Nov 7, 2019

Axios Capital

By Felix Salmon
Felix Salmon

Welcome back to Axios Edge, which you can always sign up for at In this week's 1,823-word issue (< 7 minutes): private markets, the Economist, Elizabeth Warren's fiscal debates, Ken Fisher, Brexit, Alipay, and more.

  • Erratum: I messed up Saad al-Hariri's title last week. He was the prime minister of Lebanon, not the president. Apologies.
1 big thing: The rockstar allure of private money

Yes, it's a tech conference. Photo: Pedro Fiúza/NurPhoto via Getty Images

The public stock market is doing pretty well, on the face of things. The S&P 500 is at record highs, European stocks are surging, and a slew of multibillion-dollar companies have IPO'ed this year, raising billions of dollars in fresh capital. But private markets still seem to be much more alluring.

What we’re seeing: I'm in Lisbon this week, attending the Web Summit for the first time. The clear message being sent: Private markets are more attractive than ever.

  • In some ways, Web Summit is much like any other geeky finance conference: Yesterday I interviewed a panel of VCs on the subject of "Where I am putting my money this year," while this morning I moderated a panel on "fintech disruption."
  • The big difference: These discussions take place on the stage of the 20,000-capacity Altice Arena, the largest indoor stadium in Portugal. The conference has welcomed 70,469 attendees in total, nearly all of whom are either actively investing in private companies, or hoping to raise money from people who do.
  • The Web Summit crowd is just a tiny subset of overall private investing, which can include everything from infrastructure to buyouts to timberland.

By the numbers: Venture capitalists have a record $118 billion of cash on hand, ready to invest in private companies, per PitchBook. That's up 20% from 2018. (Still, to put that number in perspective, it's roughly the amount of cash that's just sitting on Apple's balance sheet alone.)

  • As the amount invested grows, so does the transparency and liquidity of the market as a whole.

What we’re hearing: One pension plan administrator gleefully told me that the IPO market is now dead and they hope to see companies remain private in perpetuity. Meanwhile, a big-name U.S. venture capitalist said that 75% of their liquidity over the past 12 months had come from selling private stakes to other investors on the secondary market.

  • In other words, private investors are happy to actively trade corporate stakes among one another, providing liquidity to early investors without the need for an IPO. Even employees are quietly being allowed to cash out, using services like Nasdaq Private Market.
  • Early-stage investors sell to later-stage investors who sell to strategic investors. Last month, for instance, SoftBank spent $1.3 billion just in buying up VCs' stakes in the Indian hotel company Oyo. And roughly 20% of VC exits now happen when companies get sold to private equity funds.

The other side: Public markets aren't serving early private investors particularly well. Uber, for instance, fetched $45 per share when it went public in May— but private investors have only been allowed to start selling their shares since yesterday.

  • The so-called "lockup expiration" has sent Uber's stock not only below its IPO price, but even below the $33.32 per share at which Uber raised $1.2 billion in June 2014. As a result, the overwhelming majority of outside Uber investors are now underwater.

The bottom line: The tens of thousands of people at Web Summit, not to mention the even larger private-market ecosystem in the U.S., owe their well-padded livelihoods to private finance.

  • The role of conferences like this one: To make the participants feel much more cool and glamorous than their post-IPO counterparts.
2. Economist-ology

Illustration: Sarah Grillo/Axios

The Economist is by a large margin the most valuable magazine on the planet. It's still going strong in the digital age, with a 50% non-controlling stake changing hands in 2015 for £469 million ($731 million) in cash. (In comparison, Marc and Lynne Benioff spent $190 million for 100% of Time in 2018.)

  • The Economist's allure is based in liberalism, but it's not easy to understand how that is defined.

The big picture: Every so often, a talented essayist attempts to identify the source of the Economist's appeal, and invariably finds that its actual quality falls far short of its reputation.

Both pieces are good, but neither aspires to being a comprehensive historical survey, going back to the Economist's founding in 1843. Now, that survey has finally arrived, in the form of "Liberalism at Large: The World According to the Economist," a new book by Alexander Zevin.

Required reading: Pankaj Mishra's magisterial review-essay of Zevin's book has appeared in the New Yorker, and it is likely to change the way you view not only the Economist but the entire edifice of liberalism. When all 175 years of the magazine's history are viewed as a whole, the reek of colonial hypocrisy becomes impossible to ignore.

3. The anti-Warren consensus

Illustration: Eniola Odetunde/Axios. Photo via Sean Rayford/Getty Images

The Economist came down hard on Sen. Elizabeth Warren last month, describing her regulatory proposals as "jaw-dropping" and warning of "a severe shock" were her plans to be enacted.

  • Similar sentiment has arrived from Steve Rattner, the manager of Mike Bloomberg's fortune, who says that a "Warren presidency is a terrifying prospect." Billionaires Leon Cooperman and Jamie Dimon have also joined the chorus.
  • The plutocrats were joined by Joe Biden, whose spokesperson said that Warren's plan to pay for universal health care would raise taxes on the middle class, since the middle class owns stocks and the plan includes a 0.1% tax on financial transactions.
  • Even Sen. Bernie Sanders said that Warren's plan would be bad for job creation.

