Our global teams

What’s The Deal? | Are there more optimistic times ahead for Europe? 

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Louise Bennetts: Welcome to this edition of J.P. Morgan's What's The Deal podcast. I am Louise Bennetts, the head of J.P. Morgan's board advisory team in EMEA and the host of today's podcast. I'm joined today by Karen Ward, JPMorgan's Chief Market Strategist for Asset & Wealth Management for EMEA.  Karen was previously the Chair of the UK's Council of Economic Advisers and currently serves on the UK Chancellor's Economic Advisory Council. Thank you so much for joining us, Karen, and welcome.

Karen Ward: Thank you. Thanks for having me.

Louise: Today, we will be discussing a topic of increasing focus, at least on this side of the Atlantic, which is the relative economic performance or underperformance of Europe in regards to the United States. We will also be discussing the impact of geopolitics, structural impediments to economic growth, inflation, and other issues facing the region. So Karen, before the pandemic, Europe had had a difficult decade. Between 2010 and 2019, we saw that the US grew at 2.4%, but the Eurozone managed just 1.4, and the region's asset performance was similarly underwhelming. In your opinion, what are the reasons for this underperformance?

Karen: Yes, absolutely. I think it's fair to say that Europe had a difficult decade. I'd argue that it's largely that Europe felt the aftermath of the global financial crisis both more acutely and for a much longer period. There's a few reasons for that. One is that Europe as a region is much more heavily dependent on its banking sector. It doesn't use capital markets in quite the way the US does. So following the financial crisis, when the commercial banks were recoiling, the effect of that on the private sector lasted many years and was particularly acute. But then, of course, in Europe, we rolled from the financial crisis a couple of years later into the sovereign crisis. So the bailout, the support for the financial system impacted public sector debt, government sector debt concerns emerged and there were concerns about the region breaking up in fact. And therefore many of the sovereigns in the region, particularly in the south, were forced to embark on some pretty extraordinary austerity programs in order to reconvince the bond markets to lend to them. And I really wouldn't underestimate the role that that austerity played in weak growth, low inflation, because the public sector accounts for something between 20% and 25% of employment in many of these economies. And so the public sector on a pay freeze for 10 years, employment contracting, governments not investing in the economy, I think that was a pretty crucial part of the story. So in essence, we just had the financial crisis took many more years to heal.

Louise: And we also can see that the region has been dealing with a war on its doorstep after the Russian invasion of Ukraine. How is this affecting the region economically, and looking further ahead we've seen the tragic events of this weekend, how will that impact the region more broadly?

Karen: Well, the first channel of impact is via the energy markets. Europe was incredibly dependent on Russia for its energy. 40% of its gas came from Russia direct via pipelines. So the invasion of Russia and Ukraine and that severing of relationships with Russia was dramatic and extreme. So energy prices rose significantly. There were concerns that actually Europe would literally run out of gas. At one point, the expectation was that in this year Germany would contract by 5%. Running out of gas, that was the big concern. Now, in fact, what's happened is that Europe has coped, I would say, remarkably well. A response by governments to put together new gas storage tanks, liquefied natural gas was bought in largely from America to replace that Russian pipeline gas and actually therefore we got through the last winter much better than I think most analysts would've expected. There was no absolute rationing. We're obviously heading back into winter now, and those concerns about how we will cope without Russian energy supply are very much still there. But there's been a degree of luck in that the weather has been mild, both through the course of last winter and over the course of the summer, those gas storage tankers are full. Therefore, assuming the winter isn't particularly cold, which of course forecasting the weather is even harder than forecasting economies, then Europe looks well placed. Now that being said, that means we will not run out of gas, but the structural problem is that we are living with higher gas prices than we had in the past. So if we go back to pre-Russia's invasion of Ukraine, both the US and Europe had similar gas prices. They're up about two-thirds in the US, they're up seven times in Europe. Our companies are just coping with this materially higher cost. The one silver lining is that the region has been really galvanized to come together in the face of Russian aggression, and some programs have emerged at the multilateral, at the institutional level to cope. Particularly those are things like the EU Recovery Fund, and this is promoting many of those green projects, those infrastructure projects and these build on many of the pandemic-related projects in order at the government level to support activity. This is actually really quite important, Louise, because I said to you that one of the problems we had last decade was investors really questioning whether the Euro as a construct could survive because there wasn't this pact at the government level, a fiscal pact. But Almost the troubles, the trauma that we have been through in the last couple of years have forced policymakers to come together, almost begin that creation of a fiscal union. So I would say at the institutional, at the political level, in some ways, the Eurozone is stronger than it has been certainly when we look back at how we were in the solvent crisis.

