Macro Roundup

"... Hedge funds are elbowing their way into Silicon Valley at an unprecedented rate with a record-smashing $153bn worth of investments in private companies in the first six months of 2021.A report from Goldman Sachs has found that hedge funds have done 770 deals so far this year, already beating the record number set in the whole of 2020, when 753 deals reached a total of $96bn. Just under three-quarters of this year’s agreements were “venture” bets on companies in their infancy...The bets are concentrated, but they leave a big impact. Hedge funds participated in just 4 per cent of deals in the first six months of 2021 but provided just over a quarter of all capital put into private companies, according to Goldman....Returns from private equity and venture capital investments have outperformed hedge funds in the decade to the end of last year, with average gains of 14.2 per cent compared with 7.1 per cent for hedge funds, the Goldman report found...."

“Companies love the idea of a private investor who can help tune the company up for public markets, anchor the IPO and become long-term public shareholders, perhaps without altering the board dynamic,” said Cutler Cook, managing partner at investment firm Clay Point Investors, which advises investors on allocating to venture capital and hedge funds.

Hedge funds’ two-pronged pitch to companies is that they can hold on to their shares in the business well beyond a public listing, whereas VC funds typically exit soon after flotation. Hedge funds can also offer to coach private company executives about being a public entity, according to Goldman.

“At an IPO there’s little chance, as a hedge fund, to get an allocation — therefore you must have exposure earlier,” said Christian Vogel-Claussen, managing partner at London-based hedge fund Alanda Capital. It has bought into companies such as debit card group Marqeta and TikTok owner ByteDance.

The explosion of private capital has also created tough competition to participate in private deals. However, some hedge funds still find that more attractive than waiting for a company’s initial public offering on a stock market — a transaction that can often be crowded with other, often bigger, investors.

Hedge funds also have abundant opportunities to invest in private companies, which now tend to rely in private funding for longer before they launch on stock markets. The average number of private fundraising rounds companies complete before going public has tripled since 2006, according to Goldman.

“There’s an ongoing trend of lines blurring in portfolios, asset classes are increasingly converging,” said Diana Dieckman, Goldman’s global head of capital introduction in prime services.

The push into private investments coincides with a broader revival in the hedge fund industry, which last year reported its best returns since the aftermath of the financial crisis in 2009 after years of weak performance.

Nevertheless, private investments have performed better than the public assets hedge funds have traditionally favoured. Returns from private equity and venture capital investments have outperformed hedge funds in the decade to the end of last year, with average gains of 14.2 per cent compared with 7.1 per cent for hedge funds, the Goldman report found.

And some firms such as Third Point and Marshall Wace have launched “crossover” funds that invest in private firms ahead of potential public listings and then hold on to their positions. Hedge fund firms have been helped in their push in to private assets by a greater willingness among the large institutional investors who invest in their funds to lock up their money for longer if it means they eventually get higher returns.

The hedge funds entering this space include some of the most high-profile names in the industry. Some funds have launched dedicated businesses focused on private investments, with firms including Tiger Global Management, Coatue Management and Altimeter Capital Management making big inroads into Silicon Valley in recent years. Other hedge funds hold a minority of their portfolios, typically less than 20 per cent, in privates, with the rest in more liquid assets.

The bets are concentrated, but they leave a big impact. Hedge funds participated in just 4 per cent of deals in the first six months of 2021 but provided just over a quarter of all capital put into private companies, according to Goldman.

“What has attracted hedge funds is predominantly a function of the opportunity set,” said Freddie Parker, co-head of Goldman’s prime brokerage insight and analytics team.

The data from Goldman Sachs Prime Services highlight how hedge funds, typically known for investments in publicly traded assets, have been drawn to private markets in an effort to fire up largely lacklustre returns. It also shows how private equity and venture capital have shot into mainstream finance. The asset class has soared to more than $7tn in value and is expected to double again by 2025, while the number of US public companies has roughly halved since 1996.

A report from Goldman Sachs has found that hedge funds have done 770 deals so far this year, already beating the record number set in the whole of 2020, when 753 deals reached a total of $96bn. Just under three-quarters of this year’s agreements were “venture” bets on companies in their infancy.

Joshua Franklin and Laurence Fletcher, "Hedge funds muscle in to Silicon Valley with private deals,"Financial Times, September 9, 2021, https://www.ft.com/content/4935b205-8344-465a-8edf-dc23ec990302

Hedge funds muscle in to Silicon Valley with private deals

Hedge funds are elbowing their way into Silicon Valley at an unprecedented rate with a record-smashing $153bn worth of investments in private companies in the first six months of 2021.

