The Long Wait is Over: Fed Finally Cuts Rates ✂️⌛️🏦

Week of September 23rd, 2024

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We’ve scoured the vast landscape of the web to bring you a comprehensive roundup of the industry’s top news articles, all in one convenient place. We keep you ahead of the game and in the know about all things related to the vibrant world of investments

🦄 STARTUPS

ROUNDS AND UNICORNS

  1. Serán Bioscience (biotech): Serán Bioscience, based in Bend, Oregon, raised over $200 million in a round led by Bain Capital Life Sciences. The biotech startup, founded in 2016, offers development and manufacturing services for pharmaceutical and biotech

  2. Twelve (greentech): Berkeley-based Twelve raised a $200 million Series C, led by Capricorn Investment Group, Pulse Fund, and TPG. The company, which focuses on carbon transformation, also secured $400 million in project equity and $45 million in credit facilities

  3. Engine (business travel): Denver-based Engine, formerly known as Hotel Engine, raised a $140 million Series C, led by Permira, valuing the company at $2.1 billion. The startup, which facilitates business travel bookings, is profitable and growing revenue by 70% year-over-year

  4. AtoB (fintech): AtoB, a San Francisco-based fintech startup, raised $130 million in a Series C led by General Catalyst and Bloomberg Beta. AtoB provides financial services for the transportation industry, including fleet cards, payroll services, and savings tools

  5. Virtuous Software (charity): Virtuous, a Phoenix-based fundraising platform for nonprofits, raised $100 million in a round led by Susquehanna Growth Equity

INDUSTRY

The Global AI Infrastructure Investment Partnership has been announced to address the increasing strain on data centers from advancing AI technology. The partnership aims to invest up to $100 billion in private equity and debt financing for building and expanding data centers, with participants including Microsoft, Blackrock, and the UAE's MGX fund

  • They plan to raise up to $30 billion in private equity, focusing primarily on the U.S. but open to investments in partner countries. Nvidia will provide expertise in AI infrastructure design

  • This initiative comes amid a surge in demand for data infrastructure, with leading data center REITs seeing significant stock increases

  • According to Goldman Sachs, AI could drive a 160% increase in data center power demand by 2030, as AI applications are notably energy-intensive, with a single ChatGPT query requiring nearly ten times the electricity of a Google search

INDUSTRY WORLDWIDE

Venture capital investment in Chinese startups has dramatically declined, with only $26 billion raised in 2024—an 82% drop from the 2021 peak and less than 50% of the annual totals over the past decade. Deal counts are also down by half compared to last year

  • This collapse is attributed to a combination of factors, including decreased foreign investment, which accounted for only 19% of the total funds in 6.9% of deals, and domestic investment challenges

  • President Xi Jinping's policies, including crackdowns on tech giants and the removal of presidential term limits, have created uncertainty that discourages investment

  • Additionally, U.S. government restrictions on certain sectors have further complicated the landscape for venture capitalists, leading many to shift focus away from China to other Asian markets

🏦 ECONOMIC SNAPSHOT

The Federal Reserve has cut interest rates for the first time in over four years, reducing the target rate by 0.5 percentage points to a range of 4.75%-5%. This larger-than-expected cut aims to alleviate the economic impact of high borrowing costs amid easing inflation and growing concerns about the job market

  • The decision follows similar cuts by other central banks and reflects a shift in the Fed's outlook, with projections indicating inflation will decrease and unemployment may rise to 4.4% by the end of 2024

  • Powell noted the economy is currently stable, with a 3% annual growth rate and resilient retail spending, while inflation has dropped to 2.5%

  • The Fed's forecasts suggest further reductions, potentially bringing rates to around 4.4% by year-end and 3.4% by 2025

Weaker-than-expected economic data and easing inflation are bolstering the case for U.S. interest rate cuts, the first since 2020. While S&P 500 firms have largely avoided the impact of rising rates by locking in lower rates previously, many loans will be up for renewal in 2025. Sectors like manufacturing, which benefited from low rates, may face refinancing risks

  • Historically, the S&P 500's performance after rate cuts has varied. On average, it sees a 4.9% return one year post-cut, with a tendency to dip in the first three months before rebounding in six months

  • Data indicates that positive earnings growth may be a more reliable predictor of future performance than interest rate cuts alone

  • When earnings are positive, the market averages a 14% return in the following year, whereas it still sees a 7% average gain when earnings decline during rate cut periods

Private equity (PE) dealmakers are cautious about the Federal Reserve's recent interest-rate cut of 0.5%, believing it won't significantly revive deal activity. Despite lower borrowing costs being priced into transactions, the market faces challenges like weakening corporate performance, political uncertainty, and a sluggish fundraising environment

  • In H1 2024, total US PE deal value grew by 12% year-over-year to $325.2 billion, but PE exits stagnated at 626 deals

  • Dealmakers noted that the average all-in yield for leveraged buyout (LBO) loans tightened to 9.4% in Q3 2024, the lowest since Q2 2022

