Another Debt Chart
We are sure you have seen some version of the attached chart over the past several years. We are going to feed it to you again but highlight an interesting trend. The debt service ratio (ratio of income to debt costs) has been rising quite dramatically of late despite the fact that the metric was already near record highs.
There is no immediate issue here. If, however, the numerator goes down (a recession – i.e. people losing their jobs) or the denominator goes up (interest rates rise) things could get ugly in a hurry.
The bias is certainly towards a negative view of the Private Equity Industry in this piece from Bloomberg. That said, it does provide a helpful primer on the state of private markets. We should note that there are private equity firms creating substantial value even in this market climate. It is also true that cheap leverage has created structural, systemic issues that we believe are worth paying attention to. On that note:
“Investor protections used to be written on cocktail napkins a year ago,” says John McClain, a portfolio manager at Diamond Hill Capital Management who invests in junk bonds. “Now they’re scribbled in crayon on toilet paper.”
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Trust us, this one is worth your time:
1. A demographic shift that reconfigures modern economies.
When people talk about what nation will own the next century they point to leadership in AI and Machine Learning, where China looks so competitive. But it’s staggeringly hard to grow an economy when you lose a fifth of your working-age population in a single generation. China could invent something as big as the next internet, but when mixed with its demographics have an economy that muddles along. Europe, Japan, and South Korea are the same or worse.
2. Wealth inequality that’s grown for four decades hits an inevitable breaking point.
The point is that we can’t just look at how rich the top has become, or at how stagnant the bottom is. It’s the gap between the two that causes one group to push back against the other.
And that gap is the highest it’s been in almost a century, if not ever.
3. Access to information closes gaps that used to create a social shield of ignorance.
What’s happened over the last 20 years – and especially the last 10 – has no historical precedent. The telephone eliminated the information gap between you and a distant relative, but the internet has closed the gap between you and literally every stranger in the world.
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An excellent piece from AVC which serves as a good companion to the private equity article above. Private company valuations have come under extreme scrutiny recently on the back of several terrible IPOs. It’s a little known fact that there have actually been some great IPOs in 2019 as well!
Venture capital backed companies with low margins have not been valued without the same level of rigour the public markets (usually) apply. As the WeWork debacle has shown, generating profits is now front and centre.
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If you are looking for a few quality quotes to place on your wall, this is the piece for you. Johann Wolfgang von Goethe’s was a German polymath who was particularly talented at pulling together simple statements from some of life’s most complex questions.
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In late October, we hosted the 6th annual Capitalize for Kids Investors Conference. Our team raised $1.3-million this year, bringing the total over the six years the conference has been running to more than $8-million. Capitalize for Kids uses that money to work with children’s mental-health agencies, in part to help improve access and bring down wait times.
One of our speakers and an investee of Gallant MacDonald, Vision Capital has made their presentation available here.
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