Reality check: All of Warren's critics, just like Warren herself, know full well that her plan would never get enacted. The barrage of anti-Warren criticism is mostly just a function of her status as a front-runner in the Democratic primary.

My thought bubble: The consensus here is noteworthy all the same. For all that there are wonkish reasons why it makes sense for Warren to release this plan even if she knows it is doomed, we're seeing the practical effect of her "I've got a plan for that" refrain. Every plan she announces will be immediately and broadly criticized on the grounds that it raises taxes too much.

4. Ken Fisher's surprising client list

Illustration: Sarah Grillo/Axios

Public markets can feel simultaneously old-fashioned and incomprehensibly ultra-sophisticated when compared with the private-market world of pitches and storytelling.

  • Inhuman algobots make billions trading on millisecond time horizons, while trillions of dollars are invested on the basis of archaic sales pitches.

Driving the news: The biggest surprise in the latest raft of headlines about sexist comments by 68-year-old billionaire fund manager Ken Fisher is the list of "smart money" institutions that invested hundreds of millions of dollars with him.

  • Before the latest scandal, Fisher managed some $11 billion on behalf of U.S. government pension plans, including $600 million of Michigan's state employees' money alone.
  • Fidelity Investments had $500 million with Fisher, and even Goldman Sachs gave him millions of dollars of its clients' money to manage.

Flashback: When we last checked in on Fisher in February, the old lion was roaring. He was managing $100 billion of other people's money, he was bringing in $1 billion a year, and he was defiantly refusing to be disrupted by glossy startups.

  • Reality check: Fisher almost certainly still has more than $100 billion under management, and still brings in more than $1 billion a year. As Fisher knows better than anybody, people generally massively overestimate the impact of short-term news on long-term performance.

Why it matters: All fund managers invest in marketing. What distinguishes Fisher, and what made him so successful, was the amount of effort he put into direct sales. It wasn't always pleasant being on the receiving end of those sales pitches, but they clearly worked. Fisher managed to reel in not only befuddled retirees, but monster pension funds.

5. A payments milestone
Screenshot via @Alipay/Twitter

China has rapidly become one of the most cashless countries in the world. That's a big problem for foreigners who don't have a Chinese bank account, because outside the major tourist hubs few merchants accept credit cards.

  • Two private payments systems dominate the Chinese market: Alipay and WeChat. But until now, you had to have a Chinese bank account in order to be able to use either of them.

What's new: Alipay has now managed to find a way of allowing foreigners to use its service. It's a bit convoluted, and essentially involves using your passport and visa to open a new prepaid account at the Bank of Shanghai, but it's one step toward bringing the world's major payment systems a bit closer together.

6. Brexit -> Brino?

Illustration: Sarah Grillo/Axios

The U.K. is now in election mode, with Parliament having been dissolved and the U.K. press running banner headlines about, um, kulaks.

  • More than 60 MPs have decided not to run for re-election given the toxicity of the current political debate.

Britain is due to leave the EU on Jan. 31. If it does so on Prime Minister Boris Johnson's terms, it will then enter a transitional period, during which it will have to negotiate a trade agreement with the rest of Europe. That's a lot easier said than done.

One possible result is so-called Brino:

"When Brexiter trade fantasies crash into reality, expect a new scenario to emerge: Brino (Brexit in name only) for now. Brino entails the U.K. leaving the EU but staying in the single market and customs union, and paying into the European budget, until it can devise a beneficial Brexit. Since there isn’t one, Brino could stick for years."
Simon Kuper, writing in the Financial Times

The Brino scenario is the closest thing that Britain can get to "Remain" while still technically leaving the EU. Johnson is adamant that he won't let that happen, but it's not clear that he'll be able to command enough of a majority to get what he wants.

The bottom line: No one particularly expects Johnson to stick to his promises, especially if he remains prime minister of a minority government. An exit fudge whereby Britain leaves in name only, with constant extensions for further trade negotiations, would be a very European solution to the Brexit conundrum.

7. Coming up: The Fed's first climate gathering

Illustration: Aïda Amer/Axios

The Federal Reserve will host its inaugural climate change research conference in San Francisco tomorrow, writes Axios' Courtenay Brown.

Why it matters: In the past, the Fed has been mum about climate change — particularly compared with other central banks, like the Bank of England and the European Central Bank.

  • As pressure from lawmakers and local business leaders builds, the conference shows the Fed’s willingness to arm itself with academic research to back up how global warming could sway labor markets and monetary policy.
  • See the agenda.
8. Building of the week: Boston's Government Service Center

Photo: Massachusetts Institute of Technology, photograph by G. E. Kidder Smith

Paul Rudolph's Government Service Center, in Boston, also known as the State Services Center, is a group of Brutalist buildings built between 1962 and 1971. Rudolph also designed a tower for the site, but it never got realized.

  • Despite being "one of Rudolph’s most interesting commissions, and a serious work of urban design," according to the Paul Rudolph Heritage Foundation, the Center might now be demolished — or redeveloped out of all recognition.
  • The whole site has been put on the market by the state of Massachusetts, per Jon Chesto of the Boston Globe.
Felix Salmon