This week's interesting finds

A few charts worth discussing

“Capital spending beneficiaries in a capital boom adding $20 to $40 of market value for every $1 of incremental earnings...that will end well.”

- Derek Skomorowski

“Venture capital now represents roughly the same amount of net asset value as the traditional buyout private equity industry.”

- Frank Mullen

Other charts worth pointing out

U.S. after-tax wage and salary growth by household

U.S. GLP-1 therapy patients

Average U.S. grocery prices vs. Walmart

U.S. retail brokerages – average daily trades and trades per account

U.S. household net worth

Strait of Hormuz traffic levels

Inventory-to-sales ratios by seller

Effect of Strait of Hormuz closure on estimated working capital requirements by sector

YTD cross-asset global fund flows

Leveraged single-stock ETFs by AUM

Historical two-month S&P 500 Index changes since WWII

Blackstone caps withdrawals from flagship private credit fund

Blackstone has restricted withdrawals from its flagship private credit fund for the first time after redemption requests surged to $4.5bn in the second quarter, in a sign of the mounting pressure on the asset class.

The world’s largest private investment group said investors in the $45bn Blackstone Private Credit Fund, known as Bcred, attempted to withdraw 10 per cent of the fund’s net assets in the period. The fund granted redemption requests amounting to 5 per cent of its value.

For the first time, Blackstone relied on a mechanism that allows it to restrict investors from pulling their money, following rivals such as Apollo Global Management, BlackRock, KKR and Ares Management which capped redemptions earlier this year.

“Bcred remains well capitalised, and repayments and inflows have outpaced shares repurchased,” the fund said in a letter to investors. “In addition, Bcred maintains substantial available liquidity of over $15bn comprised of cash and undrawn borrowing capacity.”

The exodus from private credit has shaken the alternative investment industry, which had tethered its growth to a massive influx of capital from Main Street investors.

But wealth and retail investors have grown wary, fearful that credit losses will hit returns in the $2tn industry. Rapid advances in AI have raised questions over the prospects of private equity-backed enterprise software companies, many of which have been financed by private credit groups. 

Blackstone’s decision to honour 100 per cent of investor redemption requests in the first quarter, even as withdrawals breached a 5 per cent threshold that would have allowed it to gate the fund, opened a rift in the investment industry.

Large rivals and wealth advisers were frustrated by the decision, concerned it would suggest to retail investors that the so-called semiliquid funds they had bought offered more liquidity than promised. 

Blackstone executives signalled at the time that they had confidence in the fund’s ability to weather the storm engulfing the industry, given its low leverage and ample credit available to meet redemptions.

The outflows at Bcred have added pressure on Blackstone, given the significant revenues it generates for the firm. The fund accounted for more than a tenth of the management, advisory and performance fees Blackstone drew in last year.

Shares of the private investment group are down almost 30 per cent this year.

This week’s fun finds

This Former Engineering Student Builds Massive Rubik’s Cube Mosaics: “I Have a Lot of Fun in My Life”

When Dylan Sadiq was 21, he emptied his savings account on something his mother (perhaps understandably) considered a completely frivolous expense — not an Xbox or closet full of Nikes but rather 600 individually wrapped Rubik’s Cubes. “It was a few thousand dollars,” he recounted with a laugh on a recent call with Nice News.

Sadiq, now 26, was a college student at Rutgers University at the time, but his in-person education had been waylaid by the COVID-19 pandemic. Bored at home and itching to build — something the biomedical engineering major had been looking forward to in his university experience — he played around with a few different projects, like creating solar panel cars and 3D printing. But he yearned to do something a bit more creative.

Then, inspiration struck. He’d been solving Rubik’s Cubes since the age of 10, and one day he realized they had something in common with digital images. “Pixels are quite literally just tiny digital colored squares, and my Rubik’s Cubes are kind of like physical colored squares,” Sadiq explained, adding: “It seemed like in theory, if I had enough Rubik’s Cubes, I’d be able to make some really cool images.”

If that sounds like a wild leap to you, you’re probably not an engineer. “That’s, like, what engineers do,” Sadiq shared. “They just have crazy ideas, and then spend all their money and then hope that it works out in the end.”

This week's interesting finds

A few charts worth discussing

“There isn't a lot of data tracking how GLP-1s are impacting consumer behaviour yet, but the survey work is starting to show some persistence in trends like more exercise and more nutritional support.”

- Claire Thornhill

“We’re losing our best and our brightest. Canada needs to find a way to stop the brain drain. Taxes and incentive structures for businesses are levers we should be considering.”

- Frank Mullen

“Fundraising for private alternatives has slowed significantly over the past year as alternative managers have increased their focus on retail investors to fill their funding gaps.”

