Deer Isle Insights, Flows and Investment Trends

Crypto-Currency Ecosystem Becoming Institutional?

Crypto-currencies have had multiple barriers to becoming institutional and it seems, one by one, they are coming down.

A signal, in addition, to the issuance of BTC and Eth ETF’s , of the on-going institutionalization of crypto-currencies is that Blackrock has issued (March 2024) a 506c tokenized money market fund (BUIDL) that trades on the Ethereum blockchain. It has raised ~300 million even though it has a $5 million minimum investment which signals that this is an institutional or ultra-high net worth investment.  

Why issue a securitized money market fund on the blockchain – aren’t there already enough money market funds?  One reason to issue this kind of offering is to offer to crypto holders the ability to have a “stable coin” that gives a positive yield.  Investors who have “cash” on the blockchain do not need to come off the blockchain to invest their money in a safe manner while also earning a yield.  To date, there have been stable coins but they do not usually “pay”, by giving a yield, for the right to hold the investment or there have been crypto investments, but they have not provided much safety.

Was this issue a success yet?  It has successfully raised capital in a tough environment becoming the largest token of its kind, but it seems to have only 14 holders.  The market still has a long way to go!

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Capital Provider Interest:  Continued interest by non-fund sponsors for control investments in SAAS companies in a wide range of industries with revenue between $3 million and $50 million.   

Private Equity:  Companies that have engaged investment bankers are starting to become realistic about current market conditions and “repricing” to a valuation that is approx. 50% of peak valuations, so these transactions are starting to close. If valuations were 10x EBITDA in the past – a valuation today that would garner capital provider interest would be 5x EBITDA.  Shareholders with no “professional” guidance are still hoping for the old higher valuations (in the example – 10x) and, therefore, not able to successfully close a transaction.

India: India funds are actively seeking US capital based upon recent stock market performance and Modi win (as narrow as it was).   One LP said they have seen 29 (!) India funds since the beginning of the year.  However, India market prices are mostly driven by locals who are now saving and investing which means that the Developing Markets “premium” has been priced out of the Indian market. According to a local manager, the India public markets could be up to 20% higher valuation than S&P. However, the wall of domestic capital is expected to continue to build so Indian valuations are expected to remain high.

Private Credit: More and more signs that the Private Credit party might be over. Some of the early capital allocators to private credit are starting to say that the market is overdone.  We did an analysis of one public BDC and the number of PIK’s in the portfolio has increased by 42% (from 14 in Dec 2022 to 20 in Dec 2023) reflecting an increasingly difficult operating environment for portfolio companies.