  • While some optimism exists as PE firms improve portfolio company valuations, larger firms still struggle with exits, particularly those with over $100 million in EBITDA

The U.S. economy shows resilience despite concerns about growth sustainability and interest rate policies. After a slowdown in the first quarter, GDP rebounded with a strong 3.0% growth in the second quarter, and overall growth for 2024 is expected to be around 2.7%. The rebound is supported by a boom in factory construction and anticipated interest rate cuts, which will encourage consumer spending

  • Baseline (60%): GDP growth remains strong, supported by consumer spending (predicted to rise 2.4% in 2024) and business investment (4.2% growth), driven by legislation like the Inflation Reduction Act and the CHIPS Act

  • Downside (20%): Geopolitical tensions and trade policies could lead to persistent inflation, slowing GDP growth to 2.6% in 2024 and 1.0% in 2025

  • Upside (20%): Advances in technology and a larger labor force could boost productivity and GDP growth to an average of 2.5% annually through 2028

  • On trade, imports are expected to outpace exports, contributing to a widening trade deficit, especially as new tariffs on Chinese imports are anticipated

🌱🌎 Impact & Climate Resilience

Venture funding for Black founders continues to decline sharply in 2024. In the first half of the year, Black-founded U.S. startups raised just $228 million, representing only 0.3% of the nearly $79 billion invested in U.S. startups. This marks a 60% drop from H1 2023 and is an improvement from the $123 million raised in the second half of 2023

  • Deal flow is also down, with only 28 funding deals in Q2, the lowest since 2019

  • In 2023, Black-founded startups raised $699 million, a stark drop from the $4.5 billion in 2021

  • This year is on track to raise less than half-a-billion, the lowest in over a decade, as funding and deal flow for Black founders remain at historic lows

🚀 IPO & Exits

In today’s slow exit market, secondary financings have become a vital tool for investors to manage liquidity challenges. Once considered uncommon, these transactions have gained popularity as a way for venture firms and their limited partners (LPs) to access cash without waiting for traditional exit events like IPOs or acquisitions

  • This trend has grown as many companies, especially those over 10 years old, choose to remain private longer due to unfavorable public market conditions and the operational burdens of being public

  • Investors are now able to acquire shares in established companies at significant discounts, sometimes as much as 30%, providing liquidity to shareholders who need to return capital to their LPs or reward employees

  • The goal for many firms in these deals is to generate solid returns, often targeting a 2x multiple within a 5- to 7-year window

🗞️ AI8 VENTURES HIGHLIGHT

Check Beyond Survival: Opportunities in Climate Change

It all started in 2010 after a great conference with Mr. Al Gore. I was in Mexico City attending an event where Mr. Gore presented what the climate would look like if we did not act quickly and reduce our carbon emissions. That day, Mr. Gore’s team made his “models” available for everyone to study and play with. He told me that the largest desert in the world would be what used to be Mexico, California, Nevada, Arizona, New Mexico, and Texas, all the way to the State of Mexico. He didn’t know if Mexico City would be a part of it because of its altitude. That day, we walked several miles to our dinner because of the bad news.

Your best effort is fine; we don’t need 20% of the people doing everything right. We need 80% of the people doing their

Carlos Ochoa - Alpha Impact 8 Ventures Managing Partner

Introducing: Climate Resilience Technology

Alpha Impact 8 Ventures is pleased to announce that we are adding a third investment vertical to our thesis: Climate Resilience Technology.

Climate Resilience Technology encompasses digital solutions designed to help communities, businesses, and ecosystems adapt to and recover from the impacts of climate change. We're looking for scalable technologies addressing existing problems caused by climate change.

Our focus areas include:

  • AgFinancing: Integrating advanced technologies and tailored financing solutions to improve access to capital for agricultural growth and trade, enhance food security, boost productivity, predict disruptions, and optimize logistics.

  • Water Management Systems: Utilizing advanced technologies and financing solutions to address water scarcity and inefficient water use exacerbated by climate change.

  • Energy Management and Optimization: Implementing advanced technologies and financing solutions to tackle increased energy demand and grid instability due to extreme weather conditions. This includes smart grids, microgrids, energy management software, and demand response systems that optimize energy use, integrate renewable energy sources, and enhance grid resilience.

  • Data, Analytics, and Predictions: Companies that utilize data and advanced analytics to predict and mitigate disruptions and climate-related events. These solutions provide crucial insights and foresight, helping communities and businesses to prepare and respond effectively to climate challenges. Advanced technologies and artificial Intelligence to enhance supply chain visibility, predict disruptions, and optimize logistics ensure continuity and efficiency.

Alpha Impact 8 Ventures is disrupting the industry, generating wealth, creating technology, providing access, leveling the play field, reducing systemic barriers, and building a resilient world.

Become part of the our revolution.

Happy reading,

AI8 Ventures’ Research & Investment Team