An asset class that deserves a home in your portfolio … the numbers behind its dominance … one corner of this asset class to avoid … seven themes to watch

 

A rate hike in March?

That’s what minutes from the Fed’s Dec 14-15 meeting, released yesterday, are leading many to believe.

Given surging, persistent inflation and a tight labor market, some Fed members believe that raising rates might need to happen “sooner or at a faster pace than participants had earlier anticipated.”

Also surprising from the minutes was the perspective from some Fed members that the Fed should begin shrinking its $8.76 trillion bond portfolio soon after beginning to hike rates.

These surprises roiled stocks yesterday, particularly the tech-heavy Nasdaq. It ended the day down more than 3%.

As I write Thursday mid-afternoon, the three major indices are flat, trying to find support.

We’re not overly concerned about yesterday’s selloff (this volatility is nothing unusual in the broad scope of things), but it can feel disconcerting nonetheless.

It’s also a good reminder of the importance of diversification. If 80% of your net worth is tied to tech stocks, the last few days have hurt far worse than if your exposure was just, say, 30%.

Bottom-line, for most of us, diversification is critical when it comes to having some peace with investing.

But isn’t there a tradeoff between diversification and returns – especially if you’re trimming tech exposure for more peace?

Not necessarily…

***Do you want to know how you could have diversified away from tech in recent years while not suffering any reduction in returns – in fact, crushing tech’s returns?

It’s one of the preferred asset classes of the ultra-wealthy.

Private equity.

Even the “public” way to invest in private companies has been a monster winner.

To illustrate, look at Blackstone Group (BX). It’s a massive private equity company that handles money for pensions, institutions, and high-net-worth individuals.

Below, we look at its return over the past five years. We’ll compare it to that of the S&P 500, as well as XLK, which is the SPDR Technology Select Sector ETF. I’m including XLK to show how private investing has dominated even high-flying tech stocks.

Take a look…

If you’re having trouble reading the chart, the S&P is up 108% while XLK is up 265%.

Meanwhile, Blackstone has blown them both away, soaring 406%.

Plus, it’s been as high as 525%, but recent fears of exposure to toxic investments in China have weighed on returns.

***As we’ve noted before in the Digest, the best way to amass extraordinary wealth is to be the entrepreneur behind a successful business

But if you can’t be that entrepreneur, then your second best shot at lifechanging returns is by investing in tiny, private companies that will eventually grow into tomorrow’s massive mega-winners.

Of course, having the foresight to recognize the next Amazon or Uber is the challenge. But it might not be as challenging as you think.

Last year, InvestorPlace welcomed venture capital expert, Cody Shirk, into our portfolio of analysts. Cody is a veteran venture capital investor who’s done deals all over the world, resulting in a growing list of 1,000%+ venture capital winners under his belt.

One of his most recent deals returned him roughly 35-times his money last year. That turns $10K into $350K (though I suspect Cody’s investment was far greater than $10K).

I include this to illustrate that massive returns from private investments are real, happening, and available to “regular” investors. This is no longer an asset class for the Silicon Valley elite.

This also means that if your portfolio doesn’t have some exposure to private equity, you’re missing out on a powerful way to diversify your wealth into an asset class that offers high-powered returns, while offering some insulation from a potential crash in the public markets.

That said, as we begin 2022, there’s a corner of the private equity world that is enormously overvalued. You need to be very careful if you’re considering putting money to work here.

Today, with Cody’s help, we’ll dive into those details. Then we’ll highlight seven private equity trends that Cody is highly bullish on.

Let’s jump in.

***The coming collapse of some mega-valued private companies

In Cody’s free newsletter, Venture Capital Digest, he shares tips and tricks to private investing… trends he’s tracking… even deals that catch his eye. Cody’s Digest is a fantastic way to keep a finger on the pulse of the venture capital world.

Right now, that pulse is suggesting caution for one sector.

Here’s Cody:

One area of particular concern, for me, is the fintech sector.

One out of every three new privately held startups that became a unicorn (valued at $1 billion or more) in 2021 was fintech related.

