Funds management and investment in the modular economy

Last week’s 25th anniversary issue of BRW focused on the future 25 years forward, so not surprisingly included interviews with both Richard Watson, Chief Futurist at Future Exploration Network, and myself. The extensive interview with Richard was a fun and broad-ranging discussion on the future of technology, which unfortunately is not available online. I was interviewed for an article on the future of superannuation (the British/ Australian term for retirement plans). One of the points I made was about living longer healthy lives, the shift to flexible working structures, the blurring of the age of retirement, and the need for legislative structures to adapt to these changes. What I think was the more interesting issue I raised was about how investors will need to seek new investment vehicles.

“The fact is that listed companies represent quite a small proportion of the economy. We will need increasingly to look outside the stockmarket for investment opportunities,” Dawson says. “Private equity and venture capital are going to become far larger. Even today, private equity funds are pushing valuations up.”

“There will also be a growth in companies that are less capital intensive. They will need less money and so will not be so attractive to investors. Over the net 25 years we will have more services companies and flexible, loosely arranged organisations that do not need investment funds,” Dawson says. “Whole new layers of investment companies will build up around smaller sectors, such as micro-caps. In 25 years, althought it will have taken a long time, there will be pretty large segments of portfolios going into sectors that are currently classified broadly as alternatives.”

There is no question that we are shifting to an increasingly modular economy. Technologies such as web services and Web 2.0 are creating an intensely modular online and application environment, in which elements are combined at will. These technologies, together with the modularization of business processes, and easy flow and integration of processes across organizational and national boundaries, are creating a truly modular economy. The ultimate unit of the modular economy is the individual. Certainly there will be many reasons for organizations to exist in the future, not least in those industries that require significant capital. However as the economy inexorably shifts to the intangible, an increasing proportion of value will be created by aggregations of individuals or small organizations providing knowledge-based services, that mesh with other organizations large and small in economic networks. In many cases they will require little capital, and thus there will be no or little need for investors. Stockmarkets can only function effectively with large, highly capitalized companies that have highly liquid shares. Already the proportion of the economy that investors can reach is limited to fairly large companies, at most one third of the economy. It is likely that an increasing proportion of the economy will fall outside the listed sector, and thus be not directly available to investors. Much is made of private equity companies, but these focus on an extremely small subclass of opportunities. Venture capital also works within quite defined parameters, though it plays a very important role. There is a massive potential market in providing capital and services to very small participants in the modular economy, while also providing opportunities for investors to participate in this burgeoning sector. Mechanisms such as sharing in defined ways in future cash-flows of individuals or very small organizations could prove to be viable for both entrepreneurs and investors. While it is hardly a representative situation, Tom Cruise’s recent deal to fund his production company’s overheads suggests the kind of model that could be implemented on a smaller scale.