Louise: So then perhaps let's look at the one country outside of the Eurozone, the UK, also now outside of the EU. Do you think that the UK has been a particular outlier in Europe in terms of growth or inflation?

Karen: Many of the themes I would say are the same. We have like the continent, although much of our gas is piped from Norway, we've still had to compete in global markets. We have had this energy shock, this headline inflation shock, which has really damaged both household and business spending. And that's working its way through the system like it is on much of the continent. But as you say, the UK is also dealing with its Brexit situation. I would say where the UK perhaps stands out slightly in terms of the current concerns about weak growth and elevated inflation is that our labor market does seem to be struggling to recover from both the pandemic and our Brexit relationship. Because our participation, the number of people here and looking for work does seem to be structurally damaged. That is then promoting wage growth, although wage growth sounds like a good thing, obviously when we're worried about inflation, it's not such a good thing. So the Bank of England, I think, are treading a very fine line. They have a difficult balancing act to play in terms of not slowing the economy too much when the economy is already struggling in the face of high energy prices. But also being cognizant of this deep-rooted underlying inflationary pressure that's coming from some real structural problems in the labor market.

Louise: So then let me ask you on that point, Karen, should interest rates have been hiked sooner?Karen: I think all the central banks failed to see, and I put the Fed in this bucket as well, was that a cost shock would actually then become more embedded in the economy because the labor markets were so strong. We've been through a decade where workers never really asked for more pay, and they became a bit complacent, I think, about our ability domestically to generate inflation. Whereas actually what happened is workers were hit with a 10% rise in their cost of living and they asked their boss for more money. And therefore the what economists call second round effects of inflation, they were underestimated. I would say that is true here in Europe. It is also true in the US, and for that reason, that sort of degree of complacency about the second round effects, yes, the lift off from zero interest rates, the exit of quantitative easing, all of that could have been earlier. They've obviously caught up significantly now. I do think we are getting to the point where the central banks have probably done enough. We will see inflation moderate here in Europe and catch up with the downtrend that we've already seen in inflation in the US. Because I think it's worth remembering that here in Europe the energy base effects they are coming through much later. So the US has had a beneficial tailwind for inflation that we will get in the coming months here in Europe.

Louise: So on the topic of the United States, you've been a bit skeptical about what you've described as the Goldilocks narrative when it comes to the US economy. Explain what you mean by that and also how likely you think it is that Europe, the US and the UK will avoid a recession going forward.

Karen: The market narrative swung so incredibly quickly. This time last year, the market narrative was, "Oh, it's the 1970s again. We're going to need really deep recessions in the US and in Europe in order to get rid of inflation." Then by February that narrative had switched towards, "Oh, inflation's going to go away all of its own accord. We don't need any weakness in activity. The central banks are going to be able to bring interest rates down to support growth." So what I mean by a skepticism about the Goldilocks narrative is this idea that growth will remain resilient even in the face of 500 basis points of interest rate hikes and that resilience will not result in lingering inflation. So usually, if we look back over multiple decades, when the central banks have slammed on the brakes, the result has been a recession. That recession is what gets rid of the inflationary pressure. That's the normal cycle. And I just think that's still the world we're in. They have raised rates, growth was slow. I still think a recession is more likely than not in the US. I think we are further through it, actually, I would say, in Europe. Our activity is weaker than in the US. Our consumer hasn't stayed as strong as has happened in the US, and, therefore, I'm skeptical on this idea that everything will soft land and we are at the beginning of a cycle and all will be well. I think we should still brace ourselves for some weakness ahead.

Louise: And you've also expressed concerns about the increase in oil prices with OPEC’s recent actions. Is this still a concern for you going forward and what do you think the likely impact of that is?

