🍋 Hedge Funds Private Problem

Private company valuation mark-downs are a problem for some hedge funds especially D1 Capital Partners. Spotify is planning a major push into the audiobooks space as CEO Daniel Ek laid out plans to reach $100 billion in revenue over the next decade. Wealth for the bottom half of households has soared, as they more than doubled their cash savings during the pandemic. US average gas price reached another record: $4.955/gallon, with some counties approaching the $8 mark. Also facing tough times due to shortages is Huy Fong Sriracha sauce.

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Short Squeez
June 09, 2022

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"Taking on a challenge is a lot like riding a horse isn't it? If you're comfortable while you're doing it, you're probably doing it wrong." — Ted Lasso

Good Morning! Spotify is planning a major push into the audiobooks space as CEO Daniel Ek laid out plans to reach $100 billion in revenue (~10x current levels) over the next decade. Some good news in tough times: wealth for the bottom half of US households has soared, as they more than doubled their cash savings during the pandemic. It'll come in handy, as US average gas price reached another record: $4.955/gallon, with some counties approaching the $8 mark. Also facing tough times due to shortages is Huy Fong Sriracha sauce. Weather conditions are taking a toll on the chili peppers. Hopefully, some lab grown food guys can step up and save the day!

📢 Intern szn is in full swing and we at Short Squeez are trying to swoop y'alls talents as well. If any of these positions appeal to you, go ahead and apply below:

Lastly, for those looking to invest in real estate, check out today's sponsors, HoneyBricks which provides an easy way to invest in real estate from your crypto wallet.

1. Story of the Day: Hedge Funds Private Problem

Dan Sundheim's D1 Capital Partners is one of a number of hedge funds that invests in private companies (instead of only public company stocks). Less of those funds use leverage to finance those transactions. Only a truly wild few put up investments in some private companies as collateral for loans to invest in other private companies. Now that valuations are crashing, this situation could get ugly.

JPMorgan Chase crafted a deal with D1 for a $2 billion loan with the above structure, and it looked great as D1 updated its valuations and posted a huge 70% gain in the private portion of the portfolio. As valuations in Silicon Valley crash, funds like D1, Tiger Global, Coatue, Lone Pine, and Viking Global are under more scrutiny.

Investors are wondering whether fund managers may suspend withdrawals, have to post up more collateral to meet lender demands, or worse, begin selling investments driving down asset prices. "Years of cheap and easy money have driven up valuations. This year company multiples will fall, investor marks will fall, values in totality will fall," said Taylor Rosanova, head of the fair value group at Marcum.

The situation is a lot worse in the private market than in the public market. The Refinitiv Venture Capital Index is down 47% this year, more than double Nasdaq's 22% decline.

Valuation declines are starting to come out into the open, and it ain't pretty. See markdowns from only a few months ago:

Short Squeeze Takeaway: D1 finds itself in a precarious situation and if investors start withdrawing capital, it could trip loan covenants and be forced to sell its private company portfolio at suppressed prices. A moment of silence for D1 and its fellow hedge fund gang trying to private equity their way into returns.

Source: Bloomberg

2. Markets Rundown

All markets were lower today as growth and inflation concerns are on everyone's minds and the US 10 year Treasury yield moved higher than 3%.

Movers & Shakers

  • (+) Roku ($ROKU) +9% on news of a possible acquisition by Netlfix.

  • (+) Novavax ($NVAX) +5% after winning an endorsement of its COVID vaccine from an FDA advisory panel.

  • (–) Western Digital ($WDC) -4% after jumping the same amount in premarket trading on news that it's reviewing strategic alternatives for its business lines.

Private Dealmaking

  • Multiverse, a tech apprenticeship platform, raised $220 million in Series D funding at a $1.7 billion valuation

  • Onfleet, a provider of last-mile delivery management software, raised $23 million in Series B funding

  • Moxe, a Madison, a health data exchange, raised $30 million in Series B funding

  • Take Blip lands $70 million to grow its omnichannel messaging service

  • Immuta, a data governance startup, raised $100 million in Series E funding at a $1 billion valuation

  • Trovata, a cash management automation startup, raised $27 million in Series B funding

3. Top Reads

  • Elon Musk will get user data "firehose" from Twitter (Axios)

  • Americans swarm golden visa programs as political tensions boil (BB)

  • The IRS is coming for your Venmo income (BB)

  • Here’s how soon prices could go down again (CNBC)

  • Coinbase’s hiring freeze shatters crypto hopefuls’ career plans (BB)

  • 5 top ways to save on high gas prices (Axios)

  • Volkswagen is ‘actively’ looking to build new EVs in US (CNBC)

  • Elon Musk's 180 on Tesla job cuts did damage to his credibility (BB)

  • DeChambeau, Reed to join Saudi-funded golf league in US (CNBC)

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4. Book of the Day: Beautiful Game Theory: How Soccer Can Help Economics

A wealth of research in recent decades has seen the economic approach to human behavior extended over many areas previously considered to belong to sociology, political science, law, and other fields.

Research has also shown that economics can provide insight into many aspects of sports, including soccer. Beautiful Game Theory is the first book that uses soccer to test economic theories and document novel human behavior.

In this brilliant and entertaining book, Ignacio Palacios-Huerta illuminates economics through the world's most popular sport. He offers unique and often startling insights into game theory and microeconomics, covering topics such as mixed strategies, discrimination, incentives, and human preferences.

He also looks at finance, experimental economics, behavioral economics, and neuroeconomics. Soccer provides rich data sets and environments that shed light on universal economic principles in interesting and useful ways.

Essential reading for students, researchers, and sports enthusiasts, Beautiful Game Theory is the first book to show what soccer can do for economics.

“Economy is the art of making the most of life.”

5. Short Squeez Picks

  • International Intrigue is a global affairs newsletter created by diplomats to help you enjoy understanding your world. Sign up to get the most important analysis in <5min.

  • Raising a middle-class child will likely cost almost $286,000 (CNBC)

  • A list of resources for new investors to learn about finance and investing

6. Daily Visual: Where Most NFT Users Live

Number of NFT users in selected countries

Source: Statista

7. Daily Acumen: Ideas

Apophenia: A tendency to perceive correlations between unrelated things, because your mind can only deal with tiny sample sizes and assuming things are correlated creates easy/comforting explanations of how the world works.

Self-Handicapping: Avoiding effort because you don’t want to deal with the emotional pain of that effort failing.

Cobra Effect: Attempting to solve a problem makes that problem worse. Comes from an Indian story about a city infested with snakes offering a bounty for every dead cobra, which caused entrepreneurs to start breeding cobras for slaughter.

Braess’s Paradox: Adding more roads can make traffic worse because new shortcuts become popular and overcrowded.

Declinism: Perpetually viewing society as in decline, because you’re afflicted by the Pollyanna Principle and you forget how much things sucked in the past.

8. Crypto Corner

9. Memes of the Day

 

 

 

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