Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: This podcast was recorded for publication on the 2nd of May 2024 by HSBC Global Research.
Speaker: All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Speaker: You can follow this weekly podcast on Apple and Spotify, or wherever you get your podcasts.
Speaker: Just search for The Macro Brief.
Speaker: Hello and welcome to the Macrobrief.
Speaker: I'm your host, Piers Butler.
Speaker: In today's special edition, we're bringing you the results of our first ever Funding the Future survey, which opens a window into the world of venture capital, private equity, and high growth sectors.
Speaker: It's based on the views of more than 200 market professionals investing in both private assets and publicly listed companies.
Speaker: But which sectors have caught their eye?
Speaker: And after two difficult years, is there light at the end of the tunnel for venture capital?
Speaker: I'm joined by Mark McDonnell, head of data science and analytics, to discuss.
Speaker: Mark, welcome.
Speaker: Thanks for having me back on the podcast, Piers.
Speaker: So, Mark, this is the third of our proprietary investor sentiment surveys after the emerging market sentiment survey and the ESG sentiment survey.
Speaker: But the scope of this survey is a little bit different.
Speaker: So let's start there.
Speaker: What's different about it?
Speaker: So the main difference here is that as well as surveying investors in public equity markets, we also survey investors in private markets.
Speaker: So this survey, it covers venture capital and private equity investors, but it also asks investors in listed equities in high growth sectors as well.
Speaker: So it's interesting to be able to compare and contrast the responses from the two different cohorts.
Speaker: So we'll get on to that in a second.
Speaker: But firstly, I wanted to ask you that when you started your Funding the Future series and you were looking at some of the existing data on venture capital activity, it was pretty gloomy.
Speaker: But this survey would indicate that the outlook has improved.
Speaker: Yes, VC is back, seems to be one of the main conclusions from this survey.
Speaker: It has been a tough couple of years for venture capital, but sentiment is recovering.
Speaker: So in our survey, 79% of the venture capital investors that we surveyed, they see an increase in activity over the next 12 months.
Speaker: And in addition to that, like 42% of respondents hold no cash at all in their portfolio.
Speaker: So they're absolutely fully invested with only a tiny percentage having over 75% cash.
Speaker: So it seems like it's a pretty positive picture.
Speaker: And we asked them what they perceived to be the biggest headwinds and tailwinds.
Speaker: Can you sort of update us on that?
Speaker: So the most common tailwind that was reported was ESG and sustainability.
Speaker: At the other end of the spectrum, over 80% of our respondents put political risks as being amongst the biggest tailwind.
Speaker: That's quite a common response, that one.
Speaker: Yeah, I guess there's no surprise there.
Speaker: It's understandable as a theme, but it does seem in contrast to the positivity of the sentiment.
Speaker: Yes.
Speaker: And then looking at the preferred sectors, obviously no surprise, I guess, from my perspective that at the top you saw IT, but I was a bit surprised to see that healthcare wasn't the second most preferred, it was third.
Speaker: What was in between the two then?
Speaker: So it's kind of financials, it's really the fintech sector.
Speaker: You have got quite a thriving fintech community and that's obviously attracted a lot of venture capital interest.
Speaker: Of course as well many of the startups in the fintech space, their offerings are AI powered in some way so they're probably riding that AI wave whereas whilst AI is going to become an increasingly important theme in healthcare,
Speaker: for healthcare startups, I think it's further behind in that chain.
Speaker: And the other feature of the survey, which you mentioned, is this uniqueness in bridging the gap between public and private investors.
Speaker: Were there any significant differences in those two cohorts in terms of their sentiment?
Speaker: Yes, there were.
Speaker: I mean, they obviously agree on many aspects, but probably the most interesting divergence for me was electric vehicles.
Speaker: So electric vehicles, they're still quite in favor with the venture capital community when you look at their responses to the question of what have they funded over the last 12 months and what are they planning to invest in over the coming 12 months.
Speaker: Electric vehicles still feature quite high up the list.
Speaker: Whereas for investors in listed tech companies, electric vehicles were by far and away the least favored investment theme.
Speaker: And that divergence is interesting.
Speaker: I mean, it clearly can't persist forever.
Speaker: Eventually, private companies, you know, they typically want to
Speaker: get some kind of an exit.
Speaker: So there are links between the private and public markets eventually.
Speaker: So it's going to be really interesting to see how this divergence of sentiment towards the EV space plays out.
Speaker: And you mentioned exits.
Speaker: It is one of the key aspects of early stage funding, just the ability to exit the investment.
Speaker: What did the survey reveal there?
Speaker: Yep, exits are definitely in focus.
Speaker: So 77% of respondents plan to exit at least some companies in the next 12 months.
Speaker: And of these, by far and away, the most common preference for where they would like to list is in the US.
Speaker: So over 71% of respondents listed the US as their favored location.
Speaker: 52% of people responding to the survey see an increase in IPO activity over the next year.
Speaker: So it does seem like exits really are a focus at the moment.
Speaker: Now, let's come back to the sort of sector preferences and the one that was at top of the pops, which is IT.
Speaker: No surprise that within that it was AI and that in terms of geographical areas it was North America.
Speaker: But give us a bit more colour.
Speaker: Yes.
Speaker: I mean, obviously the big theme everywhere nowadays is clearly AI and VC investors are heavily involved in this space.
Speaker: So over 70% of respondents say that they've invested in AI over the last 12 months.