Karen: Yes, absolutely. There's the direct channel by which higher oil prices eat into consumer spending power and how that slows activity. But I also think it's just a strategic challenge for the central banks. They've all had inflation above their 2% targets for well over two years now. And it's fine for them to say, "Look, OK inflation's above target, but it's coming down, it's under control." But of course rising oil prices sends headlight and inflation back up again. We've already seen it start to pick back up again in the US. I think for the central banks, that's a much harder narrative for them to claim victory when, actually, even if core inflation is suffering, headline inflation is picking back up. So I think rising oil prices, any rising costs just adds another ripple to the inflation problem that we are still working through and certainly increases risks, as I say, that actually it's not such a soft landing.

Louise:  And in terms of the structural impediments to economic growth, I think there are some quite big distinctions between the Europe and the US as you touched on in in the first response. Can you elaborate a little bit about more on what those are and how we are likely to see them addressed or not as the case may be?

Karen: Yes. Partly they are the deep-rooted building blocks of how our economies grow, which is that our economy grows either by having more people or those people are more productive. And Europe's demographics aren't as strong as the US. The US still has a marginally increasing working population. Europe's population is on aggregate going to decline over the next 20 or so years in the region of 10 to 15% on current forecasts. So we would have to be even more productive in order to keep up. Now, that could happen. But I think the energy transition will be at least in the short-term relatively difficult. That's another impairment to structural growth. I think the other thing that Europe is going to need to manage is its geographic orientation. It had done a very good job of reorientating its activity towards China as a growth engine. But China's emergence from the pandemic is not as strong as anyone anticipated. Much of that export demand heading towards China just doesn't look like it's going to be coming back as strongly. So I think it's partly our capacity to grow, but also where our end consumer is, where our end demand is. But I don't think we should be too pessimistic because, as I say, I do think one of the big problems in Europe, which was really exposed in the sovereign crisis, was this idea that we had created a monetary union without a fiscal union. I think what's happened in the last couple of years in the face of this adversity, from the pandemic and from Russia and wars on our doorstep, is that actually the institutional architecture of the Eurozone has really improved. And therefore, as the recovery fund gets spent, that will start to support growth in the region. I think there are structural concerns that we've known about for a very long time, but actually incrementally to me, we're just putting together our long-term capital market assumptions which are our projections for the next 10 to 15 years. And I have actually been revising up my forecasts for the Eurozone and for the UK just because I think actually some of those foundations are better than they were a few years ago.

Louise: On that optimistic note, we will end today's podcast. Thank you very much to all of our listeners.

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What’s The Deal? | View from the board: Strategies for effective governance

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Rebecca Thornton: Hi, I'm Rebecca Thornton, and I'm the head of Director Advisory Services for J.P. Morgan. I'm today's host of this week's What's the Deal? podcast and looking forward to interviewing my friend and partner in governance, Lisa Wardell. Lisa is the former CEO and executive chair of Adtalem. She's on the board of American Express and remains a director of Adtalem. From my count, you've been on something like six public boards and maybe 10 or more private boards. I couldn't be happier to be spending this afternoon with you, talking about some of the themes we're seeing in governance, and learning a little bit more about your amazing career, so thank you so much for being with us.

Lisa Wardell: Great to be here. I can't wait to dig in. 

Rebecca Thornton: Awesome. Well, as I teased in that very brief bio, you've had an extraordinary career in diversified industries, including public companies, including private equity, and obviously seen a lot in terms of governance. Maybe tell us a little bit about your career path and what got you to serve on boards.

Lisa Wardell: Yeah, sure. So, I have been in a bunch of different industries partly because I started my career at Accenture as a strategy consultant in media and telecom. But that really led me to my role as chief operating officer and EVP at RLJ Companies, which was a really diversified portfolio of public companies that was started by Bob Johnson. Sold BET and then had lots of different ideas about how to enter industries and really drive diversity within those industries. We did everything from starting a private equity fund in partnership with the Carlyle Group, bought a community bank, bought an NBA team, started a film studio. And so I've seen a lot of different areas of industry. While I was in that role, I joined the board of a company called DeVry Education Group, which is now Adtalem. The interesting thing about that board opportunity at the time is that they were really looking for a board member who had M&A experience and also Washington, D.C. regulatory experience. I actually lived in Washington but didn't have very much regulatory experience.

Rebecca Thornton: (laughs)

Lisa Wardell: But had done a number of deals in my role at RLJ, and so got onto that board and then served on that board for eight years before I became CEO. And as you know, Rebecca, once you get on a public board you tend to get other opportunities to do so-and-so. I've had the pleasure of sitting on several other boards, public and private since that time.

