The evolution of asset classes is in a constant state of disruption as market dynamics shift. In the early 1980s, investors were generating yields in excess of 15% by investing in US Treasuries1. This resulted in the flow of funds to risk-free assets or fixed-income securities that were senior on the capital structure. There wasn’t a need to take on risk: investors were able to double their money in 5 years by investing in US Treasuries; even quicker if they invested in corporate bonds. After multiple recessions and different iterations on central bank policies, rates have gravitated towards 0% across the globe, mostly accelerated after the 2008-2009 financial crisis.
To participate in equity markets in the 80s was a privilege. Trading stocks was an inefficient process which required brokers to facilitate trades on behalf of retail investors. This made investing in equities costly and mostly accessible to the affluent. Annualized returns during that decade was around 17%2. As technology advanced and financial markets adapted, returns on public market equities have been decreasing ever since. The availability of information has made investing in public market equities frictionless and cost effective. Investors are now able to trade equities on their own without paying any transitions – it’s as simple as a few clicks on a smartphone. Liquidity is abundant which has tightened spreads for equities. In addition to individual trading, investors now have a preference to allocating their money to exchange-traded funds. This has created an environment where equities move in synchrony and when there is a misalignment, professional traders and high-frequency platforms can quickly react and monetize on the opportunity3. This creates little opportunity for investors to generate value.
Chief investment officers at financial institutions have witnessed this evolution in interest rate and equity markets, which informed them to begin to lower their forward-looking market assumptions for fixed-income and equities. This has created an imbalance for investors that are looking for returns. The commonly used 60/40 portfolio rule (60% equities / 40% fixed-income) has been declared “dead” given the rock-bottom interest rates and expectations on public market investing4. Investors are now forced to allocate to alternative asset classes such real estate, private equity, private credit, and venture capital.
To participate in the private markets in the early 2000’s required private investors to make large fund commitments. This resulted in banks only showing top deals to families that had large balance sheets and were willing to commit $2 million or more per deal, making the private markets an exclusive asset class to only a few. Now, the major private equity funds are competing to raise the next $100 billion+ fund and are publicly traded. Access to these funds has been democratized.
To access select private deals in the past was constrained to only the players that are within the start up investing ecosystem, SpaceX, Klarna, Revolut, etc. These same deals are now available to accredited retail investors through online secondary markets for late-stage and mid-stage companies, eliminating wealth creation opportunities.
Looking back, the way society dealt with the Covid-19 pandemic has reshaped human behavior. It disrupted economies and increased the adoption of digital channels, processes and technologies by many years. Disruption certainly belongs to our evolution and yet the pandemic triggered an acceleration.
At QBIT Capital, we make it our mission to harness this opportunity for value creation in the search of success for our founders and investors. We believe that value creation nowadays is centered around the ability to capture disruption at the birth of innovation – that is at the early stage. Are you in? Get in touch to find out more.