For decades, state pension funds have relied on the private equity industry to invest retirement savings for teachers, firefighters and other public-sector employees. But in recent years, critics of alternative assets have argued that pension managers, who oversee some $4.5 trillion across the US, would be better served investing in low-cost index funds that track the S&P 500 and avoiding PE's high fees. This past week, public pension fund managers threw PE detractors more red meat, raising larger questions about the longstanding practice of smoothing returns and who exactly holds pension fund managers accountable when they underperform.
In Pennsylvania, a half-dozen trustees on the board of the Pennsylvania Public School Employees' Retirement System, a $64 billion pension fund, have reportedly called for the resignation of executive director Glen Grell and CIO Jim Grossman. The trustees have denounced the pension fund's investment performance and its payment of management fees totaling more than $4.3 billion over the past four years, exceeding the roughly $4.2 billion paid in by fund beneficiaries, The Wall Street Journal reported. Oh, and in March the FBI launched an investigation into PSERS over a possible bribery, according to The Philadelphia Inquirer. And Pennsylvania state senator Katie Muth reportedly sued the pension over a lack of transparency around its investment decisions. Not exactly the kind of publicity a pension fund wants. Meanwhile, a former teacher last year sued the State Teachers Retirement System of Ohio, which manages some $80 billion, after it ended cost-of-living increases to retiree benefits in 2017. All while paying private equity and hedge funds a whopping $4.1 billion in fees over the past decade, according to a report commissioned by the Ohio Retired Teachers Association, an advocacy group. In both instances, watchdogs have called attention to pensions overstating their return performance. In a recent analyst note, we detailed a strategy PE firms use to downplay a portfolio's volatility, known as return smoothing. In Pennsylvania, the misdeed had significant consequences. By botching a critical financial calculation by a third of a percentage point, it spared pension dues from increasing for around 100,000 state employees, with the shortfall going to taxpayers.
In March, PSERS admitted the error and acknowledged it would have reportedly cost taxpayers at least $25 million. In Ohio, STRS spokesman Nick Treneff in an interview with NBC disputed the findings in a report commissioned by the Ohio Retired Teachers Association, downplaying a high-cost PE fee structure that has included charging $143 million for managing the pension's money (excluding fees). Richard Ennis, co-founder and former CEO of EnnisKnupp (now Hewitt EnnisKnupp), a consultant firm that advises institutional investors, has tracked fund performance for more than a decade. And he says public pension fund returns have rarely outperformed public markets. "The Georgia Teachers pension fund is the only one in my study to achieve a statistically significant positive alpha," Ennis told me via email. "They have zero alternative investments and a total cost of operation of about 10 basis points. Nevada's pension fund, which is almost entirely indexed, also did well." In Ohio, STRS said its PE and hedge fund holdings returned 6.7% annually over the past five years, well below publicly-traded benchmarks. That was bad news for teachers, investors and the pension managers, which dedicated some 18% of its portfolio to PE, outpacing many peers. But don't bet on recent events to cause pensions to abandon PE.
The asset class has continued to rack up billions in commitments in recent years. Dry powder has reached record levels. And PE has convinced its backers it can soften economic downturns, with some firms even thriving during the pandemic. Ennis disagrees. "This is a myth, utterly without precedent," he said. "The argument is meritless propaganda of the alts industry, probably born of the return smoothing associated with alts." This isn't the first time a pension's cozy relationship with PE has caused trouble.
Last year, Ben Meng resigned as CIO of Calpers, the largest US pension fund, after it was reportedly revealed he had failed to disclose he had personal investments in Blackstone, The Carlyle Group and Ares Management—while Calpers allocated some of its $450 billion in assets into those firms' funds. Pension fund returns over the 12 years ended June 30, 2020 have trailed public indices by 155 basis points annually, according to estimates presented by Ennis in a recent report. Since pensions collectively manage some $4.5 trillion in assets, that costs US taxpayers approximately $70 billion annually, a figure Ennis described as "astonishing." Broken down by each eligible taxpayer, that equates to nearly $500 more in annual taxes per individual, according to MarketWatch. Put another way: It might be a good time to reevaluate how pensions are spending their money.
It impacts everyone. "Pension benefits are fixed and in most states guaranteed," Ennis said. "The taxpayers will foot the bill for the shortfall."
What's next for the fintech expansion-stage ecosystem? The fintech expansion-stage ecosystem exploded throughout the 2010s, ushering in revolutionary advances in retail investor access and technical innovations across financial services value chains. The latest edition of Deloitte's Road to Next series zeroes in on this select arena, reviewing which companies look poised to become category frontrunners, and where the forefront of the next wave of innovation in fintech lies. Additional highlights include: Datasets summarizing key dealmaking trends Insights from Deloitte leaders as to first-mover advantages in regulation A spotlight on the B2B payments ecosystem.
