Opportuna Newsletter #2

'No Summer Lull'

Alban Cousin
October 16, 2024

Hello all,

Welcome to the second edition of the Opportuna Newsletter. Thank you for all the very positive feedback we received on Issue No.1, especially regarding our work on the IPO bottleneck. In this edition, we provide updates on our strategic developments, key market activities, and insights into the current investment landscape.

If you have any questions or would like to discuss any aspect of our approach to direct secondaries and late-stage primaries, feel free to reach out!

Update on Opportuna

Over the past month, we have been busy laying strong foundations for our strategy. Specifically, we are equipping our team with first-class advisors to complement our skillset in the main verticals we will be investing in: Cybersecurity, Enterprise Software, Semiconductors, Fintech, and Video Games. These advisors will help us source deals, perform due diligence, and identify market inflections. Their broad set of skills will enhance our information and analytical edge.

We will be sharing more details in next month’s edition, but if you are eager for more information, feel free to book a call!

Highlights of the Month

There was much activity in Fintech secondaries recently. Revolut launched a sale of up to $500m, on a $45bn valuation. Stripe now has a valuation of around $70bn, and Klarna is exploring a secondary sale, which will provide a new benchmark for valuation.

New reports have been published on the secondaries market by Pitchbook, Jefferies and Evercore. The bottom line is that volumes picked up in 1H to record highs, bid-ask spreads narrowed, and supply remains plentiful with many funds coming to the end of their life, and having to redistribute, creating the perfect set of circumstances for us. We agree and are studying a number of opportunities.

Robin Lauber has been featured in PEI, and expanded on Infinitas Capital’s approach to private equity.

Chart of the Month: A Very Slow Rebound in US Secondary Discounts

Source: Pitchbook Q2 2024 US VC Valuation Report

Turmoil In the Markets: Slowing Exits, Improving Entry Prices

I returned from my summer break on Monday, August 4th, to find the Japanese stock index down 10% and the VIX—a measure of market volatility—spiking at 66. While market corrections happen regularly, these numbers are unusual. Periods of heightened volatility often occur during regime shifts prompted by economic news and monetary policy expectations. We are experiencing one now, as small-cap companies have significantly outperformed large-cap growth stocks (e.g., Nvidia) since July (see Chart 1). Market leadership concentration and thin trading volumes during the summer months only exacerbate these price movements.

Chart 1: Small Cap Value Outperforming Large Cap Growth by 10ppt QTD

Source: Koyfin

Here is a non-exhaustive list of the many factors at play:

Weaker-than-expected US unemployment statistics Friday, August 1st triggering the Sahm rule and a rise in expectations of Fed cuts.
A disappointing earnings season relative to what was already priced in.
Unwinding of the JPY carry trade.
Increased uncertainty surrounding the outcome of the US elections.
Growing negativity around the AI investment cycle.

For us, as investors in the venture secondary market, factors 2 and 5 are the most relevant. We address the AI landscape in a separate section.

The immediate effect of 2) is to reduce valuations. Most investment cases we consider contain a variation of “we are going to IPO in 18-24m”. Lower valuations on public markets can weaken that narrative, by either lowering the expected value of the IPO or delaying the transaction. As we showed in Newsletter No.1, the backlog of IPOs is so large that even if the market environment becomes somewhat less favourable, a lot of opportunities will remain -- no change to our long-term thesis.

For us as secondary investors and new entrants, these trends may add to the chance of sourcing good entry prices, as delayed liquidity events force primary investors to find exiting alternatives. It is a good time to start deploying. A more challenging investing environment also add to the premium of building on multidisciplinary expertise, combining strong VC experience with a deep knowledge of public markets supporting by strong sectoral insights.

Navigating the AI Landscape in Venture Secondaries

At this stage, almost everyone must have received offers to buy into a single-layer SPV for XYZ AI (Anthropic? Scale AI?) funded by a top VC, with former employees from OpenAI or one of the FAAMG companies! AI is capturing a lot of attention among investors. There doesn’t seem to be much evidence that AI-driven tech spending is slowing down; quite the opposite—Microsoft’s huge capex forecast is a case in point.

However, a growing number of voices - Sequoia, Elliott Management, and Goldman Sachs, among others - argue that the pendulum has swung too far. There is too much spending for too little return. Research we’ve read from CIOs and CFOs suggests that economically viable use cases take time to emerge. In a context of growing economic uncertainty, experiments tend to get cut. Currently, AI spending relies heavily on a few deep-pocketed tech players.

In private markets, we avoid AI-LLM companies. We do not see the sustainable business model or competitive advantage for this sub-sector; the models are converging in capabilities and output. My own experience using all of them is that I cannot notice a difference in quality. We believe these models will become commoditized over time, and profits will be made elsewhere. Additionally, in nearly all the transactions we’ve observed, we lacked the information rights we typically seek.

As such, valuations uplifts depend on the ability to attract outside capital. We do not feel we have an edge calling how long that outside capital will keep pouring in before the music stops – and don’t want to be caught unable to exit with no downside protection.

This doesn’t mean that we don’t see the huge opportunity AI development can mean for investors – but we are focusing on related sectors that get boosted by the AI trend – such as data management, semiconductors, fintech and other services that can build on AI as a tool (Builder.ai).

Warm regards,

Alban Cousin, Partner, Opportuna