Market Pulse | Tech billionaires betting on nuclear fusion. (Even) higher UK interest rates on the horizon? And more...

Sidekick Money · Sidekick Market Pulse 24th April 2023

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Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

In this week’s edition we have:‍‍

Tech billionaires bet on the next big thing. It’s not AI.
(Even) More UK rate hikes on the horizon?
European startups loading up on debt

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It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information. ‍

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1) Tech billionaires bet on the next big thing.

Nuclear fusion is the process that powers the stars. It offers the potential of near limitless clean energy. Humans have been trying to replicate the process in labs since the 1950s but, until recently, have been unable to achieve net gain. Net gain is where you produce more energy than is required to kick off the fusion process.

In December 2022, the National Ignition Facility in the US had a breakthrough. By using the most powerful laser in the world, scientists delivered more energy than the entire U.S. power grid for a brief instant[1]. This ignited a fusion reaction and helped them achieve their goal, net energy gain.

Since 2021, private companies have been pouring billions of dollars into fusion research. More than 30 companies have raised more than $5bn, all in an effort to commercialise fusion reactors[2]. Sam Altman, the CEO of OpenAI, has invested $375mn into Helion, a nuclear fusion startup. But Sam Altman is not the only tech founder to invest in the area. Tech billionaires including Jeff Bezos from Amazon, Bill Gates from Microsoft and Marc Benioff from Salesforce are all betting that fusion reactors are within reach[3].

We live in an era where technological breakthroughs in one area are enabling breakthroughs in other areas. As an example, advanced AI could materially speed up the development of new medicines. In nuclear fusion research, increases in computational power and advances in artificial intelligence are enabling breakthroughs in materials science.

There has been some exciting progress but experts say we are likely many years, if not decades, away from having nuclear fusion reactors that provide electricity to the grid [4]. What the experts agree on is that it is only a matter of time until we can harness the power of the stars to provide abundant clean energy to the world.

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2) (Even) Higher UK interest rates on the horizon?

In March the prices UK consumers have to pay for goods and services increased more than 10% compared to last year. Petrol and diesel prices fell but sharply, but increases in the cost of housing and food meant overall prices kept rising at a rapid clip. The main contributors to the high inflation number were housing and bills, up 26% over last year, and food and drinks, up 19%. General expectations were for inflation to drop to 9.8%[5].

Market participants now expect the Bank of England to increase interest rates 3 more times, all the way from the current 4.25% to 5%[6]. The Bank of England, on the other hand, have indicated that they are nearing the end of the tightening cycle. According to Andrew Bailey, the Bank of England governor, they are in a ‘wait-and-see’ mode.

While UK inflation doesn’t seem to be budging yet, there are increasing signs that the economy is feeling the weight of higher interest rates. In March, business bankruptcies rose 16% compared to last year[7]. UK retail sales also fell more than expected as consumers started tightening their spending belts. Compared to February, the volume of retail sales fell 0.9% in March[8]. And it’s not just consumers and businesses that are feeling the strain. Property prices in central London dropped almost 5% in March and transaction volumes are down around 20% compared to last year[9].

If inflation doesn’t start coming down soon, the Bank of England will have little choice but to keep rising interest rates. There are clear signs that the economy is responding to higher interest rates and, in our view, it’s only a matter of time before inflation starts falling. Let's hope it’s sooner rather than later.

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3) Venture debt stepping in to fill a funding gap for European startups

Startups can raise money by selling a stake in the company, known as equity financing, or by borrowing money. Venture debt is a loan available to startups and can be used to complement equity financing to extend a company’s cash runway or to reduce the impact of equity dilution.

For fast growing businesses, the ability to fund growth without dilution is particularly attractive. But venture debt does carry a higher cost than traditional bank lending. Loans can carry interest rates of 10% or more as debt providers need to be compensated for assuming the risk of lending to a company that is most likely still unprofitable with little in the way of collateral[10].

We’ve written previously about the sharp decline in global VC equity funding in 2022 but venture debt funding in Europe is doing a lot better. Private tech companies in Europe took out €15.9bn of debt in 2021 and this almost doubled to €30.5bn in 2022[11]. While providers of equity financing are pulling back from the highs of 2021 and 2022, venture debt providers are stepping in to fill some of the gap.

Silicon Valley Bank was the biggest venture debt provider in Europe over the last 2 years. After its collapse there was a high level of uncertainty around the outlook for European venture debt. But as reported by Sifted, SVB UK, after being taken over by HSBC, still appears to be lending as usual. [12]. But SVB isn’t the only venture debt game in town. Late in 2022, London-based Claret Capital launched a £250m debt fund to invest in European technology and life science businesses [13]. And, more recently, Bootstrap Europe, a Swiss firm, closed their third venture debt fund. They raised more than €130mn and plan to invest mainly in sustainability startups.[14].

With many market participants expecting a high likelihood of a recession over the next year, startups burdened with large interest payments in a challenging market environment may face some challenges. But, without such an active equity financing market, there are fewer choices to fund growth for those startups with strong prospects and venture debt could be a strong beneficiary. This is an area to keep a close eye on.

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