By Jacob Wolinsky. Originally published at ValueWalk.
Madera ONE commentary for the second quarter ended June 30, 2018.
Madera ONE, our global streaming video strategy, returned 32.5% in the second quarter and 103.9% year to date.
Madera NEXT, our next generation entertainment and disruptive telecommunications strategy, returned 14.0% in the second quarter and 24.7% year to date.
Madera Master Technology returned 1.3% in the second quarter and 5.2% year to date.
Dear Partner,
Innovation is accelerating. As we continue to execute on our thesis, our portfolio companies are creating value.
World Wrestling Entertainment (WWE), our story of the hero, is traversing the globe and delighting its customers. With confirmation of expanded distribution, the value of our equity investment has grown from $13 to $80/share. More on this to come.
The opportunity to help create the first purpose-built machine-to-machine communications network represents the best risk/reward opportunity in technology. If needing any confirmation of the future, don’t just take our word for it: “we already have 11 million connected BMW Group cars. We are aiming for 100 million by 2025” – Klaus Frölich, BMW head of product development. Not quite 10X, but close.
A few exciting developments to share: our new investment in Mexico; starting our new single position Madera UNO strategy to capitalize on the machine-to-machine network thesis; furthering our investment in music innovation; retiring our Founder’s share class.
Retiring Founder’s Share Class
We will be closing our Founder’s share class (discounted management fee of 0.50%) at the end of September. New and existing partners are welcome to invest in this class for the time being.
Opening new Innovator’s Share Class
Our new Innovator’s share class will give partners better access to our private company investments. Partners will have the option of having up to 30% of their capital invested in our opportunistic illiquid investments (venture capital, esoteric assets) seamlessly as deals arise. This will immensely enhance our ability to pounce on great deals by optimizing the capital call process. Of course, partners can opt-out of this feature if they wish to only have exposure to our public equity holdings.
Launching Madera Music Innovation II
Madera has been extremely focused on the structural disruption in the distribution of entrainment content globally. We are launching the Madera Music Innovation II fund to deepen our investment in music technology. The private credit / private equity vehicle invests in esoteric music copyright royalties to produce an uncorrelated annuity-like credit cash flow stream with equity-like upside returns. We aim to deliver a 15% yield to investors.
The music industry is at the start of a powerful inflection driven by technology. Before, we were limited to music playing on the radio or CDs produced by the major record labels. Today, we can access every artist, no matter how niche, from across the globe, instantaneously, on demand, and wherever we want. This is a tremendous shift that creates value.
Our music innovation operating company has a unique process that furthers the success of the artist, which thereby enhances returns for our investors. This is very different from traditional royalty investors that only passively collect cash. Instead, we are uniquely able to drive synergies throughout our portfolio by leveraging our proprietary relationships and equity ownership interests, music industry experience and expertise, and JSTARS data science technology to actively enhance monetization.
We will limit the size of the fund to give us a good balance between nimbleness and scale. Madera Music Innovation II seeks to provide partners with a long-term, uncorrelated, mid-teens return stream.
Partners in existing Madera strategies are welcome to invest in Madera Music Innovation II at a 50% discount. The immense structural shift in music represents one of the most exciting investment opportunities that we have worked on.
Launching Madera UNO
Madera ONE, our global streaming video strategy, has driven a more than 29X return.
Building atop Madera ONE, we have started Madera UNO to provide dedicated exposure to the creation of the first purpose-built machine-to-machine communication network. This is our next big idea. The long-term opportunity is driven by an esoteric asset that is very misunderstood by investors and is one of the best risk/rewards in technology.
Thirty-five years ago, the game changing technology was being able to call a friend via a mobile telephone. Tomorrow, the game changing technology will be having all our devices communicate with all other devices seamlessly in real-time. This is a paradigm shift that will unlock tremendous innovation and value.
