Tuesday, January 31, 2023

Sebastian Mallaby interview: 5 takeaways

Sebastian Mallaby is a leading financial author who has written definitive histories of the hedge fund and venture capital industries. He is the Paul A. Volcker Senior Fellow for International Economics at the Council on Foreign Relations.

Mallaby joined Alternative Fund Insight in episode two of the AFI podcast for a wide-ranging discussion on the rise of venture and tech leading up to this year’s growth sell-off; the role of Tiger Global and what the future holds for Chase Coleman’s firm; why the stage is now set for a macro hedge fund revival; and he reveals the subject of his next book.

Here are five key takeaways from the conversation.

  1. “The this of the that” approach brought Tiger Global huge success

The Power Law tells the story of venture capital from its early days in Silicon Valley to growth in the 1990s, leading up to the dot-com bust and the mega-comeback over the past two decades as the VC approach took root in China and around the world.

Mallaby is one of the few — if not only — journalists to have interviewed Chase Coleman, the founder of US hedge fund Tiger Global, who pioneered “crossover” funds which took early-stage private stakes in companies, competing with VCs. Mallaby explained how “the this of the that” approach brought success in the years after the dot-com bust, when public markets offered less opportunities in tech.

“You’d already had eCommerce (like Amazon), you’d had search (Google) and the game in China, which was ten years behind, was to replicate all those proven business models from the US and do them in China. So it was the Amazon of China, the Google of China.

“Having done it in China rather successfully Tiger Global then tried to find ‘the this of the that’ in Russia. They took this to Latin America, they took this all over the place.”

2. The tech correction has cost Chase Coleman

Tiger Global emerged as a major disruptor in the venture capital world. Rivals chafed at their high bids, sending valuations soaring in early funding rounds via their private markets investing vehicle.  Huge returns followed as growth stocks exploded in the past decade. The opportunity set expanded as companies waited ever longer to IPO.

But this year’s tech sell-off has left Tiger Global with huge losses. Mallaby makes the point that the likes of Tiger Global, SoftBank and Coatue focused their investments in the latter funding rounds, where valuations were pushed higher and higher. The seed and Series A investments were less over-heated. “I think the biggest correction has come for the Tiger Globals of the world.”

It is interesting to contrast Tiger Global’s approach during the tech boom with that of Julian Robertson, the Tiger founder, who was wary of internet stocks and bet against them in the years before the dot-com bust. Those bets actually led him to close Tiger down as the boom outlasted his positions.

“He was short the tech bubble and of course he was right,” noted Mallaby. “But the market can be irrational longer than you can stay solvent.”

3. Mallaby thinks Tiger Global will still be a long-term winner

“If you are a Tiger Global limited partner and you’ve been investing since 2005, say, basically you had 16 years of off the charts, fantastic returns, then one terrible year,” said Mallaby.

“You’re just going to look through that. You’re going to carry on giving Tiger Global money. I’m convinced they’re going to be completely fine as a business. And therefore, why would they change? I think they’ll just carry on writing fast checks to ‘the this of the that.’ And their LPs will probably do well.”

4. The stage is set for macro

Mallaby published More Money than God in 2010, following years of strong hedge fund returns. They have been leaner since. But he is convinced the return of inflation and a more volatile market environment provides an ideal environment for hedge fund strategies, starting with macro.

“Quantitative easing and super loose monetary policy had a lot to do with the fact that hedge funds didn’t do so well for 10 years,” he said.

“With inflation back and interest rates having to rise to get inflation under control, we’re going into a choppy market where there’ll be recessions in many of the advanced economies. There’ll be distressed debt opportunities. There’ll be all sorts of special situations. There can be some interesting currency moves as different central banks respond to inflation in different ways.”

5. Crypto is next on his agenda

Asked if he had decided a subject for his next book, Mallaby revealed to AFI he is focusing on crypto.

“I find it intellectually fascinating and mind-stretching,” he said. “Which of these purported use cases is really credible and which is a bunch of nonsense and total hype?”

He doesn’t share the acute pessimism of sceptics such as Ewan Kirk — and said the Power Law model of venture means the crypto sector can succeed even if most use case attempts fail.

“If one thing out of ten works that’s success and that could change the world  and it could be a massive wealth creation opportunity. So I can be bullish on crypto whilst thinking that 90% is nonsense.”

The Power Law: Venture Capital and the Art of Disruption by Sebastian Mallaby is out now.