"I think in 10 years we will probably look back and will recognize that this is the most important technological revolution of our time." —Siraj Khaliq, partner at London-based VC firm Atomico, on the development of synthetic biology products Datapoints (Marco Bottigelli/Getty Images) Brazilian banking upstart Nubank unveiled its $750 million fundraising this week, the most ever for a single Latin American fintech round, in a deal that spoke volumes about what's happening in that market lately. This has been a year like no other for fintech in the region, where investors so far in 2021 have bet $2.32 billion, blowing away the previous record of $1.7 billion set in 2019, according to PitchBook data. Indeed, Nubank's total haul of some $2 billion has dominated the list of Latin America's largest deals over the past 10 years. Did you know that the unicorn startup birth rate has already broken its previous record this year?
The first half isn't over, but we've already witnessed the creation of 138 billion-dollar VC-backed startups in the US. By comparison, investors valued 91 US companies at $1 billion or more in 2020, according to PitchBook data. This year's crop is dominated by 27 business software startups, including Eightfold AI, a SoftBank-backed talent-recruitment company that just raised a $220 million Series E earlier this week. Also heavily represented in the class of 2021 are fintech and network management software specialists. Deal Flow Lordstown Motors warned investors that it probably doesn't have enough cash to fund the commercial production of its electric trucks—adding to headaches that have already included prominent short-seller attention and an SEC probe.
The company is reportedly now in talks to raise additional money less than a year after reaching a $675 million SPAC deal. Are SPAC investors fazed by the tribulations facing Lordstown and other EV makers? Evidently not. Blank-check firms are still going whole hog on next-generation mobility tech. Self-driving car company Aurora is closing in on a SPAC deal with Reid Hoffman-backed Reinvent Technology Partners Y, TechCrunch reported. That deal, pegged at a $12 billion valuation, would be valued at more than quadruple what Aurora was said to be worth in 2019. The transaction has also raised conflict-of-interest red flags: Hoffman is an Aurora board member, and Greylock Partners, where he works as a partner, is an investor in the company. Electric vehicle charging company Wallbox agreed this week to go public at a $1.5 billion valuation by merging with Kensington Capital Acquisition Corp. The Spanish startup stands to bring in about $330 million in the deal. Electric aircraft maker Vertical Aerospace plans to merge with Broadstone Acquisition Corp. at an enterprise value of $1.84 billion. The deal is expected to provide the UK startup with $394 million in cash, which includes a PIPE backed by Microsoft's M12, 40 North Ventures and Rocket Internet.
The Statue of Liberty is getting a little sister — and the age gap is huge. 137 years after sending the original, France is shipping another Lady Liberty to the US as a gift of friendship. Consumer prices spiked 5% in May from a year earlier, the highest annual inflation rate since 2008. Stocks still closed the week at a record, with gains led by the tech-heavy Nasdaq index.
Netflix launches an online merch shop and here's why it could be pulling a Disney. Lupin Season 2 just dropped with Lupin pillows for $60 each. Last week, Netflix launched Netflix.shop, an ecommerce site for flix-branded merch. Think: caps, hoodies, jewelry, and even furniture related to your favorite shows. The shop will sell exclusive, limited-edition merch for shows like Stranger Things, Money Heist, and The Witcher. Old flix: Netflix already has licensing deals with retailers for apparel based on its original shows (think: "Hawkins Lifeguard" tee at H&M).
New flix: This is Netflix's first owned-and-operated retail shop to sell products directly to flixers. It could become a top destination for super fans. Trying to beat the DPF blues... DPF = demand pulled forward. Netflix saw explosive growth last year, as we hibernated with laptops and ramen. But that led to subscription saturation (#subscripturation) — and slowing growth: Netflix added less than 4M subs last quarter, compared to nearly 16M in the same quarter of 2020. And Unlike Hulu, HBO Max, and others that show commercials, Netflix relies almost purely on subscription bucks. Merch is a new way to boost sales in the face of slowing growth — and growing rivals. Disney+ has already crossed 100M subs (half a Netflix). Merch potential: Global sales of licensed products tied to shows, movies, and characters were $128B in 2019 — and $49B in the US alone. The merch master = Disney.
THE TAKEAWAY This is Netflix’s 1st step in Disney-fication... because it may have hit peak streaming. Disney makes $$$ off its characters in movies, Disney+ series, and spin-offs — and through merch, theme parks, and toys (Elsa-themed everything). Netflix could benefit from a similarly self-reinforcing IP ecosystem. After merch, a next step could be show-themed video games or even Stranger Things theme park rides. Nintendo, which hit peak console during the pandemic, is Disney-fying itself with the upcoming Super Nintendo World theme park in Japan. EVENTS Coming up this week... Diaper cakes FTW... Jessica Alba's Honest Company drops its first earnings report as a public company on Wednesday. Honest sells "clean" baby, beauty, and household products (including: cakes made of diapers). Total sales grew 28% last year, with "Household and Wellness" sales more than doubling including prenatal vitamins and refillable cleaning kits). But the ten-year-old company is still unprofitable overall. Honest shares have dropped 20% since last month's IPO. Earnings on Aisle 5 for the Honest Company. Oh well, Jessica Alba said she has already earned her billion dollars, so she'll be just fine financially.
