Where have all the multibaggers gone?
Photo by Tigmi Moiz on Unsplash
Our background in equities was in emerging markets. Long before we hopped onto the crypto train, we cut our teeth in the insanity of the emerging world. From Sao Paolo to Johannesburg, Mumbai to Shanghai and Moscow to Istanbul, we saw it all. The experience was just extraordinary – the places, the people and the stories we have to tell are the reward for over a decade of running around the world and learning along the way.
But at the end of the day, why did we do all this? Of course, we love meeting new people and hearing their stories. Of course, the privilege of seeing so many famous places in the flesh and learning their history was wonderful and something we appreciate still each day. But the reason we did all of this was ultimately to find winners. Our job was to find winners: look for those absolute gems which would grow and grow and become multi-baggers over time. We’d conceptualise an idea, meet the management teams, understand what they were building, do the numbers, contextualise the opportunity within the history and culture from where it comes and then find a place for it in a well-constructed portfolio.
And we did this a lot. All the structural ideas percolating in our heads would lead us to the single stocks to look at in deeper detail. From the commodity super cycle (and its demise) to the rise of the emerging market consumer (physically, before the internet) to the rise of ecommerce and ultimately tech platform companies in emerging markets, the excitement was never-ending.
Until one day, it ended. Over the past couple of years, the number of POTENTIAL multi baggers in emerging market equities has quite simply dwindled. And so, we began to look in the developed world too, applying our same set of skills. And the opportunities were certainly more abundant with some really cool opportunities. But to be honest, apart from a select few (and there will of course continue to be these) the pickings are slim. Any stock picker knows that feeling of finding a winner – you just know when you are on to something.
Yet, apart from the likes of Sea Limited and Mercadolibre and one or two select others in the emerging world, the rest is still rather mediocre. All equity managers will probably disagree with us and back their own stories and investment cases, but for us, the abundance of growth opportunities in equity markets disappeared. We are not talking about the dynamic of large caps becoming megacaps or riding a wave of passive money on the way up. Sure, the FAANG stocks have done well; Sure, the markets have gone to all-time highs; Sure, Peloton and Shopify and Twilio et al have been fantastic growth stories (and continue to be) and there are others out there, but in our view the opportunity to find mid-cap stocks which grow to become much larger ones is severely diminished compared to what it used to be – especially in emerging markets.
There are a number of reasons the opportunity set has disappeared.
Firstly, and most obviously, is the evolution of private markets and VC capital. We wrote about this when we asked, “Where did all the money go?”. Companies are staying private much longer and waiting to become more mature so that by the time an IPO happens, the size of the company is way bigger. The private investors capture the extra zero (or two) of the valuation of many of these companies, instead of the public investor. As the VC community has permeated emerging markets, the very best companies have had heavy investment from a relatively early stage. Take the examples of both Grab and Gojek in Southeast Asia and contrast them with Sea Limited. Sea listed in October 2017 (after a number of private rounds), at a time when Gojek raised its series E and Grab was on its series H round. In fact, Grab had so many rounds it almost ran out of numbers, concluding a series H in mid-2019 before moving on to “late VC” and “growth equity” rounds. Eventually it announced plans to be listed as a SPAC this year through a merger with Brad Gerstner’s Altimeter vehicle.
Other reasons include the platform nature of how a single aggregator is taking share and opportunity away from smaller single-vertical companies which would explain the dearth of new opportunities in EM.
The real news though is that multi baggers have a new home and it coincides not by coincidence with our own journey of discovery. As we found that multi bagger opportunities in equities were diminishing, we also found that multibagger opportunities were in crypto nearly everywhere we looked!
In the early stages, the opportunities were more conceptual than fundamental – and they were highly speculative. We were excited but remained grounded in acknowledging how far away we were been from having anything that can genuinely grow in a non-crypto-native environment.
But today things have changed. And they have changed with astonishing speed. For the first time ever, there are multiple crypto projects that are getting real world traction. Led by the example of Axie Infinity with over 1 million daily active users generating over $200m in July, crypto is coming for the real world and anyone not paying attention runs the risk of being run over before they even know what has hit them. Other projects like Helium, Audius and the broader NFT and DeFi movements are heading for a collision of gargantuan proportions with none other than their traditional, legacy counterparts: data infrastructure, music streaming, finance and essentially every other non-financial asset class out there.