John Authers, "A Momentous Shift Is Taking Shape in the Labor Market," Bloomberg, September 10, 2021, https://www.bloomberg.com/opinion/articles/2021-09-10/wage-growth-trend-points-to-inflation-political-joy-for-biden

A Momentous Shift Is Taking Shape in the Labor Market

I spend a lot of my professional life drawing charts. You had probably noticed this. Often, producing a chart that tells a story clearly and without distortion takes a lot of work. And sometimes, the first numbers I key into the terminal lead to something truly fascinating that needs no further explanation. This is one of those charts.

The latest revision of the Atlanta Federal Reserve’s Wage Tracker, for August, is now out. It’s enthralling research that has been running since 1997, and breaks down earnings growth by gender, age, skill, level of education and so on. This is how wages have risen since 1997 for the high-skilled, compared to the low-skilled:

In terms of the momentous macroeconomic issues of the moment, this is good for growth, as poorer people are more likely to spend their pay rises than richer people. It’s also potentially bad for inflation. Wage growth for the lowest skilled is the fastest since August 2008 (not coincidentally, the month before the Lehman bankruptcy), and that could easily lead to higher prices.

More interestingly still, it does suggest a shift in the balance of power between labor and capital. This isn’t as yet a deep-seated or well-established trend, of course. But if it continues it could rattle a lot of assumptions, and alleviate a lot of social tension.

And that leads to one final readthrough. Low-skilled workers endured a truly terrible deal from 2011 to 2013, when their wages didn’t even gain 1% per year. Higher-skilled workers did far better. Barack Obama was president at the time. If any one chart helps to explain how Donald Trump was able to disrupt the coalition that elected Obama, this might be it. And if this continues, it could be fantastic political news for Joe Biden, who could do with some at present. It’s worth watching this, very closely

John Authers notes that wage growth for the low skilled has now outpaced high skill wage growth for 3months, a new record, "...The latest revision of the Atlanta Federal Reserve’s Wage Tracker, for August, is now out. It’s enthralling research that has been running since 1997, and breaks down earnings growth by gender, age, skill, level of education and so on. This is how wages have risen since 1997 for the high-skilled, compared to the low-skilled:For the third month in a row, wages for the low-skilled have risen faster than for the high-skilled. In the previous history of the survey, which now goes back almost 25 years, this had only ever happened in two months, in early 2010. Wage growth for the low-skilled is also exceeding that for the high-skilled by the most on record. In terms of the momentous macroeconomic issues of the moment, this is good for growth, as poorer people are more likely to spend their pay rises than richer people. It’s also potentially bad for inflation. Wage growth for the lowest skilled is the fastest since August 2008 (not coincidentally, the month before the Lehman bankruptcy), and that could easily lead to higher prices. More interestingly still, it does suggest a shift in the balance of power between labor and capital. This isn’t as yet a deep-seated or well-established trend, of course. But if it continues it could rattle a lot of assumptions, and alleviate a lot of social tension. And that leads to one final readthrough. Low-skilled workers endured a truly terrible deal from 2011 to 2013, when their wages didn’t even gain 1% per year. Higher-skilled workers did far better. Barack Obama was president at the time. If any one chart helps to explain how Donald Trump was able to disrupt the coalition that elected Obama, this might be it. And if this continues, it could be fantastic political news for Joe Biden, who could do with some at present. It’s worth watching this, very closely...."

Vox write up of Catalist data (note report attached)“…Biden’s share of votes by Latinos decreased by 8 percentage points compared to Hillary Clinton’s, and his share of votes by Black people decreased by 3 percentage points. Biden’s share of white voters without a college degree improved about 1 percentage point as compared to Clinton. Biden’s share of white voters with a college degree improved by about 4 percentage points from Clinton’s….”

Andrew Prokop, "A new report complicates simplistic narratives about race and the 2020 election,"Vox, May 10, 2021, https://www.vox.com/platform/amp/2021/5/10/22425178/catalist-report-2020-election-biden-trump-demographics

A new report complicates simplistic narratives about race and the 2020 election

In the days and weeks after presidential election results come in, commentators attempting to figure out what happened with voter demographics are often in a fog — forced to rely on unreliable exit polls. More rigorous analysis simply takes longer.

Now, Catalist, a Democratic data firm, has put out a report on “What Happened in 2020,” authored by Yair Ghitza and Jonathan Robinson, which makes a serious attempt to answer that question. The report is superior to the exit polls because it’s based in their research for what’s known as a “voter file.” Basically, they’ve put together a large database of turnout information about actual voters, assembled from state or local records about who actually showed up.

That information has its limits — it’s a secret ballot, so we don’t know who specific people voted for. But this information can be supplemented with precinct-level vote results, census information, and survey findings. The Catalist authors put all this together to estimate how different demographics voted. Some of their general findings about what changed since 2016:

Biden’s share of votes by Latinos decreased by 8 percentage points compared to Hillary Clinton’s, and his share of votes by Black people decreased by 3 percentage points.
Biden’s share of white voters without a college degree improved about 1 percentage point as compared to Clinton.
Biden’s share of white voters with a college degree improved by about 4 percentage points from Clinton’s.