Rebecca Thornton: I'd love to hear a little bit more about how you ascended from the director's seat at DeVry, now Adtalem, to the CEO position and the executive chair role.

Lisa Wardell: Yes, it is an interesting one. I was on the board for four years and then became the audit chair, came up through the audit committee, which I highly recommend as a great place to start on a public board, especially a first public board. Chaired the audit committee for about four years. At that time, the full board really knew we needed a CEO change. The CEO had been in role for a decade at that point, and there were lots of things happening, and changes in the industry and in the company. And my name came up at a desktop review that an executive search firm had completed, and the chair of the board said, "Hey, you can either help us with the process as the audit chair or you could be a part of the process." And so I decided to do that. The reason I decided to do that turned out to be a false one. I worked for really a family office on steroids.

Rebecca Thornton: Hmm.

Lisa Wardell: Just lots of different businesses, and I figured nothing could be harder than that which turned out to be far from the truth. The public company CEO role is a very demanding one, but it was a great move for me. I also, as the audit chair, thought, "Oh, I know everything about this company," and that also turned out to be a bit false because obviously as a board director, you just have a very different lens into a company, and so it was a great opportunity for me to see from the management side and then also have the ability and the support of the board, who had formerly been my peers-

Rebecca Thornton: Mm-hmm.

Lisa Wardell: …to make the changes I needed to streamline the portfolio, rebrand the company, and move the stock in the right direction.

Rebecca Thornton: So a few years in the seat at Adtalem as CEO, what made you decide you were ready for an external board, and how did it inform how you showed up as a CEO at Adtalem?

Lisa Wardell: So actually, it wasn't that long, I think about 15 months in the seat. Obviously, you need that first six to nine months to really assess from a talent to operations to strategy perspective. I was a relatively new CEO, but it was really important to me to seek an external board, because having that perspective in the boardroom it completely changes once you become the CEO. And I needed to continue to have that perspective so that I'd be able to really see around corners in my CEO role. The first call that I got that I thought, "This makes a lot of sense," was Lowe's Home Improvement. And I interviewed for that board because at the time, they also were, unbeknownst to me at the time, were thinking of making a CEO change, and D.E. Shaw was coming in to add board members to the board, and they wanted individuals who had private equity experience-

Rebecca Thornton: Mm-hmm.

Lisa Wardell: ...and really understood their thoughts and needs as investors and stakeholder. So, I joined that board in 2018. And this was also a learning, the second board meeting, the board made the decision to make a change in CEO, and I found myself on the CEO search committee.

Rebecca Thornton: (laughs)

Lisa Wardell: Which took a lot of time, but was obviously well worth that time. That was a very interesting and helpful process for me, because it helped me learn more about what boards and directors want in the CEO and the CEO interactions with the board, and so that was just a really good learning for me.

Rebecca Thornton: Yeah. And CEO succession is probably one of the most important responsibilities that a board will have. Maybe you can pivot to talk about board succession planning and maybe some of the best practices that you've seen in terms of how boards really thoughtfully think about where the ball's going, is one perspective to have, another is the apple-to-apple replacement of a departing director. So, question one is, best practice, and two, are there any recent themes or changes that you've seen in terms of how boards are thinking about succession planning?

Lisa Wardell: Yes, and I would put those two together, because there really have been some step changes that I've seen in my experience across the boards I've served on, including American Express, where I serve now. In terms of just the thoughtful comprehensive process of board succession planning, beyond do we have enough members with the right skillsets. And what I mean by that is I'm seeing more companies, plan succession from a committee perspective, and that ties into diversity, equity and inclusion on the board, because when you're thinking about a compensation committee chair or an audit committee chair, or a risk committee chair, you want people who can come through those committees and make sure that you've got a plan for when that chair moves on. The other piece of the succession planning for committees that I've seen is making chair changes be normalized within the board process. Because call it five, 10 years ago, it was “there's something wrong, so we need to change the audit chair.” And as we look at boards today, you're seeing much more robust change of chair, change of vice chair a three-year cycle, a two-year cycle. In the case of a lead independent or a chair, maybe a five to seven year cycle, but it's something that people understand they're going to come in and out of those roles, because that gives you the leadership across the board, and you're much more prepared if someone does need to leave the board suddenly or if you have a skillset that's missing and you need to refresh the board that way.