Speaker: So quite a high percentage of
Speaker: unsurprisingly.
Speaker: Over 80% say they intend to invest in AI over the coming year.
Speaker: So whilst there's clearly a lot of hype around AI, it seems like it might still be early days.
Speaker: It's still growing, the interest around this.
Speaker: And when you look at the responses from investors in listed tech companies, AI is by far and away the most common favored investment theme amongst these investors.
Speaker: Other tech themes which we're getting a lot of love from this community
Speaker: include like cloud technologies and data centers, but AI is definitely the dominant one.
Speaker: Now you're spending a lot of time looking at AI, testing it internally, looking at the impact of generative AI on our work, for example.
Speaker: And I've asked you this question before on the podcast in previous conversations, but where do you think we are in terms of the pace of development?
Speaker: Is it still accelerating?
Speaker: And what about the pace of adoption and this so-called productivity bonanza?
Speaker: Yeah, I believe we are still accelerating in the development of these technologies.
Speaker: It feels still quite overwhelming to try to keep up with all the AI news.
Speaker: Every few weeks there's some new amazing model that gets released by somebody that can perform really quite well.
Speaker: And so the gap that OpenAI had initially opened up with ChatGPT compared to all their competitors
Speaker: that's steadily being eroded.
Speaker: And so the general performance is continuing to improve.
Speaker: In terms of the pace of adoption of these things, I think that whilst I clearly believe that the capabilities of these models are going to continue to improve, even if
Speaker: we had complete stasis and the models didn't get any better than they are today.
Speaker: There's still five or ten years of productivity improvements to be had from integrating this thing into the world of work.
Speaker: There are so many ways in which this technology can be used to improve little processes here and there and as companies and people who are entrepreneurs and students and basically anybody who has an idea, as people are able to integrate these ideas into their workflow more effectively, then you're just going to see these productivity improvements dripping in just from the existing technology.
Speaker: And so even if, like worst case scenario, we don't get any better, I think there's a powerful tailwind for the global economy from this.
Speaker: Is it uniform or are we seeing parts of the world being earlier in terms of their adoption or is it a bit too early to tell?
Speaker: I mean it's too early to say with certainty but it certainly seems like the US is winning this race at the moment.
Speaker: When we look at what companies actually say about AI on earnings calls, if we compare the sentences discussing AI from US company management to say their European peers, then we can see that the US companies, they're just talking about it in a much more practical way.
Speaker: They're sort of using terms like capabilities and
Speaker: investments and benefits and products disproportionately frequently than their European counterparts.
Speaker: So in Europe and the UK, in comparison to the US, it seems like people are more experimenting with AI, whereas American companies seem to at least be talking about actually implementing it into the workflow.
Speaker: No doubt the sort of future iterations of the survey will pick up on that sort of pace of development.
Speaker: How often are you planning to publish the survey?
Speaker: The aim is for this to be a quarterly survey.
Speaker: Okay, well, we look forward to the next iteration.
Speaker: Final question, Mark.
Speaker: You talked about keeping up.
Speaker: What about regulation?
Speaker: Does it have any hope of keeping up with the pace of development and preventing abuse and misuse?
Speaker: Well, it's not just AI that's a growth area.
Speaker: I think AI regulation is also a growth area.
Speaker: It's clearly captured the attention of regulators around the world.
Speaker: And that makes sense.
Speaker: There are clearly new risks that are brought up by this technology.
Speaker: The challenge at the moment is that there doesn't seem to be a great deal of coordination amongst these regulatory bodies.
Speaker: So regulators around the world are taking very different approaches to the same problem, which will make it challenging for people who want to use this technology in big organizations because anything you do is likely to hit upon multiple regulatory regimes.
Speaker: I think probably the most promising approach is regulating use cases rather than regulating the base model per se.
Speaker: These models are general purpose tools, so they can be used for great things and they can also be used for terrible things.
Speaker: I think the challenge for regulators is to put in appropriate rules and governance that reduce the probability of the bad outcomes
Speaker: without stifling innovation from what could be a very exciting technology.
Speaker: Mark, I suspect we'll be having you back on the podcast to carry on this conversation.
Speaker: But for now, thank you very much for joining us today.
Speaker: Thank you very much.
Speaker: I enjoyed this.
Speaker: Mark McDonald there on the results of our inaugural Funding the Future survey.
Speaker: If you'd like to hear more from Mark, then sign up for our next live insights, where Mark will be answering your questions on the outlook for venture capital.
Speaker: The event is taking place online on Thursday, the 23rd of May.
Speaker: Just email askresearch at hdpc.com for more details.
Speaker: All eyes are on the Fed this week as they held their latest policy meeting.
Speaker: Fed Chair Jerome Powell struck a cautious note and noted that inflation was proving more persistent than expected.
Speaker: As a result, Ryan Wang, our U.S. economist, now only expects one 25 basis point cut in September this year.
Speaker: He previously forecast three cuts in 2024.
Speaker: And in the bond market, Stephen Major, Global Head of Fixed Income Research, has been assessing the formation of a third peak for yields in the last 18 months.
Speaker: Why does this matter?
Speaker: Well, Steve argues that this could be a so-called triple top, where yields hit a high before reversing.
Speaker: For more information on any of these reports, or the Funding the Future survey that we talked about earlier, then please email askresearch at hsbc.com.
Speaker: So that's it from us this week.
Speaker: Thanks very much for listening to The Macrobrief.
Speaker: We'll be back again next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
