“Vision Fund” in the current global socio-economic context

Recently, The Economist, a newspaper carried an article on the impact of Mr. Masayoshi Son’s Vision Fund1. In my opinion the analysis contained in the newspaper was far too inadequate in defining the context and also imagining the impact on the society of such a unique experiment.

In this slightly longish blog by my standards, I will try to put the context and impact for the Vision Fund on the following dimensions:

Now, on the global macroeconomic context. The central banks of the world are trying very hard “to push the string” since 2009. In spite of all the screaming headlines of tightening monetary conditions, the global major central banks2, even today (data as of March-April 2018) are increasing the size of their balance sheets at the rate of thrice to fivefold the speed I deem necessary to support the nominal GDP growth rate under normal economic conditions3. In the last 12 months, the average annual growth in major central bank balance sheet was $1.7 trillion. And if one guestimates the GDP growth of the underlying economies under care of those central banks, it would be $2.8 trillion during the last 12 months. In other words, the world growth is supported by central bank balance sheet growth at the rate of 60 percent of the nominal GDP. This are astonishing number for global economy which has not seen any major shock since 2012 and indicates that central banks have failed to push the string.

Another indicator of the fact the central banks have failed to push the string is the record stock buybacks reported in the media, mainly in the USA, and also in other global markets; in spite of record stock market levels, hinting at lack of risk appetite in the conventional global corporate sector.

In this environment, an entity like the Vision Fund, willing to put multi decade bets should be like an angel of mercy to the tired central bankers. They are willing to take advantage of near zero global interest rates and invest big and invest long in untested areas and in areas that will grow in next two decades.

Now, on the second point on global income inequality and social structure. The global VC industry has contributed significantly to global income inequality by having narrow focus on Silicon Valley. The PE industry has also exacerbated the global income inequality by focus on debt and resultant instability to the bottom-line; which increases the pressure on low wage workers disproportionately.

Vision Fund is world’s first truly global VC fund without any myopic undue focus on Silicon Valley. This will help entrepreneurs across the world to take a stab at solving the problems affecting their regional economies, reducing opportunity inequality at global scale which is a precursor for reducing income inequality.

Also, quicker adoption of various exciting and promising technologies at the same time across the globe will change the global social structure. In the history of mankind, the early part of 21st century is the very first time that new technologies can be adopted globally at the same time and at the same cost structure. Earlier technology revolutions, especially steam and electricity helped the Europeans mercilessly colonize the remainder of the world, causing untold miseries for the people in the colonies. It is important that now we are witnessing a new wave of technologies, too numerous to list down here, that every human being on this planet is given an equal chance to benefit from it. A truly global VC fund will play its own small role in ensuring the same.

Next, on the third point of room for more experiments like Vision Fund. I estimate that global GDP will grow 2.25x in next 20 years as the Indian Subcontinent, Africa, and Middle East experience in next 20 years what China experienced in the last 20 years. This will require investments to the tune of $325-400 trillion in the global economy over next 20 years. Given the massive scale of investments needed, I my opinion there is a room for another 10 to 20 funds which are as massive and as bold in the outlook as Vision Fund is. Twenty such funds will mean $2 trillion, which represents mere 0.5 percent of what I expect to be the investment need of the globe over next two decades.

Will Vision Fund be a success? I am sure that they will have multiple hiccups during their journey. That is the very nature of investment, whether bold or tepid. I hope that the past record of the sponsors will ensure some bit of success for the fund.

The more pertinent question is whether the world economy can take in its stride a failure of this experiment. As I have mentioned in the previous paragraph, even if we have 10 such bold funds and even if all 10 funds fail, it would be just 0.5 of the investments in next twenty years; and a mere rounding off error in the global GDP during the next 20 years.

This also needs to be tied to my very first point of central banks unsuccessfully trying to push the string since 2009. The main point of trying to push the string is not that the string should go somewhere. The main objective of pushing the string is that it deploys the productive capital of the economy in hopefully pushing the potential output of the economy tomorrow while deploying the productive capital today – reducing unemployment today which reducing inflation tomorrow. I am sure that the ecosystem built by funds like Vision Fund can help in doing that by mixing and matching new technologies to the myriad global problems; especially as humankind is seeing huge influx of educated youth entering the global workforce at speed never seen in its history. Whether such pushing of boundaries of potential output results in financial gains for the investors in the fund - well that is for the investors to ponder before investing and not for me to speculate.

1 https://www.economist.com/news/briefing/21741969-it-giving-new-opportunities-entrepreneurs-and-forcing-silicon-valleys-best-stay
2 Fed+ECB+BoJ+PBOC considered
3 https://www.yardeni.com/pub/peacockfedecbassets.pdf

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