But the report doesn’t just look at the narrow question of what changed in each group; it helps us understand the two parties’ coalitions as a whole. For instance, it drives home the fact that the non-college white population, while declining as a share of the electorate, remains quite large (they were about 44 percent of all voters in 2020), and Trump won 63 percent of them. And though Biden performed worse among Black voters than Clinton or Obama, he still won about 90 percent of that group.

One note here is that, for the sake of allowing easy year-to-year comparisons, these percentages are calculated by looking only at votes cast for either the Democratic or Republican nominees, rather than for third-party candidates. This is called the two-way vote share — Catalist’s report focused on this metric, so all of this article’s references to demographic vote percentage will use it as well.

The non-college white vote: Joe Biden’s underrecognized electoral achievement

Much attention has been paid to the shift of white college-educated voters toward Biden and Latino voters toward Trump in 2020, which makes sense — as a table from Catalist shows, those were particularly dramatic shifts.

This was crucial to Biden’s success for two main reasons. First, white non-college voters continue to make up a very large chunk of the electorate. Catalist estimates that their share of the electorate has been shrinking, but they still were 44 percent of all voters in 2020. And second, they make up an even larger share of the electorate in some key swing states.

Furthermore, the shorthand of punditry often says Democrats win because of a coalition of nonwhite and college-educated white voters. But the below chart makes the point that non-college whites actually still make up an estimated 32 percent of overall votes cast for Biden. In comparison, Black and Latino voters together also comprised 32 percent of the overall votes for Biden. More than half the Trump coalition, in contrast, is comprised of non-college-educated white voters (and Trump’s coalition is 85 percent white overall).

Latino voters: Biden’s better-recognized problem

Biden’s worsened performance among Latino voters as compared to past Democratic nominees has been much discussed since the election, and Catalist puts some numbers on just what happened there — the group estimates that Hillary Clinton won 71 percent of Latino voters in 2016, but Biden won 63 percent in 2020. This 8-point drop is the most dramatic shift in a four-year period among the major racial or ethnic groups seen in Catalist’s data.

This comes in the context of a massive increase in Latino turnout overall — while turnout was up across the board, it was particularly up among Latino (and Asian) voters, in what’s just an incredible increase in a four-year period.

The turnout surge also raises a question — did Trump improve because previously voting Latinos switched from backing Democrats to backing Republicans, or were his gains mainly among new voters? Catalist doesn’t provide a definitive answer, but the authors say, “we see suggestive evidence that both of these factors played some role.”

In contrast to claims that Democrats’ worsening performance with Latinos was mainly concentrated among Cuban Americans in Florida, the report finds that the decline was broader — but that the drops were smaller in key states that Biden barely won, like Arizona and Georgia.

Black voters’ support is crucial for Democrats — is it dropping?

Biden won an estimated 90 percent of the two-way vote among Black voters in 2020 — which is both an overwhelming win, and the worst performance for a Democrat among Black voters in over a decade. Clinton won 93 percent of the two-way vote among Black voters in 2016, and Obama won 97 percent in 2012.

The authors make that point that despite this drop, “Black voters are key to Democratic success” — without the large majorities of Black voters Biden won, he couldn’t have been competitive nationally or in key Electoral College states like Georgia, Pennsylvania, or Michigan.

Furthermore, the report estimates that turnout among Black voters increased from 2016 by 14 percent, a higher rate of increase than among white college voters (13 percent) or white non-college voters (11 percent). So it can be true both that Biden did worse than Clinton among Black voters and that Black voters remain a core pillar of the Democratic coalition.

White college-educated voters have moved toward Democrats (but many still vote for Trump)

So how does Joe Biden win if he barely improves on Clinton’s performance among non-college-educated white voters and does worse than she did among Black, Latino, and Asian voters?

It’s because of those gains among white voters with a college degree — where he built on and expanded the improvement Clinton had made. In 2012, Obama won an estimated 46 percent of these voters, in 2016 Clinton won 50 percent of them, and in 2020, Biden won 54 percent of them.

Further, according to the report, about 58 percent of white women with a college degree voted for Biden (compared to 55 percent voting for Clinton in 2016 and 50 percent voting for Obama in 2012).

This is true as far as the trend goes, and it’s one of the most important factors explaining why Biden won and Clinton didn’t. However, it’s also important to stress that 46 percent of college-educated whites still did vote for Trump. Democrats don’t exactly dominate among this group just yet, and it remains to be seen whether their gains here will prove durable.

One overall takeaway from the report, though, is that an electoral majority is often a fragile thing these days. Lose a few points among a few groups and it could slip from your grasp. And some apparent trends continue from one election to the next — while others can surprisingly reverse