Daily Commentary

MarketMinder’s View: This may not have immediate investment implications, but it is pretty darned cool. Patents are key to innovation, which drives economic growth and development, but the infrastructure for reviewing and approving applications can be slow and clunky, especially in Emerging Markets (EM) nations. So Japan is helping out, using AI—more specifically, large language models—to summarize its patent examinations and provide these to several EM nations to help them speed up the process. “Countries involved in the initiative will provide lists of patents that they plan to examine. The patent office will create AI-generated summaries of its past patent examinations that are similar to those on the lists. The reasoning behind the determinations, among other things, will be included in the summaries.” This will help shorten the time it takes to determine whether something is “novel and original.” Now, the initial aim appears to be speeding the time it takes for Japanese companies doing business in these nations to secure local patents. That is a nice incremental positive for Japanese firms. But over time, we can see it being a boon more broadly, helping speed up business creation and development and maybe even motivating more entrepreneurs to jump into the fray.

MarketMinder’s View: While we aren’t inherently against private equity (or most investments), we think there are some crucial considerations here. For a while now, the private equity industry has been making inroads into the traditional retail investing realm. This article focuses on the push to enter 401(k)s, but there are other overtures, including ETF versions of private equity or private credit funds. Whenever you see a push like this, why is it happening? is a key question to ask. In this case, there is compelling evidence the industry is scrambling for liquidity after years of lackluster returns, failure to sell portfolio companies and an institutional client exodus. Maybe it goes a little far to suggest fund managers want mom-and-pop investors to bail them out, but it rings true in principle. Now, where this piece goes a little far is in warning this could be sowing the seeds of a 2008-style financial crisis if individual investors load up just before the industry goes belly-up. That ignores the underlying health of a lot of their portfolio companies, and it isn’t automatic that private equity funds would do materially worse than the broad stock market during a bear market that accompanies a recession whenever the business cycle rolls over. But we see a parallel risk, which is that when the market does turn and investors need liquidity, investors who loaded up on private equity are forced to sell traditional assets, deepening a downturn. This is an area we are watching closely. But it is worth noting that this is getting increased attention and recent listings of private funds are pricing at huge discounts. That suggests markets are more cognizant of this threat than many presume. 

MarketMinder’s View: Please note, as this piece mentions some specific firms, MarketMinder doesn’t make individual security recommendations, and any names cited here are coincident to the broader theme we wish to comment on. With the financial industry—and legislative initiatives—pushing wider adoption of private equity (PE), we think this is something for investors to be aware of: “Roughly a fifth of all PE sales this year involved groups raising money from new investors to acquire businesses from their older funds, up from 12-13 per cent the previous year, said Sunaina Sinha Haldea, global head of private capital advisory at Raymond James. Such transactions sell assets already owned by a PE group to so-called continuation vehicles—newer funds also managed by the firm. The tactic enables PE firms to return cash to investors in older funds, but has prompted concerns about potential conflicts of interest.” While we have nothing against PE per se, such practices deserve close scrutiny and underscore the extra due diligence those considering PE stakes must undertake to understand their investment—and potential returns. Like the article notes, “some backers of PE funds such as pension funds are concerned that in such transactions the same buyout firm is on both the sell and buy sides of a deal. Some investors fear firms could underplay the value of the assets being transferred, to the detriment of the original fund backers being offered an exit.” That is a potential blind spot worth being aware of, especially if investors rely on their managers to do the analyzing for them. As with any investment, it is critical to look past the hype and dig into the details to ensure you know exactly what you are buying.