investors”, said Eugene Scalia, US labor secretary.’
‘Evercore predicted the labor department would eventually throw open the 401(k) market to other so-called alternative investments such as real estate, credit, and infrastructure. Ultimately this is “the holy grail” for alternatives managers, said Mr. O’Hara from Jefferies, although he did not expect Wednesday’s announcement to “open the floodgates”.’
Here’s the news release from the U.S. Department of Labor
Platform to Know
From the Company’s website… ‘The Dream Exchange will be a “first-of-its-kind” stock exchange that intends to help the small and medium business owner and investor alike by creating a market for the free trading of small business stock through a fully licensed and operational stock exchange.’
‘The founder of the Dream Exchange has worked in Washington for several years in an effort to create a brand-new security called a “venture security” on a brand new exchange called a “venture exchange,” which will serve a massively underserved sector of public capital markets representing hundreds of thousands of small and medium businesses in need of capital to achieve growth, expansion and success.’
The Company has been around for a few years but it’s starting to pick up some momentum as they are unveiling DreamEx Connect this week — their brand new platform for business owners and investors to access each other.
Company to Know
// Wave
Wave is an entertainment technology company and creator of the world’s first multi-channel virtual entertainment platform for live concerts.
“[Musicians and concert promoters] all recognize the problem that they can only reach a certain number of people and the industry doesn’t scale the way it has been. The ability to reach 100 plus times as many people in an interactive way is a natural extension of live performances… That’s the future of music. I’d been looking for that company and Wave is that company.” - Co-Founder Phil Sanderson (TechCrunch)
Ready Player One (written in 2011) starting to look eerily prescient.
If You’d Like to Know
// Private
The State of the Private Markets: Industry Consolidation, Issuer Control, and Market Integrity (EquityZen)
// Public
Data
// IPO Industry Breakdown
// Thanks
This newsletter is created and authored by Bryce Tolman and is published and provided for informational purposes only. The information in the newsletter constitutes the Author’s own opinions. None of the information contained in the newsletter constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You understand that the Author is not advising, and will not advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the information contained in the newsletter may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.