Grocery giant Kroger delivers earnings on Thursday. Kroger and other grocers thrived last year as we swapped menu meals for pantry classics. Since then, Americans have been swapping grocery bags for doggy bags: restaurant sales reached a new pandemic peak in May. Meanwhile, packaged food prices are rising due to epic inflation and workers are in short supply. Now, Kroger plans to raise wages. It is TBD if these factors hit its earnings last quarter.
Crypto finally had its tender moment in time. Last week, El Salvador became the first country to approve Bitcoin as legal tender. Businesses there will be required to accept Bitcoin as payment, and Salvadorans will be able to pay taxes and bank loans in BTC.
This could be a valuable experiment for developing countries considering crypto as legal tender, since it can be a cheaper way to move cash across borders. But analysts worry about the economic risks posed by BTC’s extreme volatility along with the price of the US dollar and other global currencies.
The US will donate 500 million doses of Pfizer's Covid vaccine to 100 countries, in an effort to stem the pandemic. Globally, Covid deaths this year have already exceeded 2020’s toll, as cases surge in poor and developing countries due to The Great Divide. Meanwhile, the US halted new shipments of Johnson & Johnson's one-shot Covid vaccine as states deal with too many expiring doses. Developed nations are on track to vaccinate 75% of their citizens this year, versus approximately 25% for third world nations.
Atai Life Sciences has become the third biotech company focused on psychedelic treatment for mental health disorders to list on a major US stock exchange. The deal underscores continuing investor interest and growing acceptance of what has, until recently, been viewed as a fringe area of medicine. Investors are hopeful that FDA approval of certain psychedelic substances could revolutionize mental health, leading to the creation of a large industry. To grow the field, psychedelics companies must consider a variety of factors, including regulatory hurdles and coverage of patients' health plans. read more.
How are startups helping to revamp health insurance? Rising healthcare costs have created opportunities for startups to disrupt or offer technologies for the health insurance industry. These companies compete with existing players, provide cost-saving solutions for incumbents or build marketplaces that help consumers purchase insurance for less. Our latest Emerging Tech Research analyst note provides an overview of the health insurance technology landscape and explores industry drivers, recent venture capital activity and developing opportunities.
In 2020, VCs poured billions of dollars across 90 deals into companies in this space. Year-to-date, 30 health insurance tech startups have accrued $1.3 billion in funding. Notable venture deals of 2021 include CityBlock's $352 million Series C and Collective Health's $280 million Series F. This year's exit activity includes public listings of Oscar, Clover Health and Shuidi. Insurance provider startups identify high-risk customers and develop plans for self-insured employees and lower-income populations.
As part of their work with private equity, consultants with the top-20 retained executive search firm ON Partners interviewed established operating partners (OPs) and added additional insights on the state, impact and future trends of the OP role. The result is a snapshot of keys to OP success, why the current environment makes the role uniquely challenging, how culture and diversity play a part, and what the future holds. To learn what operating partners and ON consultants have to say about the impact of the role and its future, click here.
Fintech giant Wise is to go public soon in a landmark deal. London direct listing Taavet Hinrikus and Kristo Käärmann co-founded Wise in 2011. (Courtesy of Wise) The UK is set to see its first tech direct listing as cross-border payments startup Wise confirmed plans to go public on the London Stock Exchange, possibly available to be traded on WeBull and Robinhood exchanges among other top investment platforms. The rarity of a tech stock listing in the UK could spark investor sentiment, which has started to cool off after an abundance of London-based floats in Q1.
The UK has seen only a handful of direct listings, and Wise's decision could help open an alternative path for other companies seeking to go public. Reports have suggested that Wise could be worth up to £9 billion in its debut, but its decision to adopt a dual-class share structure may hinder its valuation aspirations.
Which lenders are leading the way in PE? Nine different US firms issued at least 30 loans to PE-backed companies in the first quarter of 2021, with the most active three all notching at least 40. Antares Capital topped the list for the second consecutive quarter—but they're far from the only busy firm as the economy continues to bounce back. Our Q1 2021 PE Lending League Tables are now available, in an interactive format that breaks break down the data from the private debt market in a multitude of ways. Sort by deal type, geography, sector and more for a detailed look at the lending landscape in PE.
