One of the marked trends of the past year has been innovation in financial markets – which is usually an entertaining and ultimately dangerous phenomenon. We have seen and explosion of activity in the options market, unconventional financial structures like SPAC’s (Special Purpose Acquisition Companies) become conventional weapons of acquisition and the crypto currency/coin market has blossomed, partly on the back of impressive technology platforms such as FTX.
Two further points are worth noting. One is that as ever, innovation and speculation go hand in hand – the price of Tesla and that of bitcoin follow the same parabolic upwards path (they only go up) shows how the options market, technological innovation and animal spirits are all umbilically linked. Second, promisingly for the broader economy, waves of innovation often start in the financial markets and spread out towards other sectors.
Democratisation of risk
Much of this financial innovation has been cast as the ‘democratisation of finance’, giving people access to low-cost trading platforms and multiple types of assets (and leverage). When all is said and done it will more likely be remembered as the ‘democratization of risk’ – the distribution of risk from large institutions and hedge funds to retail investors. The sell-off of the past few days speaks to this point.
While much of the financial media fixates of the ‘democratisation of finance’ and the meme stocks that define it, there is another, almost opposite trend taking place at the other end of markets – the deepening of private capital investments.
This is defined by a quest by higher end asset managers, large family offices, well connected financial investors for access to non-quoted (e.g. venture capital, pre IPO stakes) investments in companies that are at the heart of technology driven sectors. To a certain degree, not least in its sociology and anthropology, the contrast between the search for private investments and the hurly burly of retail trading reflects growing social divisions.
Bloomberg to PitchBook
It might also be exemplified by differences in the tools of the trade. To a large extent the rise in equity markets over the past twenty years, and all of the wealth that has been created around them, is exemplified by the Bloomberg terminal.
In the private capital world the tools of choice are ‘rolodex’s’ in the modern sense that private capital operators rely largely on trusted networks, and Pitchbook – an information service that provides otherwise hard to get detail on private companies (such as funding rounds, identity of shareholders, financial profiles).
The ‘Pitchbook’ economy has sprung from several factors. One is an explosion in entrepreneurship that arguably started in Israel and the US and spread to Europe. For instance, in France the venture and startup culture is very healthy, fueled by a rising number of business schools, incubator platforms like Station F, supportive state bodies like the BPI.
A second change is the role that technology has played in permitting companies to grow faster (and fail faster too it must be said). I was struck by a line in Azeem Azar’s excellent ‘Exponential Age’ where he remarks that when he started writing the book, TikTok was little used, and when he finished some twenty months later it was the most downloaded app’.
In the Pitchbook economy, capital moves very quickly towards companies that are perceived to be able to win in the sense of establishing a market foothold. Commensurate with this, competition between venture capital firms, banks and new investors (Tiger Global is increasingly spoken of) is heating up. Against this backdrop investors talk of the growing number of unicorns (startups worth a billion dollars) and decacorns (startups worth ten billion dollars of which there are 30 globally – almost the same as the total for the three previous years).
At this relatively early stage in the emergence of what I call the Pitchbook economy the rising private investment sector has several implications. One is a change in the way people work and regard employment. It seems to me that any younger people are willing to try the entrepreneurship/growth company route than be seduced by the security of large corporations. There is now a cachet associated with entrepreneurship, and for the moment a sense that the payoffs can be significant. Labour and pension structures have yet to adjust.
A second is that the digitization and the ‘greening’ of our economy will accelerate –it is hard not to think of private growth companies in Europe that are not involved to some degree in either trend.
We will also likely see rapid consolidation across sectors. The neobank market in Europe is in my view becoming congested and some operators will simply not make any money (N26 has wisely pulled out of the US market) and in the mobility sector BOLT is now becoming the dominant player.
As a final comment, the one factor that unites the private capital and public markets is financial liquidity. The bloating of stock market valuations is matched by the very demanding valuations of private companies. In that respect, the ‘Pitchbook’ economy will only prove itself once we go through a monetary tightening cycle, and we get a sense of who the survivors are.