Rebecca Thornton: Are there any trends you're seeing in terms of recruitments either that you've overseen in committees of either of your boards or just thematically of things you're hearing from peers that are in the boardroom?

Lisa Wardell: So, we know that diversity is important in board searches today. I will use my experience at Adtalem. I wanted to diversify that board, particularly from a gender perspective, because our student base was over 50% female. Our board did not represent our students/customer in that sense. In order to do that, I added female board members who were very senior executives but did not have public board experience. And they are excellent board members. Have been and continue to be. But what happens with that and perhaps other diversity bringing onto the board, we know we've got to expand the number of people that are in the board service realm. You need to make sure that you're balancing, and boards are really talking about balancing the experience on other public boards, as you think about activism, or you think about capital allocation, debates with investors. They want to have board members that have done that other places and understand what that looks like and have best practices, and you need to be able to balance that with members where this is their first public board. I think a second trend is there are certain subjects where, I would say five years ago, it was okay to have one, maybe two people on the board. I'll take technology as an example. Unless you were quote, "A technology company," you could have a technology specialist or expert on the board. I think boards are realizing now, yes, that's great, but you really need to have education for the board and experts coming in, so the entire board understands how technology impacts the industry and the business. Every board member needs to have a level of sophistication in and around those things because of how important they are to the evolution of the business and the industry. So, I would say those are two of the biggest trends that I'm seeing.

Rebecca Thornton: Going back to your selection of DeVry Adtalem, and then later Lowe's as your first couple of boards, you mentioned some of the challenges of coming into the boardroom. I’ve heard of buddy systems and partnering. Certainly, sponsorship and mentorship from the board chair. Best and worst practices of things that you've seen that have set you up to be the really successful and sought after director you are today?

Lisa Wardell: So, I think the mentor buddy system is a great best practice. I actually have not seen it work poorly. Obviously, it's about personalities and who you-

Rebecca Thornton: Sure.

Lisa Wardell: ...match people up with, but I've only seen positive results from that. I've been a mentor, as well as had somebody bring me along on a board, and it's really for every board member. It's not just for a first-time public board member, because boards have their own DNA. It's like a very complex, complicated family of relationships, and then there's a relationship of the board with management and the CEO, who is also a board member. And so, I see that as a real best practice.

Rebecca Thornton: Do your boards all do annual assessments? How is feedback distributed across the board?

Lisa Wardell: Yes. So, almost all boards that I know of, and certainly all public boards do annual assessments. I think best practices are one,  evaluations that not only have a place for, but encourage the written and anecdotal comments, because I know for me as a CEO, yes, I'm gonna look at, is it one through five, but having those comments about how I perform and what I do well and where they'd like to see improvement was just so valuable to me, and very valuable for me as a director. The second is making sure that those evaluations are anonymous so that people really can give feedback to their peers, 'cause again, it's a very complex relationship. And so, you don't want to put directors in a position where they can't give valuable feedback in a way that they feel is confidential. And then the third piece is how is that used? Our board chair has an individual conversation with everyone about their top three best responses, the top three opportunities and challenges that they have and directors are held accountable for that, the way that management members would be in terms of the next year moving forward. 

Rebecca Thornton: And to the point of to account, is actually the most important.

Lisa Wardell: That's right.

Rebecca Thornton: Because you can do assessments that go nowhere, but it, I think especially for first time directors coming into the boardroom-

Lisa Wardell: Yes.

Rebecca Thornton: ...and I don't want to put you on the spot, but sometimes CEOs have a hard time letting go and being directors.

Lisa Wardell: Yes.

Rebecca Thornton: Are there any learnings you could share with our audience about the things that you particularly like about public boards and things you particularly like about private boards, or things that one could learn from the other?

Lisa Wardell: Yeah, absolutely. So let's start with public boards. The interesting thing about service, and it really is service on public boards, is that there's such a great distinction between management and you are not working for that board, but you are serving as a fiduciary for that management team. And the perspective that you get in terms of.. on a good board, we are here to help. Our job is to support that CEO, and by the way, help that CEO in robust succession planning. That is a normalcy and a normalization, not something that happens because somebody's doing something wrong. Just a perch that you don't often get to be in, where you get to see everything that's going on at a high level, and really focus on strategy as it relates to execution across a broad timeframe. Whereas in management and/or as the CEO, you've got to put out fires and go to long-term strategy, and it's a constant battle both ways. It's great to have people, and those would be your directors, who can really think about the art of the possible,-

Rebecca Thornton: Mm-hmm.