- Steven Lo

Other charts worth pointing out

Top 10 U.S. companies by decade – % of market concentration over time

Top 10 U.S. companies by decade – market share retention

S&P 500 Index – P/E vs. P/FCF

Historical U.S. IPOs

Short interest by sector – current vs. historical

# of trading days to go from $500 billion to $1 trillion in market value by company

30-day trailing return percentile by factor

Global equity and debt securities outstanding

Global bond market by sector

U.S. equity sector weights since 1790 

Cross-asset total returns by decade

Asset class inflows since 2008

Chip stocks race towards biggest gains since dotcom era on AI demand

A roughly 75 per cent gain since the start of the year has left the Philadelphia Semiconductor Index, which tracks 30 of the world’s biggest US-listed chip manufacturers, on track for its largest annual return since 1999, according to Bloomberg data.

The index has gained more than $5tn in market value over the past two months — about 1.5 times the value of the UK’s flagship FTSE 100 index — on the back of increasingly optimistic bets on chip manufacturers’ future earnings.

Prices for the chips that underpin AI, as well as the manufacturing equipment required to fill new chip factories around the world, have surged as suppliers struggle to match soaring demand from Silicon Valley giants.

Meta, Alphabet, Amazon and Microsoft have together set aside $725bn to spend on the data centres and physical equipment needed to power the AI era this year.

Bank of America strategists this week reiterated their “high conviction in continued AI [infrastructure] strength”, writing in a note to clients that tight supply and “under-appreciated sovereign, enterprise and industrial demand” were likely to propel further growth.

AI labs OpenAI and Anthropic, both of which operate at a loss as they spend heavily on data centres, are expected to fetch valuations in excess of $1tn when they go public later this year.

“It’s gung ho, folks,” JPMorgan chief Jamie Dimon told a conference on Tuesday. “There’s a lot of exuberance out there. Right now it’s good.”

But he noted similar periods of exuberance before the market downturns in 1972, 1986, 2000 and 2007. “That doesn’t give me comfort,” Dimon said.

This year’s rally has been driven by a handful of stocks beyond the Magnificent Seven — Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla — which accounted for the bulk of the US stock market’s gains in the years after the release of OpenAI’s ChatGPT in 2022.

Nvidia remains the world’s biggest public company, with a market capitalisation of $5.1tn.

Yet a trio of the chip giant’s competitors — Intel, AMD and Arm — have massively outpaced Nvidia’s stock market gains this year. Their performance has been driven in part by the anticipation that the AI infrastructure market is diversifying away from Nvidia’s graphics processing units towards central processing units.

Intel’s shares smashed an all-time high set during the dotcom bubble after it gave a bullish outlook for CPU demand in April’s earnings. Its fortunes reversed after the US government stepped in to take a 10 per cent stake in the company last year, as well as an injection of billions of dollars in investments from Nvidia and SoftBank.

Shares of AMD, Nvidia’s chief competitor, have meanwhile risen more than 120 per cent in the year to date after it struck major chip supply deals with Meta and OpenAI.

SoftBank-backed Arm has surged more than 160 per cent on a bold strategic shift into offering its own chips to compete with Nvidia’s, rather than designing the underpinnings of other vendors’ hardware. Memory chip stocks have also been big beneficiaries, as demand from data centres creates a global shortage. Two high-bandwidth memory chipmakers, Micron and SK Hynix, joined the small group of companies valued above $1tn on successive days this week.

This week’s fun finds

UK’s Oldest Candy Shop Has the Same Bestselling Sweets After Nearly 200 Years

Calling all candy lovers: Have you ever tried pear drops or humbugs? The 1820s-era treats aren’t staples at the average U.S. candy store, but at The Oldest Sweet Shop in Pateley Bridge, England, they’ve been bestsellers for nearly 200 years.

Founded in 1827 and located in a 400-year-old building, the establishment is the size of an average living room, Ben noted. In 2014, it was named the oldest candy store in the world by Guinness World Records, although in 2020 it was dethroned by Japan’s Ichimonjiya Wasuke, which dates back to about AD 1,000.

The shop has remained virtually unchanged since it first opened, boasting large glass jars on dark wooden shelves and the original cash register — which was rescued by the previous owner, Keith Tordof, after he recognized it in an antique store.

This week's interesting finds

Reflecting on the lessons the Investment Team has learned at the 18th annual Cymbria Day

At the 18th annual Cymbria Day, the Investment Team talks about some of the important lessons they’ve learned throughout their career. They discuss why humility matters when investing, the power of consistency, how to have a well-calibrated sense of future regret and why we are continually evolving our investment approach. 

