Open Spaces Are Where The Greatest Opportunities Reside
Gold miners, oil prospectors, technology entrepreneurs and smart investors know that the greatest opportunities for long-term growth and returns reside in open spaces. Land rich with minerals and natural resources served as open spaces for gold miners and oil prospectors in the late 1800’s through the early 20th century. The software business was born in the late 1970s in Albuquerque, New Mexico when Microsoft was founded. The greatest hardware company of all time – Apple – was founded in 1976 by the son of a Syrian immigrant. John Rockefeller, Andrew Carnegie, J.P. Morgan, Eli Broad, Steve Jobs, Jeff Bezos, Sergey Brin, Sam Altman and countless other entrepreneurs built large businesses by identifying market opportunities (“open spaces”) and marshalling the resources to capitalize on those opportunities.
Venture investors have the luxury of casting a wide net when looking for a place to park Limited Partner capital. Early stage venture is where “open spaces” and the best returns may be found. Series A rounds and future rounds became over-priced from 2007-2022 given the low interest rate environment, an abundance of capital, a crowded playing field of Venture Capital firms and a venture investor psychology that every future round would always be an up round, especially the final exit round when equity was sold to the suckers in the public equity market.
Private Equity investors may cast a fairly wide net when looking for deal opportunities. However, asset prices have became too rich (until 2023) given low interest rates, an abundance of debt, a thirst for yield (primarily by insurers and retirement plans), and too few deal opportunities relative to the number of PE firms. PE was a great way to make money while destroying value when interest rates were close to zero from 2009-2022. PE firms routinely acquired companies with 100% debt, often paying themselves fat dividends on deal close date sourced from the underlying debt that funded the deal. Nothing like patting yourself on the back before you have even generated a return. There are few “open spaces” in PE land.
High yield debt markets are interesting today, particularly when one considers specific high yield issues where the company in question is led by a quality management team. “Open spaces” may be found in high yield land.
Equities are largely overvalued in my view without getting into a detailed discussion about forward multiples. Suffice to say 2024 earnings estimates need to come down. The passive investing phenomenon of the past 15 years isn’t helping valuations as enormous sums of capital are concentrated among fewer names (the magnificent 7) than ever before. There is lots of room for those names to fall. Apple, Microsoft, Meta and the like are not where the “open spaces” may be found. Not when investors may reallocate capital from those names to under-the-radar small cap equities, to physical commodities, to art, to classic automobiles and other asset classes that may provide a better combination of downside risk protection and inflation hedging.
2024 is the year for investors to look for opportunities where others are not. Look to the open spaces.