Lisa Wardell: ...as you think about strategic planning annually or every two years, et cetera. Private boards it's a little different. It's a bit more scrappy and board directors are just a bit more involved, so they're learning and meeting with people who are a couple of layers down in the organization. And really helping that CEO prepare for the next level of scale as well as customer innovation and product innovation that you wouldn't necessarily get to participate in on a public board as comprehensively as you would on a private board. So, I think there's benefits to both.

Rebecca Thornton: Yeah. And we're also seeing... I wonder if you see the same. Private companies are really taking a much more holistic, sophisticated professional view of governance. And I think some of the larger-scale private equity firms have led the charge in bringing in independent directors, making statements about their expectations of diversity within their boards. Which I think are wholly positive for private boards to start to look and act like public boards. And perhaps public boards can start to get a little bit more strategically focused to be leaner and a little bit more agile in the way that private boards are. 

Lisa Wardell: I absolutely agree with the strategically agile, a bit leaner, a bit less bureaucracy. But keeping the governance in public boards is no question.

Rebecca Thornton: Is there any other due diligence best practice, that you might offer... Private or public, for our listeners that are looking to join a public or private board?

Lisa Wardell: From a public board perspective, obviously you can get all of the information, which is great. But you really want to make sure that you have a conversation with the CEO that allows you to understand how that person operates. And then whether you have a good rapport to be able to get to know that person in a way that's going to be helpful to them and helpful to you. And really pushing them to say, "What does success look like for a board member that joins this board in this minute?" Because one of the things that I try to make people understand, is that board selection is not personal. It's all about what that board needs at that time. There are public boards that I just am not the right fit for right now. It has nothing to do with me, Lisa Wardell, as the person, and everything to do with my experience, my skill set, and what that company needs.

Rebecca Thornton: Is there any advice you'd give to aspiring directors, to other CEOs, who may be managing their own boards? I know that's a very broad question (laughs), so, so pick a theme. But I understand you've seen it from both sides and have a lot to offer on this topic.

Lisa Wardell: So for CEOs, I think the most important thing is to have a process not for a director, but a process for your board. And make sure that you're having conversations with your directors about their service and the time that they think they will be in service, et cetera. I'm being very vigilant about what do I need now, and what am I not getting? Sometimes it's not, because you're not asking the right things of the board, but sometimes it's because you need change. And then for aspiring board directors, what I would say is understand what your personal brand is, understand what you're bringing. Be very comfortable in talking about what you don't bring. That's perfectly fine, and you're gonna be respected for that. If it's a biotech company and you don't have biotech experience, everyone ought to know that. It's because they're looking for something different, and that's okay. And then, it's so difficult to do this. You just alluded to it, but I'm gonna say it again. Be picky. You need to make sure that you've got time to do that and that you have that capacity, even if you're joining what is a seemingly very stable company. Because that is the nature of public companies; change, risk, crises can happen at any moment. And a director's job is to support the CEO during those challenging times.

Rebecca Thornton: Well, Lisa, this has been a pleasure, as always. Thank you so much for sharing your wisdom and your experience with us. I really appreciate you doing this podcast with us. 

Lisa Wardell: Thank you for having me. This was lots of fun
 
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What’s The Deal? |  The power of data in private markets 

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Rebecca Thorton: Welcome to another episode of What's the Deal? I'm today's host, Rebecca Thorton. There's been a lot of activity happening in the venture capital market, and J.P. Morgan recently acquired a data company called Aumni. And that's what –we're here to discuss today. I'm delighted to welcome the CEO, Tony Lewis, and our colleague, Mike Elanjian, head of digital private markets for J.P. Morgan. Welcome.

Michael Elanjian: Thanks, Rebecca. Nice to be here.

Tony Lewis: Thanks for having us.

Rebecca Thorton: So Tony, let's start with you. It's safe to say that your career started off in a unique direction, as you were headed down the path of big law. Tell us how you came to co-found Aumni.

