This quarter was another glimpse into Big Tech's balancing act of maintaining the cost discipline vs investing in AI.

The largest tech companies have continued to get fitter and have optimised spend to prioritise cash flows. Investors love to see this. Revenue growth is picking up again from the lows of 2022.

They are leaner and are generating higher cash flows in the short term which investors are putting a much higher value on. As they ramp up AI related spending again, the balancing act might not last for long.

But this is what it takes to create trillions in shareholder value.

I looked at the top 500 deals (financing, M&A, investments, buyouts) in football since 2012, involving clubs, media and other football related businesses. Around 130 of those included clubs and media assets.

Some interesting trends and stats in the football business landscape in my latest.

Came across an interesting piece on labour productivity in developed western countries this week. (by Joachim Klement)

If you look at the growth in labour productivity, the U.S, unsurprisingly, has trounced the rest in the sample by some distance since 2000. The UK has had a declining labour productivity since the GFC, much worse than Southern Europe.

This is where the "work-ethic", "lazy labour", "culture" related arguments start pouring in during a conversation around the topic.

However, if you strip out population growth and capital investments, and only look at total factor productivity (TFP), another picture starts to emerge. The U.S, UK and Germany have seen some growth in TFP since 2000, France is almost flat, whereas Spain and Italy have seen a declining TFP since 2000, which has only picked up slightly since 2015.

Finally, when you stack up all these components to look at the contribution to GDP growth for these countries:

The U.S has had a +ve contribution from the three components (TFP, population growth/labour composition and capital investments) in all periods analysed, whereas the UK has barely seen any capital related GDP growth (which are driven govt. and private investments in the country) since 2000. Southern Europe has a TFP problem which it has failed to solve.

Looking at GDP growth through this lens makes things interesting, especially in the wake of our changing relationship with work and the emergence of TFP impacting tech like AI/Gen AI.

The current market environment with higher rates and tight credit conditions is likely to keep dealmaking subdued for some time. Consequently, one could expect PE returns to trend much lower from their highs in 2020-21.

However, PE vintages from down years like these have a great track record of outperforming the markets, almost ageing like fine wine.

I tried following this train of thought this week, looking at other down year vintages and what might be driving this outperformance during tougher economic environments.

A lot of talk and murmurs around the debt refis coming up for PE backed companies, touting it as something that could potentially stop the music in this space for a while.

Default rates are picking up all over as rates stay higher for longer.

Acc. to Pitchbook, default rate of the Morningstar LSTA US Leveraged Loan Index rose to 1.60% at the end of May, a two-year high.

Base rates going from 0-5% in less than 12 months have pushed up floating rate debt costs to 10-12% (could be higher for smaller MM/LMM companies).

Acc. to Lincoln International, debt coverage ratios for PE backed companies are already declining (45% of them in their database are showing worrying signs).

It started with base rates, but is spreading to spreads over base rates as well, which are ticking higher slowly.

One could expect syndicated loans market to slow down even further as the loans get degraded to junk/closer to junk categories. Banks will be less willing to lend to deals/companies with higher leverage levels.

Some are using it as a proxy for the impending troubles in PE and the private credit space, which has been on a tear recently.

I could take the other side, saying that larger private credit teams could gain even higher share in private debt. The loans are held by a much smaller group and are likely to work out a solution during duress.

There is an uptick in realised losses in direct lending as well (0.25%, highest in two years). Credit teams with restructuring capabilities might be able to increasingly gain share here. One could expect experienced distressed investors to do well too.

On the PE sponsor side, GPs that have focused on having a cleaner capital structure, a management that can steer the ship well, and a healthy balance sheet might be able to navigate this best. Their portcos would gain share against competition in this type of environment.

A couple of interesting reads on PE this weekend. Two different sets of opinions from the opposite sides of the spectrum on the never ending debate around PE valuations and how they drive returns.

Even though they were aiming to reach opposing conclusions, they had an overarching theme that underlies PE's new reality.

A focused operational execution and a strategy aligned to growth/cost reduction plans are key to drive revenue growth and margin expansion for your businesses - the real value drivers for PE returns.

In tech cycles of the past, the demand side of the equation has captured almost all the value. The supply side mattered less as the incremental cost to produce and distribute decreased massively as the cycle moved forward.

In this new AI cycle, there seems to be little room to capture value if you’re anywhere above the infrastructure layer (the supply side).

The AI hardware supply is too constrained, the incremental costs to produce are enormous and suppliers are extremely well positioned to capture most of the value.

The other side of the AI equation is turning out to be more important than we have seen previously.

Fresh off the press on The Atomic Investor.. 👇

After $NVDA 's mammoth stock price jump, companies are even likelier to use AI to improve the perception of their prospects. This is just the beginning. All in on the AI hype.

Fewer companies are citing inflation and recession on earnings calls this quarter in the U.S.

The number of companies discussing inflation is also down meaningfully.

Given that the consumer has been fairly strong, margins are relatively stable and earnings have not fared as bad as expected, its been a strong start to the year in developed markets.

After a decade of growth and rampant success, some say big tech had got too big.

Shareholders, now preferring profitability versus growth, baulked last year when they saw how much money these companies had been spending on projects which were unlikely to be profitable in the short term.

Big tech faces the biggest test in a long while: if they can keep growing at that scale without growing their cost base considerably and can still innovate profitably.

They've barely passed for now, but the second test is already around the corner and could be even bigger than the first one.