“When you are through changing, you are through.” -Bruce Barton
With the notion of embracing constant change in mind, today, we’re back for Part 2 of this series focusing on some of the latest happenings in Alts. Here we go!
Misallocated capital?
In Part 1, we discussed the extended life of many private equity funds and how that is being addressed through various structures, including continuation funds, co-investments, and secondaries. But I came across this article from the CAIA® Association that raises a vital question: with all these new vehicles/opportunities coming to market, how are they being analyzed effectively?
The authors also add NAV facilities (where the manager borrows against the mature portfolio to continue fueling growth and/or repay investors) into the mix. And between those four categories, it’s akin to multiplying the workload of allocators by 4x with no additional personnel. For many institutions, required disclosure of the compensation of their in-house investment teams makes expanding the teams politically challenging (think boards, constituents, the media, etc.) even if pragmatic (or necessary!). Thus, allocator teams are resorting to decisions (i.e., passing or participating in given deals) with a fraction of the ideal level of due diligence; they may end up passing on deals they otherwise would have participated in or vice versa. The question is then what risk and return implications this creates for allocators, the funds, and the industry as a whole?
Closed Borders
Remember Borders bookstores? It was founded in 1971 by Tom and Louis Borders (brothers) as a local bookstore in Ann Arbor, MI, while they were studying at UofM. They opened a second location in 1985 and by the early 2000s had almost 1250 locations! Apparently, there are still some stores in the Middle East, but Borders was fully liquidated in the US by 2011, after a combination of M&A, debt, and technological innovation did them in. There are certainly some business and Alts lessons in there, such as a) it can take many years to build a business before getting to critical mass and exponential growth, and b) if you cannot evolve and stay relevant, then it’s game over. Companies that stay relevant and profitable for decades make it look easy, but there must be constant adaptation over time. As today’s quote reminds us: when you’re through changing, you’re through.
Open borders
Back to modern times…one of the basic utilities of cryptocurrency/blockchain is a very simple one: sending money internationally between bank accounts can be complicated, expensive, and slow. If you don’t believe me or you haven’t had the pleasure of cobbling together local bank routing information from India and attempting multi-week trial-and-error of sending international wires, I will be happy to bore you with some stories. Sending crypto between wallets (that can reside anywhere in the world) is comparatively simple, cheap, and instantaneous. Though Bitcoin’s price is wildly volatile, it has taken on a significant role in global payments over the last decade, as have other crypto solutions.
However, as we are now at this crossroads of increasing AI and AI agents, the Fidelity Digital Assets team is exploring some important questions, like:
- Do AI agents’ abilities to expedite blockchain app development (many of which will be payment technologies) threaten incumbents like Bitcoin? One can only imagine that the answer is a resounding yes, as “public blockchains will likely face increasing competition from payment networks, exchanges, banks, and technology platforms developing proprietary agent infrastructure.” And, as Pantera points out, companies like OpenFX and Orthogonal represent exactly this type of disruptive technology – one for (near) instant cross-border money movement, and the other providing tools for AI Agents to do business (e.g., “company data, the live web, and email.”). And both run 24/7.
- “Is the Macro Case for Bitcoin Unraveling?” Historically, Bitcoin has been inversely correlated with an increasing money supply, but that relationship seems to have changed in recent years. As they go on to say, if investors change their minds about the store-of-value utility of Bitcoin, then that utility changes – even if nothing is broken with the underlying integrity of the blockchain, inherent scarcity, etc. At the same time, maybe M2 (money supply) isn’t the right measuring stick, or maybe the current AI movement, higher USD, and higher oil are absorbing money that would otherwise have found its way into Bitcoin. Or maybe we’ve experienced tighter financial conditions (despite increased M2), and that’s the better benchmark for Bitcoin’s utility (or maybe Bitcoin is now just like gold: sometimes it maintains purchasing power and sometimes it doesn’t, which is to say it doesn’t work for that purpose 😊). Even if the correlation with M2 has ended, they note the “silver lining” is that these developments could make Bitcoin a better diversifier than ever before. Time will tell.
Secret (AI) agent man
The thought of an AI-agent-driven world of e-commerce and business development we alluded to above seems simultaneously mind-blowing, exciting, frightening, and wildly futuristic to me. Whether we can collectively let go of the reins enough to have agents roaming the Matrix transacting on our behalf (and whether we’ll put in the time to create these agents in the first place) remains to be seen. Pantera discusses this in a piece entitled “The Battle for 80 Billion Customers.” How do you get to 80 billion? Well, you simply assume 8 billion people have 10 agents each (and that excludes agents of companies).
Even if I go along with the idea that 8 billion people on planet Earth all have the internet and create 10 agents, I fully disagree that this suddenly results in 80 billion “customers.” Instead, it is the same 8 billion customers, only now with personal shoppers. Having 10 agents doesn’t mean I need 10x the food, clothing, shelter, TVs, guitars, phones, or fill-in-the-blank.
To be fair to their line of thinking, I’m sure this will result in new opportunities, and there may be needs we don’t currently have, such as: “A logistics agent might purchase ten minutes of real-time supply chain monitoring. A research agent might pay for one database query. A coding agent might rent a specialized security agent for thirty seconds.” As of now, I’m not doing any of those minute tasks; however, if, in the future, I need a logistics agent, research agent, and coding agent to accomplish my day-to-day needs, then I agree the virtual world needs to solve for how all of that interaction takes place.
The next derivatives of this conversation are also fascinating but get far too in the weeds for our purposes here; for example, the article goes on to consider ownership and property rights of the agent economy (check it out if you are interested). To try and make this more tangible, they offer the example that “A person should be able to say: ‘This agent may spend up to $2,000 per month on travel, book refundable economy flights, disclose my passport only to verified airlines, and never transact with sanctioned entities.’”
I’m all for agents doing the heavy lifting of travel planning, but making that happen requires solving for a lot of requirements. Thus, while I was poking fun at the “80 billion” math above, there is validity to the notion that the agent economy will have to interact with many more customers “who” have many more demands – even if the underlying human demand itself hasn’t changed much.
That’s enough on the crypto/blockchain/AI front for now. From here, we’ll get back to some private market updates and round out this series (or at least that is my current intention).
Until next time, this is the end of alt.Blend.
Thanks for reading,
Steve