Tony Lewis: Well, I did work, for a number of years, in so-called big law. That was Latham & Watkins and then later, Wilson Sonsini, predominantly as an M&A and venture attorney. And a couple of themes emerged while working at each of those institutions, and the appetite for market data related to the investments that our clients were putting to work, continued to grow. And at the firm, you try your best to share information from attorney to attorney, but it's a real struggle. And so, you do your best as an associate, to think about those last five to 10 transactions you just did, to provide market data on any given financial, legal, economic term that our clients were looking to invest across. So, I knew that there was a strong desire for more market data. And also, I worked in venture capital for a while, and it was very clear within this venture institution, that we wanted, as a partnership, to make more data-driven decisions. There was this need in the ecosystem that we identified at Aumni, for accurate, structured data of the legal and economic rights underpinning investments in any private alternative asset. And that's exactly what we set out to build. And to date, Aumni has now analyzed about $3 trillion worth of company investments, and we have this wealth and data pool now, that we can provide these market analytics back to our venture clients, which include about 400 venture institutions today.

Rebecca Thorton: That's a great pivot for us to learn a little bit more about our other partner here. So, Mike, let's move to you. You've spent your time in banks, always working on the next innovative project. Tell us about how that brought you and Tony together.

Michael Elanjian: Yeah, thanks, Rebecca. I've spent my career really investing in building businesses, both externally in third party companies as well as building new initiatives at firms and really running innovation projects at banks. And as J.P. Morgan has been increasing our presence in venture over the last several years, one of the critical pain points that we constantly hear from our clients is just the lack of data in the private markets. And unlike the public sphere where there's an abundance of information available to investors and corporates to benchmark an industry or company, or even get broader market insights in trends, in the private markets, access to that sort of data is either impossible or incredibly difficult to access. So, in that context, we really prioritize trying to find a solution and a partner that could help us shine a light on what's happening in these markets, and that's really what led us to Aumni and Tony.

Rebecca Thorton: What was most compelling about their solution?

Michael Elanjian: The critical thing that we liked about the Aumni offering is that they provide portfolio analytics and solutions to both GPs and LPs, and as a result of that, they can piece together to really give you a sense of aggregate anonymous view of what's actually happening in their space. Because their database, which covers a huge portion of the venture ecosystem, is built on the core underlying legal agreements that underpin the transactions, they can give our clients a trustworthy and reliable view into private market activity, which aligns with how J.P. Morgan wants to do business.

Tony Lewis: To add to that, in Aumni fundraising journey our first price equity financing round, we received two term sheets with different valuations, except for the higher valuation deal had liquidation preference mechanics that paid the investors two times their money back. Whereas the lower valuation term sheet was the standard formulation in the market, which is a 1X, nonparticipating preferred. What that means in practice is that investor gets one times their money back before participating pro rata with the rest of the common stockholders. And so, for us founders, it was really challenging to make that decision with no data on hand, despite the fact that we were very experienced venture attorneys. And our thesis was that if we introduced deal structure early in the history of the company, we thought it was more likely that deal structure would continue to exist throughout the life cycle of our subsequent rounds of financing.

Rebecca Thorton: What do you mean by deal structure? 

Tony Lewis: By deal structure, what I'm talking about are legal levers that impact the financial outcome of all investors, and particularly common stockholders.

Rebecca Thorton: So how would Aumni help with that today?

Tony Lewis: Well, Aumni is compiling this master database to give insights into the legal economic rights, and in particular the concept of deal structure. So this is where the liquidation preference is going, for the most part, to the preferred shareholders and sometimes the most recent preferred shareholder, the latest money in. And if I would have had that data at the time, I think I could have convinced that investor to match that other valuation that the competing institution was offering us, and we ended up going with that investor regardless, at a lower valuation because we thought that they were best for the business. And I found optimizing for your vision the right team and best fit was better than optimizing for valuation. 

Rebecca Thorton: I love that example. And I think it really brings to life the power that data can give you as you make decisions in your business. So maybe we can double-click into the data a bit. We've had some pretty tenuous markets over the last 18 months. Earlier this year, Aumni put out a report on the private markets, that really delves into some of the insights that are possible with your dataset. We all understand it's been a difficult period for venture, but what data does Aumni have to quantify the shift and better understand how businesses are behaving?