When we sit down and do a deep dive into many of these projects and their ownership structures, we get that same giddy feeling of excitement that we used to get for equities all those years ago and this is not even the tip of the iceberg. Just today as I write, SuperRare, the leading digital art platform launched its token which so beautifully and elegantly aligns artists, curators and collectors to build out its network value. There will be many, many more.
And if you’re thinking that NFTs are just for speculating on JPEGs, penguins, punks and cats, think again: just this week we saw a DAO acquire a piece of Biopharma intellectual property in longevity research in the form of an NFT.
What is a DAO? The disruption coming from crypto is furthered in the form of the governance structure of many of these projects, which are run by Decentralised Autonomous Organisations (DAOs). DAOs exist in a philosophical realm that escapes the traditional capitalist: founders start a project, receiving funding from investors from all over the internet, and go on to execute on the intended vision. But part of that vision is to gradually hand over control of the entire project to the community, who can vote to determine the future direction of the project beyond the initial plans. For a traditional capitalist founder, that must be anathema – no one would hand control of a business to its customers or its stakeholders! How else can the business turn a profit if it gets taken over to serve the interests of anyone other than the equity shareholders?
That is the beauty of crypto: we wrote long ago in The Theory of Nachas about how turning customers into users, members and ultimately true stakeholders changes the alignment of interests in a way that is revolutionary to the traditional management/shareholder structure. At the time, it was an experiment. Two years on (how time flies!) there are DAOs running some of the biggest decentralised projects on the web, most notably MakerDAO which governs the issuance of pre-eminent multi-collateral backed stablecoin, DAI, which formally saw a dissolution of the Maker Foundation (initial founders) earlier this year, with power handed fully over to the community and the DAO.
This is a fundamental challenge to the traditional structures of ownership, creating alignment and loyalty like nothing else before.
At the heart of all the innovation is talent. What originally attracted us to the space was the cascade of talent stampeding into the crypto ecosystem. It is truly mind boggling. And on top of talent comes capital. The tide of VC capital funding early-stage projects speaks for itself and as time passes it is becoming clearer that it isn’t a question of if the crypto model can disrupt the disruptors but when.
Here is the key insight: when looking at the winners and losers of any tectonic shift in industries we always looked for the stock of any potential disruptor. Which midcap rising star is going to disrupt the slow, clunky behemoth? Mobile vs fixed telcos, ecommerce vs physical retail, software vs hardware. The winners were always coming from the same pool as the losers. But what happens when the winners come from another dimension? What happens when the losers can’t even see that interdimensional travel is possible?
That’s where we are now. The winners are coming from the world of crypto and the losers are going to be in equities. Obviously, this is not a pervasive, all-encompassing argument and there will be plenty of successful equities, but the direction of travel is clear. This has potential implications for equities as an asset class. As we have seen the concentration of market capitalisation move to the disruptors and index breadth narrow more than ever before, is it impossible that when the disruptors are nowhere to be found in equities that capital moves out of the asset class altogether? Just take a look at emerging markets. Once the EM opportunity disappeared, the money left and all went to the US where the disruptors are to be found. Money chases opportunity, simple as that.
We beseech our friends across the asset management world to open up their eyes and learn. Everything you ever need to know about crypto is there for the reading, listening and watching. Keep yourself open-minded because when the dam wall breaks, there will be nowhere to hide as “quality businesses” will not be able to compete with the innovation in business model that crypto brings.
As we argued in our opinion piece in Bankless, Crypto is not about Bitcoin. It is much more. It is a brand-new business model which if done correctly, can provide better incentive alignment than anything we have ever seen. And the smartest people, with the biggest money behind them, are figuring it all out. It’s not a matter of if, but when. Make sure you are on the right side of history when it happens.
Markets are forward looking. It’s just that you may need to get into a different the pool this time.
Come on in, the water is warm.