In This Issue

There’s been a lot of news these past couple of weeks! So, we’ll just be focused on the news roundup in this edition. Today we’ll cover a variety of interesting stories across:

1. Real Estate

2. Music Royalties

3. Startups & Equity Crowdfunding

4. The Economy & Other Assets

ALTERNATIVE INVESTMENT NEWS ROUNDUP
🏠 Real Estate

Insurance Is Going To Be A Problem

In our last newsletter, we talked about how higher insurance rates were helping to keep inflation elevated. Unfortunately, that trend seems unlikely to reverse anytime soon.

There are a few frontlines to the emerging national insurance crisis. California is one of them and the focus of several recent articles on the topic.

• State Farm announced they would drop policies for 72K property owners in the state.

  • In a statement State Farm cited reasons such as needing to comply with “financial solvency laws,” hinting at how challenging it is to manage risk and liabilities as climate change exacerbates natural disasters.

  • Insurance challenges are forcing more people to seek policies from the state’s “insurer of last resort” burgeoning their potential losses more than 6 fold in 6 years.

• Allstate, Farmers, USAA, and The Hartford Financial Services Group also previously announced they would not issue new policies in California.

• Unfortunately, the insurer of last resort isn’t prepared to handle a disaster. “We’re one bad fire season away from complete insolvency…” (Los Angeles Times)

• California is hoping a new plan that would allow insurers to submit models of the financial impact of catastrophic events like wildfires as part of proposed rate increases can bring insurers back.

So, California, Shmalifornia, right?

Well, it’s not just California.

Florida has its own insurance crisis, with rates triple the national average and an insurer of last resort that the Governor says isn’t solvent. It’s also now the state’s largest insurer.

OK, so California and Florida, two anomalies, right?

• The Smokehouse Creek fire burned over 1M acres in Texas earlier this year. The cause? A decayed power pole. Sounds a lot like California to me.

• New Mexico had their largest wildfire in state history in 2022, burning more than 340K acres.

• In 2023, Vermont experienced massive flooding from a “once in 100 years” storm.

• Mississippi saw rainfall totals in the summer of 2022 that were also “once in 100 year” events, or even less likely.

These are just a few recent examples. The World Meteorological Organization believes that not taking action on climate change could ultimately cost over $1.25 TRILLION dollars. With that much potential financial damage, insurance isn’t going to get any easier.

Normalization Commencing?

Conditions in the market for residential real estate, especially single family homes, have been tumultuous since 2020. After a prolonged period of slowing sales due to higher interest rates, the market seems to be in a process of normalization.

• According to CNB, February saw home sales increase by 9.5% from January.

  • This was driven by the Sun Belt, with no change being observed in the Northeast.

  • The still-constrained supply helped average sale prices increase nearly 6% year-over-year.

• A Business Insider piece attributes this, in part, due to people finally accepting that higher mortgage rates are going to stay around for a while.

  • JPMorgan believes that sellers are gradually becoming less willing to hold their homes just because they locked-in a low interest rate.

• The same piece also notes that 1.7M new houses were completed in February and there’s another 1.6M being built right now. While existing home sales are still slow, new supply will help alleviate the supply-demand imbalance that currently exists.

• In covering data from Zillow, MarketWatch reports nearly 1 in 3 sellers in some parts of the Sun Belt are cutting their listing prices.

  • This, paired with the increased inventory and sale activity suggest normalization may be under way.

  • Sellers are increasingly accepting that they won’t be able to get as much for their homes as they had hoped. That makes it easier for buyers - especially those with interest-rate based hesitancy.

• A Wall Street Journal piece focuses on the decline in Austin’s housing market.

  • Austin saw an outsized jump in property values following migration trends in 2020.

    • Nearly a 62% increase in the home index value from 2020 the peak in 2022 versus 39% nationally.

  • Austin has also seen an outsized slump as well, taking an 11% haircut versus national numbers that have edged higher.

  • Moody’s believes properties are still 35% overvalued.

  • Apartment rents are also rapidly decreasing, steadily approaching the national average.

As a poster child for the reorganization that started the decade, Austin is an interesting case study. The reversal of supercharged trends and reversion towards the national average is another data point towards a housing market that is continuing to work towards a new normal.

Other Stories

• Home prices have outpaced increases in property taxes.

  • This is due to a variety of reasons including only having periodic re-assessments, caps on how much property taxes can increase in a given review, and bills aimed to alleviate the increasing tax burden.

  • Expect to see property taxes rising across the US to catch up with the growth in home values.

• Location, Location, Location.

  • According to a Zillow Press Release Gen Z is overwhelmingly moving to places with warmer climates, even if costs are higher than alternatives. Texas, California, and Florida are the top 3 destinations.

  • Capital Economics in a Business Insider piece argues that the South will continue to see the strongest growth due to a favorable mix of employment/economy and its cost relative to other places in the US.

• Commercial real estate’s uncertain future. We’ve previously covered various mixed takes on the CRE market. Those takes continue to roll in and there are two negative ones that caught our attention this time.

  • Goldman Sachs argues that we are about to hit a critical inflection point on commercial real estate debt. While some earlier loan restructuring bought more time, that time is almost out as maturity dates loom.

  • The Washington Post details the gravity of what’s facing some of the sector. That includes almost $13B in office loans in the form of commercial mortgage backed securities - which will be hard to refinance, according to Moody’s.

  • In total, there’s an estimated $929B in commercial real estate debt that is maturing this year.

