Six Exciting Innovative Trends and How to Access Them
At Opto Investments, we genuinely think that private markets are an exciting place to put a client’s money to work. Private fund investors can access some of the more interesting (and financially rewarding) opportunities.
Differentiated exposure to innovators
Investing exclusively in the public markets can definitively limit exposure to innovative early-stage companies, which are generally not listed so early in their development. Adding private investments therefore gives you access to a much wider range of companies, and in a differentiated, direct, and more selective way:
- Differentiated, because private companies are not accessible via public markets and, arguably, the more innovative technologies are being originated by early-stage companies.
- Direct, because private funds put money directly into selected companies.
- Selective, because private funds invest in specific companies in which they have a high conviction. This selectivity is important in sectors where there are likely to be a few big sector winners but many more failures.
Venture capital (VC) in particular includes exposure to exciting new trends at a time when there is still significant growth potential. Put very simply, the earlier you invest in a company, the greater the potential upside. Even just one or two great investments – which can produce return multiples in the tens or even hundreds – in a venture fund could more than compensate for the greater number of investments that may not be as successful.
Compelling offerings for your clients
Investing in trends with long-term growth potential can be a highly lucrative approach for investors willing to tolerate some extra risk and assume some illiquidity. For advisors, offering clients the ability to invest in an exciting secular trend – one potentially aligned with their values and worldview, rather than just a broad asset class – can make for a more compelling proposal.
Below we list six interesting areas of innovation. We think investing smartly in these trends could deliver strong returns over the coming decade and beyond for those bold enough to take the plunge now.
Strong performance is obviously good for your clients, and by extension good for your practice too.
Six investable long-term trends
- The spread of artificial intelligence & machine learning
- SaaS becomes truly ubiquitous
- BioTech innovation accelerates
- The energy transition
- The modernization of defense procurement
- The reimagining of logistics
1. The spread of artificial intelligence & machine learning (AI & ML)
OpenAI’s ChatGPT is just the tip of an artificial intelligence (AI) iceberg, with the spread of AI and its cousin machine learning (ML) likely to be an era-defining development over the coming decades.
Technologies such as Large Language Models (LLMs) and the linked development of generative AI are going to impact numerous industries, including in the shorter term areas like enterprise search and various creative industries. But the sheer number of sectors that could benefit from the various AI and ML technologies offers enormous upside potential. You are unlikely to find a sector in which improved productivity is not worth investing in.
The global AI market is predicted to expand 37.3% annually in the period to 2030. Getting even a small slice of that growth could be very lucrative, though we would add that, in a sector attracting such attention, it is important to not get caught up in the mania and remain strategic and selective.
2. SaaS becomes truly ubiquitous
There are already a lot of software-as-a-service (SaaS) success stories out there, simplifying and automating workflows in areas such as accounting, customer relationship management, organizational processes, and monitoring and surveillance, among others. This includes household names such as Microsoft, Adobe, Oracle, Salesforce, and Snowflake. But there is a lot of room for further growth.
Over the coming decade it is very easy to see high-growth “smart enterprise” SaaS companies expanding into hundreds of verticals. They are also well positioned to seize a lot more of the economic value within these verticals as more of the economy moves onto the cloud: 55% of business still relying on traditionally managed on-premises systems.
The global SaaS market is projected to grow by 25.9% annually from 2022 to 2028 to reach a value of $720B.
3. BioTech innovation accelerates
Biotechnology is a fascinating and rapidly expanding industry in the US, benefiting from the confluence of a couple of major trends, namely:
- The success and rise of cell therapy as a treatment option
- The onshoring of manufacturing and research facilities due to trends putting pressure on international supply chains, exacerbated by the COVID pandemic
Innovations like the successful therapeutic use of CAR-T cells (specially engineered proteins that give T cells the new ability to target a specific antigen) and advances in personalized medicine clustered around gene sequencing, editing, and therapy have created huge momentum in the biotech sector.
There are also compelling biotech innovations emerging beyond therapeutics. These include firms solving engineering problems, applying machine learning, leveraging informatics, and finding creative ways to use tech to push biology into new areas, while helping to speed data processing and accelerate research iteration cycles.
In one of the wilder developments (pun intended) in the space, one firm is leveraging new DNA technologies to attempt to bring extinct animals back to life, such as the dodo and the woolly mammoth.
The global biotechnology market was estimated at just over $1T in 2021, and is expected to grow 13.9% annually from 2022 to 2030.