Investors tend to forget about and overlook the plumbing—all of the electromagnetic radio frequencies, real estate, servers, and cloud software that are critical in building a platform that supports everything else—and this is where we have particular expertise. We are helping to build the foundation that will become the platform for everything from autonomous cars to drones to robotic farmers to connected washing machines—and many use cases that have yet to be created. More than $1 trillion of value is allocated to legacy connectivity networks. If successful, our network will provide multiples of value beyond that. If we only match what one of the four major consumer wireless carriers has done, that will be a 35X return for investors—and that’s before we’ve even gotten to business to business sales. In terms of our investing playbook, this opportunity is on par with our early investments in Netflix (streaming video) and Crown Castle (cellular tower real estate).
The esoteric asset underpinning UNO is one of the largest investments in the main portfolio. Let us know if you would like enhanced exposure to this opportunity.
Mexico
We spent quite a bit of time in 2Q on trips to Mexico to diligence a few ideas. The data intelligence we collected provides for a few strong conclusions and led to our latest position: Mexican wireless telecommunications infrastructure.
One dynamic we always find refreshing when visiting emerging markets is that the developing world is very resourceful. These markets do not have encumbered business constructs and legacy biases. People tend to gravitate to whatever adds the most value. For example, consumers are jumping straight to smartphones, mobile payments, and streaming music and video. Interestingly, the developing world is often the early adopter and the blueprint for how the US will work once economic forces break through artificial walls like regulation and behavior biases.
From Mexico we conclude:
- Positive Netflix: we have observed strong adoption in Mexico and throughout Latin America. What stands out is that street presence (marketing) is non-existent (so it’s all word of mouth) and traditional broadband access is sparse. We know from our network tests that Netflix streams well at sub-3G cellular speeds. Investors may also be surprised by the availability of 4G speeds in Mexico. We see strong adoption for Netflix within our data. As the penetration of smartphones continues to expand, it is logical consumers will seek greater use cases for their devices. With a growing middle class and technology savvy young generation, we see great potential ahead.
- Positive cellular infrastructure: we need more towers. The confluence of a growing economy and accelerating smartphone installed base drives the proliferation of data usage. The economic proposition for cellular subscriptions and the associated capital expenditure on infrastructure appears more robust. We are following our playbook to own mission critical infrastructure underpinning the rest of the funnel.
The data explosion comes to Europe
We also spent some time in Europe in 2Q working on our Cloud software thesis. Adoption is expanding rapidly across the board, driven by everyone from large hyperscale cloud platforms to enterprise to small business to consumers. We are invested in one of the most critical pieces of the infrastructure underpinning this data explosion, and our asset has been producing a 31.5% yield.
Large platforms are the fastest growing segment of the market, with Amazon’s AWS and Microsoft’s Azure growing faster than 50%. Enterprises are in the early stages of embracing the Cloud and are growing at a double-digit rate. When we look at Europe, interestingly, half of the demand is coming from outside the region—a testament to the global nature of the Cloud. What’s most striking is the incremental growth coming from Asia.
A core component of our thesis is a small building we own in southern France. Provence is known for many great things, and the city has been an important immigration and trading hub since its founding by the Greeks in 600 B.C. Our humble building houses critical undersea telecommunications cables connecting Europe with the Middle East, Africa, and Asia. Based on projects under construction, the number of connections is expected to grow by 54% this year. Trade between Berlin and Beijing runs through our building.
Gaming and social media platforms are increasingly seeking lower latency and closer proximity, which feeds directly into our thesis. Global platforms are ramping adoption of real-time analytics, virtual reality, augmented reality, and machine learning technologies, and are driving significant expansion in data intensity. This underscores our belief that technology disruption is reaching well beyond the traditional technology sector and driving significant impact to offline businesses. We are seeing rapid adoption by retailers seeking to harness data and real-time connectivity to reach consumers wherever they are.
As a sign of what is going to happen next, unlimited high-speed mobile data is now less than $10 / month in Europe. For context, a comparable plan in the US is $85 at Verizon and $70 at T-Mobile. If we know one thing, great applications + affordable high-speed access = data explosion.
Feel free to reach out anytime if you’d like to discuss. Thank you,
Kris
The post Madera ONE Returns 104% YTD: The data explosion comes to Europe appeared first on ValueWalk.
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