Click here to watch the video

A few charts worth discussing

“Get your popcorn ready – check out the video below.”

- Derek Skomorowski

Masters of The Universe – Official Trailer

“Electronic trading is coming to the bond market. U.S. investment grade electronic trading volume has steadily climbed from a mere 20% in 2018 to almost half today, while 30% of U.S. high yield bonds are now traded electronically.”

- Tracey Chen

“Biopharma equipment/services suppliers have been climbing out of a brutal three-year hangover after customers over-ordered lab equipment and supplies during COVID. The recovery so far has been more of a stabilization than a real rebound.”

- Stas Lopata

Other charts worth pointing out

U.S. stocks vs. 10-year Treasury yields

U.S. household equity holdings as a share of disposable income

Largest IPOs vs. largest companies by current market value

U.S. strategic petroleum reserve

S&P 500 Index – YTD return contributions by sector and company

S&P 500 Index – price vs. market breadth

Historical stock market bubble concentration

S&P 500 Index capex – Information technology vs. total

U.K. growth vs. value – P/E premium and discount

U.K. equity fund flows

European equity fund flows

MSCI U.S. vs. MSCI Europe Indexes – value vs. growth price performance

MSCI U.S. vs. MSCI Europe Indexes – momentum vs. market

Global equity valuations since 2000

JPMorgan looks to offload exposure to $4bn in private equity-linked loans

JPMorgan is seeking to offload risk tied to more than $4bn in loans to private equity funds as the biggest US bank looks to cut its exposure to an industry grappling with a prolonged slowdown.

The New York-based lender is in talks with investors over a transaction that would allow it to transfer risk tied to so-called net asset value loans backed by private equity fund assets.

JPMorgan’s discussions about reducing its exposure to NAV loans come as private equity companies have struggled to exit their investments. Investors and analysts also fear that portfolio companies, particularly in the software sector, will be disrupted by AI.

JPMorgan was working on a risk transfer that would allow it to retain the NAV loans on its balance sheet while shifting a portion of potential losses to investors, the people familiar with the matter said. The pool of assets includes dozens of loans tied to private equity funds across North America, Europe and the Middle East.

Under the deal, JPMorgan would shift the risk of up to 12.5 per cent of an NAV loan pool worth more than $4bn, one of the people said. The structure would offer investors a low-teens return for absorbing the first loss on the NAV loans. The terms were still under discussion and could change, the people said. 

Private equity firms have increasingly turned to NAV loans, which are backed by the market value of existing investments in a fund, to return cash to investors or add more financing for growth. Secondary buyers of PE fund stakes also use NAV loans to amplify their returns.

Many banks rushed to extend NAV loans as they sought to build financing businesses that catered to the world’s biggest private equity managers.

NAV loans are taken by PE firms against an entire fund’s assets and are considered low risk by many lenders because of the diversification of the underlying portfolio. Generally, firms borrow against as much as a quarter of a fund’s assets.

However, the recent lack of exits and fears over technology valuations could put pressure on the returns of PE funds that have relied heavily on such borrowings.

The market for such loans, which sits around $100bn, is expected to grow to $350bn by 2030, according to a May report from AllianceBernstein.

The increased use of NAV loans has come under scrutiny from US and European regulators, which have warned of “leverage over leverage” risks given that the underlying private companies are already carrying heavy debt burdens.

Market participants also worry that using NAV loans to support a fund’s portfolio companies after the formal investment period could artificially inflate its performance.

This week’s fun finds

Nothing says post-Cymbria day/long weekend reset like a steak sandwich lunch. Thanks to Jessica, from the Operations Team for organizing and giving us a chance (and enough protein) to reconnect and recharge.

The circus family gets back on the road

The co-founder of Giffords Circus, Nell Stroud, grew up in Oxford and had a place at the university when she took a gap year to work as a drudge at Circus Flora in St Louis, Missouri; it changed the course of her life. She finished her degree but continued to work at circuses worldwide, including in China and Germany, until she met Toti Gifford, a farmer’s son. They had twins, and a shared dream to create a village green circus. They bought a round white tent from a newspaper small ad; converted a showman’s wagon to live in; and advertised for performers in the Stage.

Since then, Giffords has entertained more than a million people across southern England, showcasing talent from across the world, including France, Hungary, Romania, and Russia. Nell and Toti divorced, but the circus kept going. Nell died of cancer in 2019 and an acrimonious succession battle over the direction of the circus began when former accountant Guy James assumed control as CEO and, against Nell’s stated wishes, blocked the involvement of family and long-term performers in the running of Giffords. The dispute came to a head in May last year when James agreed to step down and Toti Gifford returned to run the show.