The art market is on fire For decades, billionaires and hedge funds have invested millions into art. Why? Contemporary art prices outperformed S&P 500 returns by 174% from 1995 through 2020. The $1.7 trillion art asset class is projected to grow by $900 billion by 2026. But unless you have $50,000,000 to build an art collection yourself, you've been locked out of this under-the-radar investment. Until now. Masterworks lets you invest in multimillion-dollar artworks by artists like Banksy and Picasso.
The US' booming recovery is fueling inflation: here's where you might be feeling it Jerome has spoken... and investors didn't clap. Last week, the Fed indicated it expects to raise rates by the end of 2023, sooner than previously projected. The central bank has been pumping $$$ into the economy to keep rates low. Now, investors worry that could end sooner than expected. Higher interest rates can make bonds and savings accounts more attractive compared to riskier assets, like stocks. They also increase borrowing costs (think: credit card interest). Should be an Uber Limo... for the price of that Uber X. The Fed can raise interest rates to slow inflation. ICYMI: things have been pretty #flated recently. Consumer prices jumped 5% in May from last year, the fastest pace since 2008. Here's where you might be feeling the bump: Gas: The pump anxiety is real. Gas prices are up a whopping 56% since last May. Cars: Consider the bus. Used car prices are up 30%, and insurance is up 17%. Flights: Your Miami getaway ticket is looking like a roundtrip to Europe — +24%. Laundry: Grab the quarters. Washing machine and dryer prices = +26%. Ride-hail: When the Uber/Lyft surge pricing seems endless. Transportation services = +11%. Food & Bev: Restaurant food (+4%), alcohol (+1.6%), cereal and baked goods (0.6%). Peanut butter has been a victim of price hikes, too.
TOP TAKEAWAYS The US' recovery has global implications... That's because the US economy accounts for nearly 25% of the world's economic output. America's booming recovery is starting to drive up inflation around the globe. That's pushed some central banks in other countries to raise interest rates early — while many developing economies are still struggling as Covid surges. Looking ahead, continued inflation in the US could slow the global recovery. Investors hope it's just a one-time increase as the economy rebounds. But some worry inflation could last longer and weigh on markets. ZOOM OUT Stories we're watching... The e-menu stays... Last month, Yelp seated a record 4M diners in the US — up 48% from May 2019. Bookings surged past pre-pandemic levels in almost every US state, minus NY. It's not just a reopening thing: Yelp's data highlights the number of restaurants and diners that shifted online during the pandemic. This digital transformation bodes well for restaurant tech providers like Yelp, OpenTable, Square, Resy, and Toast — which is reportedly prepping to IPO. Not so SPAC-tacular... SPACs = public companies whose sole purpose is to buy actual companies to take them public.
This year, the popular IPO alternatives have already raised more than they did in all of 2020. But while the broader market is up, the top 50 SPACs have fallen 19% since February. Last week, SPAC-quisitions Lordstown Motors and DraftKings plunged on not-so-flattering allegations from a short-selling firm. TBD if the SPAC-palooza will slow. FYI: SPAC investments involve risk. EVENTS Coming up this week... Home, sweet KB Home... KB Home is the Chipotle of homebuilding — but instead of build-your-own-bowl, it's build-your-own-home. KB has thrived on the Big Housing Boom, racking up a backlog of home orders on wild demand. Near-zero interest rates have made mortgages cheaper, while home sales and prices have soared. But interest rate fears and inflation (think: soaring lumber prices) could cool the homebuilding party. KB's earnings on Wednesday could provide a glimpse into future demand. E-Jordans... Nike reports earnings on Thursday. The Swoosh loves to market nostalgia with AF1s and Jordans, but its superpower is digital. Online orders have been surging, heading toward half of total sales as Nike focuses on direct-to-consumer.
With WFH sticking in the new economy, Dri-FIT leggings could keep flying off digital shelves. But ongoing supply chain issues and competition from rival Lululemon may hit Nike’s performance. ICYMI Last week's highlights... World: G7 countries want to fund global infrastructure to rival China's influence through an initiative called "Build Back Better World" (catchy). Autonomous: Google's Waymo self-drove its way to a $2.5B fundraise. Pro tip: you can now book its driverless robotaxis through Google Maps. Fashun: Chinese shopping giant Shein overtook Amazon in the app store by going ultra-fast fashion.
Foodtech startups took center stage during the pandemic out of necessity. Now, they're a fixture in everyday life, even as lockdowns are coming to a close. The shift has driven huge amounts of venture capital into the sector, with food-related tech startups raising more than $16 billion so far this year—reaching 86% of 2020's annual total in under six months. More than 30 mega-deals in the sector have pushed the median valuation of late-stage companies to a record $160 million. Beyond the buzzy companies raising billions, investors this year have also bet on a plethora of emerging technologies around alternative proteins, ghost kitchens and delivery robots.
Keep reading more Marketing Masterminds Media Blog to learn more about new investment, forex, crypto, day trading, and venture capital news for 2021 and 2022!
