As we turn the page to 2025, my colleagues and I in Asymmetric Capital Partners are optimistic about next yr in terms of growth and innovation. We don’t expect these profits to be shared evenly, but we see clear winners and losers.
The positive side is that we expect that really priceless AI corporations will outperform and thrive in the face of the decline of popular and high-demand corporations. At the same time, we anticipate the development of vertical integration and buy-and-build strategies for markets that need improved technology.
We also expect that limited partners investing in technology will proceed to gravitate toward resource-constrained, return-focused startups (vs. fee-optimized asset builders). We are finally seeing the starting of the end of the 2020-2021 cohort of overfinanced growth stocks.
Artificial intelligence
It’s no secret that since the release of GPT-4, AI has seen a complete explosion in funding rounds and dollars. As many will let you know, this moment was far from the starting of economic AI.
However, for many investors, the publication marked a breakthrough in the practical availability of artificial intelligence. While many of the applications are quite compelling, we still fear that in many cases the hype has exceeded the reality. Moreover, for categories that truly make sense in practice, so many competitors have been funded that it is going to be almost inconceivable to make average returns attractive in a winner-takes-most market.
There is a constant value of enterprise value available in every market, and excessive competition along the way results in increased customer acquisition costs and unnecessary pressure to extend the prices of inputs – computing power, salaries, etc.
While the privileged few backing the winners in these subsectors will do quite well, most enterprise capital markets ultimately only see one or two breakouts that capture virtually all of the excess return. For those few, the comebacks could be stunning. For others – and in the case of enterprise capital it is mostly others – we expect returns to be disappointing.
Vertical integration
There is a discrepancy between the variety of vertical end markets where technology can significantly improve a business (very large) and those where software could be sold, serviced, and maintained in an attractive way (much smaller).
This is primarily resulting from the costs of acquiring customers for small businesses. At Asymmetric, we consider we have the hack: buy and assemble corporations that you simply would sell software to. This works most practically when the increase in enterprise value from technology integration is of roughly the same order of magnitude as the firm’s value.
We carried out this work, among others: in the field of swimming pool services and dental spaces. We’re incredibly excited to see what other industries might be revolutionized by technology and improved by recent ownership in 2025.
Industry capital flows and fundraising
In 2006, I wrote an article for juniors on enterprise capital: “Too Much Money Chasing Too Few Deals.” Unfortunately, two a long time later, the fact stays true: enterprise is simply an asset class that does not scale.
People analyzed the current amount of returns from chasing capital in the sector and found that for all funds in this space to realize the LPs’ promised MoIC, i.e. multiple of invested capital, many multiples of the existing current technology GDP would have to be created. the coming decade.
Of course this would possibly not occur. During LP raising, we heard a consistent refrain: subscale and emerging managers will proceed to achieve share in comparison with those that have achieved scale that stops premium returns.
This, after all, won’t occur until 2025, but might be a decade-long process, not necessarily different from the parallel one in control-oriented private equity.
ZIRP era offers
Finally, we expect that 2025 might be the first of many years of ultimate reckoning for the abuses of 2020 and 2021.
While many of those corporations have thoughtfully prolonged their runway and cut costs by raising money on bonds at a discount but with no cap, eventually nature will take its course.
Companies that proceed to run deficits will have to cover them with fresh capital from external entities that can want a fixed valuation; We are afraid that these valuations may often approximate the amount of capital raised so far. The upshot: equity is worthless in many of those corporations, so founders and employees will have to reset to remain motivated – further crushing existing shareholders, already diluted by the recent incoming capital.
For corporations that systematically generate value for their customers and do so at reasonable costs, elegant solutions could be achieved.
We consider that for those that are not particularly valued by their existing customers or for whom prices are unsustainably low, fire sales and even failures will occur.
Bottom line: We expect 2025 to be the next return to common sense. Ideally, enterprise investing will return to its core DNA: artisanal, hand-knit support of necessary innovations. And some of the worst impulses in the industry – the hype economics, the hoarding of GP assets, the over-funding of every concept by dozens of players – will eventually be squashed when reality sets in.