Public to Private Equity, Future of Media, The Unraveling of America

August 13, 2020

The main thing is to keep the main thing the main thing. 

- Steven Covey

Don’t be the best. Be the only.

- Jerry Garcia

Be the change you wish to see in the world

- Mahatma Gandhi

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A. Public to Private Equity in the US: A Long-Term Look

In just 25 yrs, there has been a marked shift in U.S. equities from public markets to private markets controlled by buyout and VCs.

Michael Mauboussin is a well regarded researcher and student of the markets, he’s now at Morgan Stanley.

He produced this amazing report outlining how we got here and where we go next.

Most people know the huge shift in equities from active -> passive. We are talking trillions, and it's only speeding up.

And specifically in equities, we know the extent of the outflows since 2000.

A lot of that capital that used to go into public markets has been going into Private Markets.

Here’s why: higher returns with lower volatility. Every allocators dream.

This matters even more now, because equities are an institutional game, the individual has gone from owning 75% of equities down to 35%. The institutions are the incremental driver of capital.

And those pensions need high private market returns to get to their high assumed returns. Will it be enough? Or will we need a pension bailout.

The move into alternative assets and out of fixed income and public equities has been mind blowing.

This has all happened while the public markets themselves have transformed.

Was the change bigger from 1976 to 1996 or from 1996 to today?

But Private Markets are still fraught with their own risk: Dispersion of Returns.

You really have to pick the right manager in PE and VC.

The authors expect much more capital to flow into PE and VC because for now returns will be higher, vol. lower and maybe the lack of liquidity is a good thing from a behavioural perspective.

Yes competition will increase and fees will go down, but the asset class room to run.

What do you think?

One narrative I have heard that if few % of the $’s that went into Real Estate and Private Markets started going back into Public Markets, this equity rally could go on for a long time. Some would call that a melt up.

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B. The Future of Media

I usually listen to most Invest Like The Best podcasts twice but this Matthew Ball episode is the probably the best discussion I’ve heard on technology, media and the world of tomorrow.

5 Big Ideas:

* It's all about the IP

* Media & Gaming will merge

* This will speed up the Metaverse

* Epic Games and Tim Sweeney (the CEO) are pursuing a huge vision

* Gaming creates huge winners

IT'S ALL ABOUT THE IP:

He who has the best IP wins. The best IP is immersive, interactive, across multiple channels, demographics and timeless. We are playing for a huge pie: Just in the US there are 2.1 billion hours per day of leisure time, that's deduplicated.

In a world that is interconnected & mobile, every piece of media & gaming IP is competing with others for attention.

Netflix competes with Nintendo and not just Disney.

The more immersive & interactive the content, the more time consumers will spend with you.

Just to put some numbers on it, the entire global movie production and distribution business had $100bn revenue in 2019, music is about $22bn and video games is $150bn.

Today, gaming is bigger than movies and music combined and is growing 10% per annum versus movie and music are barely growing.

THEN COMES THE METAVERSE:

The logical conclusion of the internet is The Metaverse.

Imagine an internet experience that is

A. Interoperable across platforms and retailers

B. Connected to the real world

C. But immersive at the same time

Matthew Ball wrote a great essay on the Metaverse and what it means.

Taken to it's extreme the metaverse could even resemble The Matrix.

Could we all live in the Matrix in the future?

The key to creating the Metaverse is a) content and b) interoperability across platforms. Imagine Facebook, Amazon, Apple all connected.

THE ACCELERANT: EPIC GAMES:

The company that is making this a reality faster and is massively scaling the TAM is Epic Games. Think Jeff Bezos on steroids.

Epic is the company behind The UnrealEngine & FortniteGame. If you want to understand where gaming and the metaverse is going you need to read Matthew's series on Epic.

This is 2-min trailer of what is possible. Remember this is a real time game, not a pre-recorded video.

And the reason why the Metaverse is coming sooner is because of Epic’s flywheel.

You have all seen Amazon’s fly wheel:

This is Epic’s:

Gaming is one of the industries that has really harnessed innovations across technology, content and business models. This opens up even bigger revenue opportunties.

We should look for more trans-media intellectual properties. It's about capturing the audience across platforms and for as long as possible. Content that is Interactive & Immersive wins and leads to better revenue generation.

Does this mean Disney will make video games and Nintendo will make movies?

Imagine coming home and jumping into an immersive game with Robert Downey Jr taking you on a personalised Iron Man movie / game. How much time would spend in that?

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C. The Unraveling Of America

Anthropologist Wade Davis wrote a fascinating article on how COVID-19 signals the end of the American era.

Here are a few parts that stood out:

In a dark season of pestilence, COVID has reduced to tatters the illusion of American exceptionalism. At the height of the crisis, with more than 2,000 dying each day, Americans found themselves members of a failed state, ruled by a dysfunctional and incompetent government largely responsible for death rates that added a tragic coda to America’s claim to supremacy in the world.

More than any other country, the United States in the post-war era lionized the individual at the expense of community and family. It was the sociological equivalent of splitting the atom. What was gained in terms of mobility and personal freedom came at the expense of common purpose. In wide swaths of America, the family as an institution lost its grounding. By the 1960s, 40 percent of marriages were ending in divorce. Only six percent of American homes had grandparents living beneath the same roof as grandchildren; elders were abandoned to retirement homes.

Only half of Americans report having meaningful, face-to-face social interactions on a daily basis. The nation consumes two-thirds of the world’s production of antidepressant drugs. The collapse of the working-class family has been responsible in part for an opioid crisis that has displaced car accidents as the leading cause of death for Americans under 50.

American politicians dismiss the Scandinavian model as creeping socialism, communism lite, something that would never work in the United States. In truth, social democracies are successful precisely because they foment dynamic capitalist economies that just happen to benefit every tier of society. That social democracy will never take hold in the United States may well be true, but, if so, it is a stunning indictment, and just what Oscar Wilde had in mind when he quipped that the United States was the only country to go from barbarism to decadence without passing through civilization.

Evidence of such terminal decadence is the choice that so many Americans made in 2016 to prioritize their personal indignations, placing their own resentments above any concerns for the fate of the country and the world, as they rushed to elect a man whose only credential for the job was his willingness to give voice to their hatreds, validate their anger, and target their enemies, real or imagined. One shudders to think of what it will mean to the world if Americans in November, knowing all that they do, elect to keep such a man in political power. But even should Trump be resoundingly defeated, it’s not at all clear that such a profoundly polarized nation will be able to find a way forward. For better or for worse, America has had its time.