I’v started a personal blog that I’ll post every quarter or so, sharing topical learnings and observations from my perch co-managing a $100M family of investment funds and a network of 20 fund managers who invest in more than 25 countries in emerging markets. Here’s my first installment – feedback is always appreciated.
To “V” Or Not to “V”?
As we head into the fall in the northern hemisphere, the dreaded “second wave” appears to be starting to take shape in the US, UK, and other European locations. And cases are spiking in major cities in emerging markets, potentially impacting tens if not hundreds of millions more.
Rather than speculating on what impact this second wave — or, the continuation of the first wave — may have on the economies of emerging markets, I want to look back at the predictions from March and April of a “V-shaped” recovery and see what we can learn.
I’ll tell you in advance my conclusion: the V may be real, but it can be quite deceiving. Looking at what’s driving both slopes of the V is vital for analyzing the health of anything from a modest venture portfolio to the S&P 500. We are optimistic that our strategy of selecting companies in resilient sectors will pay handsomely in the “new normal” we’re all adapting to.
Revenue of a Venture Portfolio
For a first look analysis, here’s the aggregate revenue of the early to early-growth venture portfolio companies held by a partner fund that we’ve invested in, in India:
It looks pretty “V-like” to me. The April lock-down took some companies to zero revenue, but a few continued as they were, while others grew. And the rebound was fast!
In March, I was an outspoken non-believer in the “V” theory. But this is real data. However, it’s important to disaggregate it to understand the true story behind the hopeful “V” graph. Disaggregating is important to understand the S&P 500 market cap also. Let’s digress and look at that briefly.
Is the S&P’s Recovery a “V”?
You likely know that FAANGM prices are driving the S&P recovery. It’s quite striking when you look at the chart showing that those 6 stocks alone account for a 7.1 point spread in the S&P as indexed from Jan 1, 2020, making the difference between 2.6% up vs. 4.5% down for the year.
The question we asked was whether we had a similar situation with a small number of companies driving the revenue recovery of the portfolio in India.
Dissecting the “V”
Not surprisingly, we found that when you dig into the data of this portfolio, the answer is not dissimilar to the FAANGM influence on the S&P; the job-tech companies were the main drivers of both sides of the V:
But even the red-hot job-tech sector has not fully recovered to January revenues; the portfolio-level recovery you saw in the first chart includes the ed-tech sector also, which has nearly doubled in revenue over the past 9 months. As you can see above, the fintech portfolio has been flat for the year, with the exception of one covid-related bump in March, while healthcare is still well below January revenues.
My Conclusion: Isolate Outliers, Invest for Resilience
Whether you are looking at a broad market index like the S&P or at a micro-index of the revenue of a venture portfolio, it’s vital to isolate outliers and/or break down by sub-segments to understand how the crisis has affected individual sectors and companies. And when you take the outliers out, it’s clear that both the S&P and our partner’s portfolio in India have something in common: recovery is not what it appears on the surface.
With the likely resurgence of pandemic-related disruptions and resulting economic slowdowns, portfolio managers must work closely with every company to ensure they have the discipline and staying power to make it through at least one more rough patch on the road to full recovery and growth. And applying a resilience filter like we do across the Capria Network can help ensure you select companies that have the ability to make it through turbulent times and come out ahead of others, delivering outsized returns.
Have you seen a similar trend in your other investments? I’m always looking to learn (and share) the latest from around the globe.
Will Poole, Managing Partner, Capria