Tony Lewis: Yeah, so everyone in our client base is also asking those same questions, "What are you seeing in the market? What's your database showing?" And I would say that we have near realtime performance metrics underlying the database, and that we're ingesting all of this investment data as they're basically being completed in the ecosystem. And so the analytics that we can drive for a client base in the ecosystem is very up to date. And so what we've seen in our database is that valuations really peaked around 4Q '21 or 1Q '22, and those valuations were up almost 100% year over year. I thought I would just share some data points between the peak and now, and what we're seeing in valuation, but also maybe some things that are more unique to Aumni in terms of deal structure. So, at peak, the post-money valuation for a series A company was $80 million. Compare that to the most recent quarter that we just got out of, it's 42 million. Series B, 265 million peak. This recent quarter, down to 115 million post-money. And if I aggregate C+ transactions, the median post-money valuation was $1 billion in Q1 '22, and that dropping all the way down to 398 million this prior quarter. And so, obviously there's been a big valuation reset, and what we're also seeing is an increase in deal structure and down rounds. With down rounds, for example, in Q1 2022, only .4% of the transactions that we ingested into our database had down round applications on the price, meaning that the post-money valuation of that most recent round of financing was lower than its prior round of financing. 

Rebecca Thorton: Based on your experience as a founder who raised $100 million, what challenges are you seeing and what would you counsel other founders who are raising capital in this current market?

Tony Lewis: I think now's a real challenging time for founders. What you have is evaluation peak approximately 18 months ago. It happened to be a time with a lot of deal volume. It also coincides with the median time between financing rounds, between C and A, A and B, and B and C happens to be approximately 18 months as well. And when raising that capital, I bet many companies were budgeting between 24 and 30 months of runway. And so they're right now at that decision time. Do we go to market and raise capital? They know valuations are down and some of them, the reset is 60, 70%. So, the questions that they're asking themselves are do I extend a runway by making further cuts to the team or just raising hiring? Do I do a bridge-round financing, not reset the valuation, but maybe take a valuation haircut and dilution related to that note financing and get enough money in the balance sheet that I think that I can weather the valuation reset? Or do I just do the priced round right now, reset the valuation as something that I can grow into overtime? In my experience, I tend to find that founders can be overly dilutive and sensitive to dilution generally speaking.

Rebecca Thorton:  And what does that mean exactly? 

Tony Lewis: Most important is having a great outcome and if you're performing well and your company's doing well, I find that investors are willing to rally around the founders and the common stockholders to increase pools and take care of those executives as the life cycle of the company gets more mature over time. And so I think that that's most important is to just go about realizing your vision and make sure you have the adequate capital to realize the milestones you're trying to prove before that next round of financing.

Rebecca Thorton: I think that's great advice for our founders that are listening. So, Mike, let's move to you. What's the end state here? How do you see this all coming together, and what's the benefit for the ecosystem?

Michael Elanjian: Yeah, I think what Aumni’s done a wonderful job of, and why we're excited about the acquisition is really providing more transparency and more portfolio analytics and performance reporting solutions to venture capital firms and general partners that invest in companies. I think the other piece that we really wanna do is to extend that to the fund market and so there's plenty of limited partners that are investing in new managers and emerging managers and so providing more transparency to the fund space as well and really aligning the interests across the capital stack between companies reporting up to GPs reporting up to LPs. So I think that remains a really big focus. But the overall end game for us is not just to provide portfolio analytics and reporting solutions and market insights and trends, but how do we pair that directly into a platform that we've been building called Capital Connect, which is really focused on helping companies better raise capital in the earlier markets from investors and helping emerging managers and ECs get better access to some of the institutional LPs to raise their next fund. And again, the more that we can provide market insights and trends to help investors do research, the more that we can help companies and funds, raising capital, get a better sense of what's happening in market standard, the more that we can make that process easier coupled with software and workflow tools along the way. Over time, where I think we see this going is leveraging that data to really provide liquidity solutions to the market to make sure that we have a healthy, vibrant market structure where there's issuance, data analytics, portfolio monitoring, and trading in the private markets. No different than what you see in the healthy public markets.

Rebecca Thorton: It sounds really exciting and I can understand why Aumni was just a valuable complement to what is being built with Capital Connect. I think that's a great place to wrap up. I know I've learned a lot. I wanna thank our colleagues, Tony and Mike, for their time and insights today and to thank our listeners. We hope you'll join us for next week's episode of What's the Deal? Mike, Tony, thanks again.

Michael Elanjian: Thanks for having us.

Tony Lewis: Thank you very much.

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