Joseph Baratta, global head of private equity at the $356bn alternative investment manager Blackstone Group, speaking at the WSJ Pro Private Equity Analyst Conference in New York last month, said: “For any professional investor, this is the most difficult period we have ever experienced. You have historically high multiples of cashflows, low yields. I have never seen it in my career. It is the most treacherous moment.”
The chart that illustrated his point looked at how the net worth of US households had risen since the great recession of 2008-10 far above the growth in US nominal gross domestic product (GDP).
This disconnect has been called the “central bankers’ bubble” referring to the low interest rates being charged in this period and hence the low yields on debt assets. Stock markets, such as the Dow Jones Industrial Average, are up about 80% since the start of 2010 – more than doubling since the recession low in March 2009.
Any macro-economic shock that follows this apparent bubble condition will be a headwind making it harder to exit portfolio companies and gain corporate funding for venturing programmes, while few are prepared to invest in times of falling asset prices until a bottom has been set and confidence returns, which can take years.
This is standard practice for a procyclical industry. Potential hope for corporate venturing remains in the leadership position of increasing numbers of industry executives and units, such as Intel Capital, Merck and Johnson & Johnson – all luminary members of the GCV Leadership Society – their experience going through previous cycles and commitment to helping their parents and the industry more broadly grapple with a downturn.
A more interesting perspective, however, comes when taking a step back – looking at a period of dramatic rising wealth over the past 30 or so years and examining the potential impact of venture-funded technological change on people.
Taking Baratta’s chart and overlaying distribution of wealth indicates more than 90% of this near-fivefold rise in household net worth between 1983 and 2010 was captured by the top fifth of the population. That the poorest 80% still saw a near threefold increase in their net worth is great news, although the near one-third growth in US population from 233.8 million to 310.2 million in this period means the absolute gain for most people was weaker than appears at first sight.
Other countries have fared even worse. Management consultancy McKinsey, following on from work by economist Thomas Piketty earlier in the decade, this month worried whether people in future will be “poorer than their parents”. McKinsey said: “The real incomes of about two-thirds of households in 25 advanced economies were flat or fell between 2005 and 2014 [Italy fared worse with everyone on lower income]. Without action, this phenomenon could have corrosive economic and social consequences.”
The US Congressional Budget Office said 81% of Americans had flat or falling income between 2005 and 2013, although changes to disposable income after taxes and transfers were at least flat for almost everybody in the country. All this in a time of tremendous innovation and technological change.
Yuval Harari’s latest book – Homo Deus (Man as God) – follows the path set in his previous book – Sapiens – by looking eloquently at how society is starting to separate intelligence from consciousness in its search for human immortality, bliss and divinity. Some people may upgrade themselves to live longer and with more power, but those who cannot do so appear to become politically and economically less important. Perhaps the most insightful part of Harari’s book, which is out in the US next year, is the examination of how the past three centuries’ broadly humanist approach is being superseded by one, born in Silicon Valley, of “dataism”.
Platforms, greater storage and processing power and machine learning in the digital age encourages data and information to be shared increasingly widely and as a right. He concludes his book with a question: “What will happen to society, politics and daily life when nonconscious but highly intelligent algorithms know us better than we know ourselves?”
Treacherous times indeed.