Worldwide, nearly 50 new fintech companies entered the unicorn club.

That’s right. Dozens of brand-new fintech companies (many of which are barely generating revenue) are valued at over $1 billion.

In a past issue of the Venture Capital Digest, Cody pointed out that whenever you see a dramatic increase in the number of multi-billion-dollar deals happening, it’s wise to pause. You should step back and figure out what’s going on.

This time is no different. And when Cody steps back to evaluate fintech, he sees a sector poised for a correction.

***The numbers don’t lie

Below are statistics Cody provided in his issue revealing just how bloated fintech has become.

From Boston Consulting Group:

• Q3 2021 fintech investment is 90% higher than all 2020 funding
• 101 megadeals (funding rounds equal to or over $100 million) were made in Q3 2021 alone, totaling $23 billion — a 250% increase over the same quarter in 2020

From KPMG:

• Fintech saw $98 billion in investment in the first half of 2021, compared with $121.5 billion during all of 2020
• Global VC investment in fintech reached a record $52.3 billion in first half of ’21 — more than doubling the $22.5 billion seen in second half ’20.

Here’s Cody’s quick takeaway from all this:

In my opinion, participating in most mid- to late-stage funding rounds of private fintech companies is a risky move right now. Tread with caution.

***So where should private equity investors look for better potential returns?

Here’s Cody’s list:

• Longevity and antiaging
• Transportation (alternative fuels and autonomous driving)
• Artificial intelligence, machine learning and automation
• The Internet of Things (IoT) and 5G
• DeFi, blockchain, metaverse and the rise of cryptocurrencies
• Food technology
• Space tech

Cody will be covering all these themes in detail in the Venture Capital Digest this year – potentially highlighting specific investments. By the way, Cody recently gave away three specific private investments he likes for 2022. If you missed that special report, click here. It’s totally free.

***A recent story that illustrates just how explosive private investing can be

You’ll see that Cody included the metaverse in his list above.

A huge part of the metaverse and the growing digital world involves NFTs, or non-fungible tokens.

From one of Cody’s past issues:

(NFTs) are virtual tokens minted on the blockchain for digital scarcity, security, and authenticity.

They are unique, indivisible, and non-interchangeable. This allows for true digital ownership of in-game assets.

Buy utility tokens or NFTs on these platforms: OpenSea or Republic.co.

It turns out, OpenSea, which you just saw Cody reference, recently closed a massive capital raise that sent its valuation stratospheric.

From TechCrunch, earlier this week:

The NFT auction marketplace OpenSea had a blockbuster 2021 and as a result is seeing its private valuation grow more quickly than almost any other startup.

The crypto firm announced late Tuesday that it closed a $300 million Series C round led by Paradigm and Coatue.

The raise valued the startup at a massive $13.3 billion valuation, showcasing the wild growth the startup has seen in recent months.

Let’s contextualize this.

First, a $13.3 billion valuation is greater than that of American Airlines, Ciena, and Alcoa. It’s on the small end of the “large” market capitalization size (measured as market caps between $10 billion and $200 billion).

But even more impressive is the speed at which OpenSea got here.

It was just six months ago that VC powerhouse, Andreessen Horowitz, valued OpenSea at $1.5 billion.

Again, it just closed a raise that puts its valuation at $13.3 billion – a nearly 8X return in half-a-year.

What justifies this?

Back to TechCrunch:

OpenSea saw more than $2.4 billion in transaction volume in the past 30 days alone, hauling in some hundreds of millions in fees last year…

In a blog post, OpenSea CEO Devin Finzer highlighted that his platform’s transaction volume increased “over 600x” last year.

This is the kind of growth that’s possible when it comes to top-tier private investments. And it’s the kind of growth that is likely to create literal fortunes for OpeSea venture capital investors who got in early.

Bottom-line, yes, you must be very careful with private investments. Yes, you can lose your money. But you can also generate more wealth than ever thought possible in the public stock market.

To sign up for Cody’s free newsletter to help track this world, click here.

We’ll also keep bringing you updates here in the Digest as private equity news breaks in 2022.

Have a good evening,

Jeff Remsburg