  • Fortress Investment Group argues that we’re “in the first inning” of the economic ramifications of higher rates and commercial real estate normalization. The bottom is not in.

🎵 Music Royalties

A Sad Song (Fund)

The Hipgnosis Songs Fund (HSF) is in the news again with more trouble. As we’ve covered before, things have been problematic for the multi-billion dollar, publicly traded investment fund.

A pair of stories from Billboard (link 1 and link 2) detail the findings from Shot Tower Capital, a third-party company that has been reviewing the fund’s catalog and operation.

Here’s a rundown of some of the findings:

• The fund overpaid for many of the assets it acquired, anticipating an unrealistic level of growth in earnings.

  • About 64% of the fund’s holdings are worth less than what they were acquired for.

• Management had advertised and expected that they could actively manage their catalog in such a way to improve their performance.

  • Not only did that not happen, but they also didn’t have the systems to track all their songs’ performance properly.

• Some cases of excessive expenses unrelated to the core business of the fund.

• While no verdict was given on intent, Shot Tower Capital did conclude that the revenue and portfolio value were consistently overestimated. This had the effect of increasing the management fees for the portfolio.

• Shot Tower’s valuation of the song catalog is a full $850M lower than what the HSF management team had given it last year.

For long-term investors in the fund, it’s unlikely this came as much of a surprise. In fact, the shares actually rallied on the report.

The continued challenges at and failings of the HSF are likely to prompt greater scrutiny of music royalty investments by others.

Other

• SoundCloud made Fast Company’s Most Innovative Companies list for their unique approach to royalty payouts. Instead of the standard “streamshare” payment model, SoundCloud offers the ability for artists to earn royalties directly from listenership.

  • So, if a stream is worth $0.00001and a song is streamed only one time then that artist will earn $0.00001 in royalties from the platform.

  • In the case of Spotify, a minimum number of streams to be eligible for earnings.

• UMG along with Roland Corporation have put out some principles for AI usage and music.

• Luminate and Billboard did some data analysis to see how Taylor Swift’s and Beyonce’s tours and films impacted their streaming performance. They found significant jumps of 34% and 106%.

  • This suggests that songs that are about to go on tour might be in for at least a short-term jump in streaming earnings.

• An AI-based music “deepfake” platform in the UK has shut down after legal pressure from the British Phonographic Industry.

• The RIAA has released a report on 2023 music earnings.

  • Revenue rose 8% from 2022, reaching a (non-inflation-adjusted) all time high of $17.1B.

  • Streaming was responsible for 84% of it.

  • Physical media was 11%, driven largely by vinyl’s $1.4B.

💡 Equity Crowdfunding & Startups

IPO Window Opening?

After many months with little high-profile IPOs, the past couple weeks we saw two.

• Social media company Reddit debuted on public markets last week.

  • Priced at $34 a share, the first few days of trading have driven the price higher. The stock closed at $48 after hours on Thursday with an $8B valuation.

• Technology company Astera Labs also had a successful debut on public markets.

  • Priced at $36 a share, they ended trading last Thursday around $74 per share and a market capitalization topping $11B.

  • Aster Labs makes hardware that supports cloud computing, which has been a winner for AI technology so far.

There are many companies whose IPOs have long been awaited. Giants like Stripe, Shien, and more. The success of ARM, and (so far) Reddit and Astera Labs may indicate that the IPO market is thawing. If public markets continue to hold up, perhaps we’ll finally see some of these companies make it onto US stock exchanges.

Other

• Carta has some analysis of fundraising in Europe.

  • Pre-seed funding size increased significantly, topping 2022’s peak by 40% for the median company.

  • Seed stage funding was 14% smaller.

  • Companies are moving quickly from Seed to Series A, but those funding rounds were smaller by 21%.

  • Series B got a lot bigger - +56% but took nearly twice as long to complete.

• The SEC reached settlements with a few companies that were overstating their usage of AI, or “AI washing.”

• The DOJ is also taking a careful eye towards private companies that may be misstating or misleading investors on their AI capabilities.

• Fast Company has a lengthy, but interesting look at Y Combinator and its current role and direction.

• According to a Forbes article, funding into robotics startups reached the lowest in 5 years. Autonomous vehicles in particular saw a sharp retreat of funding, declining 77% since 2021.

• In Europe, startup funding is increasingly turning towards convertible debt, with such funding increasing 47% in 2023 to reach a new high.

• StartEngine now has self-directed IRA accounts. A new account needs to be created and have some extra restrictions around perks due to tax laws.

🎨 Economy & Other Assets

• Companies continue to try to force employees back to the office. Dell has a new tactic - no promotions without becoming a hybrid employee.

  • The battle over returning to the office has many implications for investors across asset classes and is something we need to continue to keep a close eye on.

• To the previous point, an article on TIME argues that remote work has helped keep the economy humming along. That’s because it has created more opportunities for women to have greater participation in the workforce.

• Vox has an interesting piece about the rising interest in “dynamic pricing” across different industries. This could be used to reduce pricing in periods of low demand but could also result in higher overall pricing. That makes the future impact hard to predict at this stage.

• Gen-Z is apparently less interested in streaming TV shows and movies, preferring social media instead. Advertisements on social media are also the most effective for this demographic as well.

• As interest rate cuts loom on the horizon, the era of high yield on cash investments may be ending. That means it might be an interesting time for private credit investments, as low-risk yield alternatives may begin to fade away.