Last month, I flew out to Seattle for an event to meet up with angel investors, venture capitalists and some of the largest players in wealth management and private equity. The people in the room represented firms that had more than $10 trillion in assets under management combined. And we had a frank and open discussion about how this unique group of people approached investing in alternative asset classes like startups, crypto and real estate (among others).
I’m not naming the event or speakers because I believe honest and robust discussions like the ones we had only happen when there’s an expectation of privacy. But I won’t be violating any privacy concerns by sharing what I learned. And as savvy investors, you’ll find the results fascinating.
These asset managers are moving tons of money into startups. Given the sheer volume of money floating around the private markets (and the incredibly high valuations we’re seeing), that shouldn’t surprise you. But their motivation for investing in startups might shock you.
They have no other place to put their money.
And they’re not happy about it.
If these wealth managers had their way, they would be playing in the debt markets. They spent decades creating all sorts of sophisticated and clever financial instruments that made them gobs of money. But those markets aren’t profitable now thanks to regulatory changes and a remarkable run of incredibly low interest rates.
So they’re sitting on a ton of cash. And they need to invest it somewhere.
Most of them are only comfortable investing a small fraction of that (if any) into crypto. So that’s not a viable alternative. The returns on real estate don’t excite them. And they have little interest in commodities or collectibles. So they’re focusing on startups. And they’re not happy about it.
These investors feel like they’re competing with each other for the same deals and driving up valuations. They don’t like the fact that they’re betting on companies with little or no operating history and no record of generating profits. And they hate the fact that no matter how good they are at their job, they will probably be wrong most of the time.
But they also feel like they have to invest in startups. It’s the only place where they can consistently generate returns of 10x, 50x, 100x and higher. So they’re investing in startups for now — whether they like it or not.
That means the massive amounts of money we’re seeing in the private markets will be around for some time. I’ll write more about what that means for valuations (probably not what you think) and risk next week.