4. The energy transition
Elevated fossil fuel prices have obviously had wide-ranging impacts over the last year or so, but the big picture from an investment perspective is that they should accelerate the green energy transition. This episode has dramatically highlighted the importance of energy security, which is likely to boost public investment in energy infrastructure. This should generate opportunities for private investors over the coming decade and beyond.
The US Inflation Reduction Act (IRA), for example, allocates approximately $370B through measures including rebates, grants, and tax credits to support investment in energy security and climate change mitigation. BlackRock estimates that the IRA will help boost capital spending on energy supply infrastructure by upwards of $600B relative to the prior spending path by 2035, and in aggregate unlock more than $3.5T in incremental spending over the same period.
Innovations in areas such as renewables, clean fuels (including fusion technologies), carbon analytics and accounting, hydropower, and grid infrastructure could therefore drive rapid value creation over the coming decade.
At the same time, the more traditional oil and gas sectors are highly profitable and remain a good potential source of income, yet with valuations close to historical lows.
5. The modernization of defense procurement
The US defense acquisition framework has long been hampered by special interests and anti-competitive procurement methods. But there are positive signs of change to procurement policy, including a renewed focus on working with entrepreneurs and innovators on developing technology critical to US national security.
The full-year 2023 Department of Defense budget is $773B, including more than $130B just for research and development. Areas that are really interesting to us right now and could grab a share of this investment over the coming decade include:
- Software-defined directed energy
- Electronic warfare and cybersecurity
- Logistics and supply-chain resiliency
- Autonomous systems
6. The reimagining of logistics
The application of AI and ML (discussed above) could have a dramatic impact on the logistics industry, which as a sector benefits from tailwinds from the rise of e-commerce, among other factors. Ongoing onshoring of manufacturing spurred by geopolitical frictions and anti-globalization trends, and exacerbated by the COVID pandemic, are spurring the modernization of and investment in domestic supply chains.
Logistics has long been dominated by less technologically sophisticated players, with high barriers to entry. But these new external challenges, as well as those created by innovation, are forcing them to adapt and adopt new solutions. Furthermore, the adoption is somewhat exponential: as more technology is used to collect and track data in real-time, other technologies become necessary to coordinate and work with that data to create even more efficiencies.
Software is helping drive improvements in areas such as risk management, visibility, and resilience.
Investing in these trends
While these exciting trends are likely to create a lot of winners over the long term, there will be a significant number of companies that will fail to thrive – be that because of the wrong leadership or just poor product-market fit. However, the best time to access a mega-trend is before it goes mainstream, so investing in venture funds to gain the most direct access may be a risk worth taking.
However, there are many ways to gain exposure. For example, infrastructure funds could provide access to several of the sectors we identified above, including:
- BioTech, via the facilities and infrastructure required to manufacture or develop emerging solutions
- AI & ML, via hardware infrastructure and specialist facilities such as high-performance computing data centers
- The energy transition, via investments in sustainable energy, decarbonization, and other clean energy strategies
- Logistics, via warehousing and supply-chain facilities more broadly
Certain private credit, real estate, and private equity investments could also offer some access to the trends we’ve discussed. Advisors should carefully explore each available approach to calibrate investments to the risk and return needs of your clients.
Not all funds are created equal
While a rising tide may lift all boats, it is vitally important to carefully select the right private funds operating in these themes, rather than just investing in those that are easily and widely available. Though those funds could also perform well, advisors should not have to settle for anything less than the most in-demand funds, which are frequently oversubscribed and don’t typically need to work with brokers.
This may necessitate finding a partner, given the intense competition to access certain funds.
We may be able to help. Opto’s strong, established network and ability to make investments up front may allow us to access some of the more coveted managers in the industry, and we’d love to talk to you about building custom exposure to these trends – or indeed any other trends you find compelling – to help your clients and your practice achieve your goals.
Opto Investments is a technology-enabled end-to-end solution designed to help RIAs craft tailored private market investment portfolios comprising funds from coveted managers in private credit, private equity, real estate, venture capital, and infrastructure.
To learn more, attend the webinar we are joint-hosting with Riskalyze to discuss how to tap into exciting private investment trends to attract and retain clients. Register here.
To start a conversation with Opto about building a custom private market fund for your clients, please visit our website.
Matthew Malone is Head of Investment Management at Opto Investments.