This week on Equity Mates

Hey there Equity Mate,

As we reach the end of January, we’ve almost reached the statute of limitations on looking back on 2023. However, we’re going to squeeze one more look back into this email.

Morningstar have published their list of top performing Australian funds for 2023.

Long time listeners of the podcast might recognise some familiar names.

• Hyperion: We’ve interviewed Chairman Tim Samway in June 2021 and again in March 2022

• Loftus Peak: We spoke to Chief Investment Officer Alex Pollak in June 2021

• Montaka: We spoke to cofounder Chris Demasi in November 2021

If that’s not a reminder of the high quality fund managers that you can hear every week for free in your podcast feed, then we don’t know what is.

Speaking of your podcast feed, here’s what you can expect to hear this week in your podcast feed.

• Equity Mates Investing (Apple | Spotify)

  • Designing the AI revolution - Altium

  • From oil refining to servos - Viva Energy

• Get Started Investing (Apple | Spotify): 

  • The millionaire next door

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Your questions, answered

Sophia asked via email:

I’ve heard a lot of people discuss debt recycling. What is it?

We put Sophia’s question to Jelena Koncar, a Senior Private Wealth Adviser at Shaw and Partners

The term debt recycling is a financial strategy of moving your debt from being non-tax deductible to being tax-deductible throughout your working life, with the goal of reducing the interest you pay, and accelerating wealth creation.

For example, you can do this as you build equity in your home [note: the interest on your home loan is not tax deductible because it’s not generating an income]. You can borrow against that home equity and invest into an investment property or share portfolio, which is an investable asset, and the interest on that debt then becomes tax-deductible.

The idea is that as the asset grows and generates an income, it allows you to pay off your non-deductible debt faster.

If you have a question you’d like answered, hit us up at ask@equitymates.com

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What we’ve been reading

New VC in town: “MANG”

Microsoft, Amazon, Nvidia and Google (collectively MANG) accounted for ~8% of total venture capital raised in North America last year. These four big tech companies have become the biggest players in venture capital.

Unsurprisingly, these four companies have focused their investments in data and AI. Two areas of the market that are particularly strategic for their core businesses. Starting with Microsoft’s investment in OpenAI, here are some of the biggest investments of the past year.

The interesting wrinkle here is that many of these investments will see money come back to the company. Many of Nvidia’s investments will allow these startups to buy more Nvidia GPUs. Many of Microsoft, Amazon and Google’s investments will see money spent on their cloud hosting services. In fact, in some of these investments, the companies specifically require it. For example, Google’s $300 million investment in Anthropic required it to spend the money on Google Cloud (which is interesting given that Amazon was the lead investor in Anthropic’s 2023 round).

It’s not surprising that these four companies are investing in the ecosystem. They have money to burn. Together, these four companies generated operating profits of $276 billion in 2023. What’s more, that is up 5x in the past 10 years. They need to do something with all this cash.

For entrepreneurs it does create a challenge. Do you want to align yourself with a deep pocketed tech giant or do you want to keep building and try and outcompete them? As these companies come to dominate more and more of the VC ecosystem, it becomes harder and harder for startup founders to choose the latter and try to unseat these existing tech giants.

Where do billionaires come from? Mum and Dad.

We are entering the Great Wealth Transfer as Baby Boomer die and pass their vast inheritances on to their children. This will be the largest wealth transfer in history, as an estimated $68 trillion USD (or $100 trillion AUD) is passed from one generation to the next. This article focuses on a new phenomenon we are seeing as part of this Great Wealth Transfer: the inheritance billionaire.

The past few decades have seen the emergence of billionaires. In 1987, Forbes counted 140 billionaires globally. In 2023, that tally was 2,640. And now we’ve reached the point where many of those 2,640 are passing on and passing down their wealth.

A recent report from UBS highlighted this emerging trend. It found that in 2023, for the first time in the nine years it has been publishing this data, inherited billionaire wealth outstripped new billionaire wealth.

One such example is Françoise Bettencourt Meyers, the world’s richest woman, who in late 2023 became the first woman in history to be worth $100 billion or more. Françoise is the granddaughter of L’Oreal’s founder and the inheritor of his fortune. Over in America, the children and grandchildren of Sam Walton (founder of Walmart) collectively are worth almost $250 billion.

And as this article explains, when a family inherits this much wealth, it is hard to lose it. Mackenzie Scott, who divorced Jeff Bezos in 2019, walked away with $38 billion. She has been actively trying to give it away, donating at a pace not ever seen before in philanthropic circles. Yet even after donating $16 billion in the 5 years since her divorce, her net wealth has actually increased to $41 billion (that is the power of the share market, and in this case, Amazon shares).

As wealth inequality continues to expand - today 50% of American adults, about 125 million people, own as much as the 8 richest people in the United States - this wealth transfer will start to entrench it for generations to come. Inheritance taxes are always a fraught topic politically, but surely we can agree that when we start talking billions of dollars some level of inheritance tax starts to make sense. Otherwise expect to hear about far more inheritance billionaires in the coming years as the Great Wealth Transfer picks up pace.

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