First quarter commentaries are now live!
This quarter, Sydney Van Vierzen talks about behavioural pitfalls of the asset management industry and how the EdgePoint Investment Team is structured to avoid them, while Steven Lo discusses the behind-the-scenes work that the Investment Team does before buying a security and how it helps them act quickly when volatility inevitably occurs.
A few charts worth discussing
“How oil is at $95 -- instead of, say, $295 -- is perhaps the mystery of our time. You can buy WTI oil for December 2026 delivery at $77.40 as of Friday morning. And airlines are cancelling flights?”
“Industry change in CT scans – new technology that reduces radiation and increases image clarity – rapid product adoption.”
Other charts worth pointing out
S&P 500 Restaurants Index relative P/E valuation
U.S. vehicle miles
Estimated raw material cost per vehicle
S&P 500 Index employees
AI-related portfolios vs. S&P 500 Index – returns since December 2023
S&P 500 Index vs. sectors – P/E ratios (next 12 months)
S&P/TSX Composite Index vs. S&P 500 Index – foreign revenue & valuations
TSX vs. S&P 500: Higher foreign revenue exposure & lower valuations
U.S. vs. Canada – Sector correlation and weights
Tokyo Stock Price Index (TOPIX) – Dividends and buybacks
Major index – % of revenue from a single sector
Base metal prices vs. physical inventories
AI Boom Drives Record Capital to Late-Stage Venture Funds
U.S.-based growth and late-stage venture funds raised $23.6 billion this year so far—a figure that already exceeds the annual totals for any of the past dozen years, according to research firm PitchBook. Such funds invest in startups that are typically raising their Series C or later rounds, according to the data provider’s definition.
Historically, such funds accounted for just around 10% of assets under management in venture capital globally since 2010, according to Preqin, a division of BlackRock.
About 36% of limited partner institutional investors surveyed by Preqin in November said they believe late-stage strategies are among the best opportunities within venture capital, up from 28% the previous year. At the same time, interest in early-stage funds fell, according to Preqin.
Late-stage funds have a shorter time horizon to returning capital, a key consideration for many LPs parched for cash, said Angela Lai, vice president at Preqin. Some expect that this year the multiyear logjam on initial public offerings will break, improving the chances that later-stage funds start realizing their investments. Early-stage venture funds, meanwhile, last 16 years, on average, according to Meketa’s historical database.
Andreessen Horowitz is another firm that raised a much larger growth fund in January, collecting $6.75 billion up from $3.75 billion for its prior growth pool.
Late-stage funds underperformed other venture categories after the frothy conditions in 2021 gave way to a subdued market, with higher interest rates and few IPOs, according to Preqin. Yet late-stage fund returns have been picking up.
Global investment firm Cambridge Associates advised limited partners to include multistage investing strategies as they invest in venture funds. “Doing that will increase the odds that LPs can capture Power Law winners that slip through the grasp of earlier-stage managers,” the firm wrote in a December note. Power Law refers to the tendency in venture capital of a few investments to generate the vast majority of returns.
Meketa’s Samson cautioned that currently late-stage funds tend to have a lot of overlap in their portfolios. “If you look across all of these funds, they are basically in the same companies, the Andurils, the Anthropics, the OpenAIs,” he said. LPs should pay attention to when fund managers first invested in these hot companies, as that will have a large impact on eventual returns, Samson said.
Meketa, meanwhile, is continuing to prefer early-stage when it comes to venture allocations, he said.
Preqin’s Lai said early-stage investing will remain the workhorse of venture capital in the long term. “Early stage is where you are going to see the better long-term performance, since you enter into these opportunities at much lower valuations,” she said. For now, however, investors are leaning toward strategies that back businesses that are more proven, she said.
This week’s fun finds
A brief history of instant coffee
The convenience of instant coffee masks a surprisingly difficult problem. Coffee’s appeal lies in the hundreds of volatile compounds that create its flavor and aroma, exactly the substances most likely to disappear during processing. Creating instant coffee required developing techniques to extract the soluble molecules in coffee from the insoluble plant matter without destroying the fragile compounds that make coffee worth drinking.
Instant coffee has spent most of its history as the cheapest, quickest, and most portable coffee, but with a reputation for low quality when it comes to the flavors that coffee lovers seek out. That has begun to change: a market for premium instant coffee has opened up over the past two decades. Today, specialty roasters like Verve and Supreme offer freeze-dried versions of their coffees, often selling for around $2.50 per cup, 35 times the price of standard instant.
Making this possible required technical breakthroughs. One issue was aroma loss. While freeze drying helped preserve more volatile compounds during drying, delicate aromatics could still be lost during earlier stages like roasting, grinding, and extraction. Retaining more of these compounds required improved aroma recovery methods that capture volatiles early in the process, store them separately, and add them back after drying. Primitive forms of aroma recovery had existed since the early twentieth century, but advances since the arrival of freeze drying gave manufacturers better tools to preserve the subtle characteristics that distinguish specialty beans.
Technology alone wasn’t enough to create a premium instant market. The economics of production also had to change. Instant coffee production requires multi-million dollar capital investments in extraction batteries, concentration equipment, and drying facilities. Historically, only manufacturers running at massive scale could justify these costs, leaving specialty roasters with no realistic path into the category.
This changed in 2016 when Nate Kaiser founded Swift Cup Coffee in Lancaster, Pennsylvania, pioneering what you might call instant coffee as a service. Today, a vibrant market of contract processors exists to serve specialty roasters. These processors brew roasters’ beans to precise extraction standards, freeze dry in small batches, and package the finished product under the roaster’s own brand. This converts lumpy fixed costs into variable costs, letting roasters test the market without major investment.
While instant may never be the coffee connoisseur’s preferred drink, decades of innovation have earned it a role in millions of people’s lives. From troops in the field to rushed mornings and camping trips, it offers a practical solution when time or equipment are scarce.
