ALTERNATIVE MARKETS UPDATE mid october 2021

The collapse of Evergrande last month has brought substantial volatility in the market. However, since the beginning of October, markets seem to recover from their initial shock. This could change again in the coming weeks, as the official default of Evergrande lies ahead if nothing is undertaken. Whether anything will be done by the Chinese government is still unknown. This is of additional importance, as another developer, China Property Group defaulted on 15th October 2021 over $226m in notes and rating agencies have downgraded firms in the Chinese real estate market. The inactivity of the Chinese government may ultimately be a political move, as China tries to restructure its economy and in particular what sectors should be pushed. China may try to focus on the competition with its main competitor, the US, by focusing less on real estate and more on hard technology like artificial intelligence and biotech. The crackdown of tech companies in China may hint at the opposite, although most actions target software-based companies and not necessarily hard-tech companies. Regardless of the recent issues of China, at least from a Western perspective, China has done exceptionally well over the past 20 years as Figure 1 shows. China has increased its power massively with a contribution of more than 10% of the top 100 most valuable companies. Nevertheless, its main competitor, the US, also managed to increase its share by around 10%. Consequentially, Europe lost a huge part of its share from 2000 alongside with Japan, which is almost irrelevant at that point. The massive indebtedness of Evergrande with around $300bn also led to questions on the corporate debt level. Figure 2 shows a comparison of corporate debt expressed in percentages of GDP of different countries from 1991 to 2021. The continued high growth of China, in particular in the last ten years, had to be heavily financed by corporate debt to keep reaching annual growth rates that are similarly high than during 1990s and 2000s. Emerging markets had a similarly strong increase over the years but they did not start at such a high level as China. Other developed economies a relatively moderate increase over the observed period with some minor spikes in times of crises, such as 2000, 2008 and 2020. A second reason for the increased volatility in the market is certainly inflation and the associated concerns with it. In September 2021, the US CPI surged to a 13-year record high with 5.4%, above the 5.3% in August and the expectations for September. The index is very close to the peak of the financial crisis from 2008, while the Core CPI remained at 4% as expected. Yet, the index is still substantially higher than during the global financial crisis of 2008. The general expectations remain as before with potentially further increases until year-end and normalizing inflation rates in 2022. However, the uncertainty in those forecasts has declining compared to earlier in the year which adds instability to the market.

Figure 1: Top 100 Companies by Market Capitalization in Percent, Source: Eeagli & Barchart.com, October 2021

Figure 2: Corporate Debt of Companies in Percentages of GDP, Source: Eeagli, Federal Reserve of St. Louis, Economics Research Division, October 2021

---

​Figure 3: US Inflation Rates (US Consumer & US Core Consumer) from 1990 to September 2021, Source: Compound & YCharts, October 2021

*|MC_PREVIEW_TEXT|*

RESEARCH PERSPECTIVE VOL. 165 October 2021 Alternative Markets Update October 2021 The collapse of Evergrande last month has brought substantial volatility in the market. However, since the beginning of October, markets seem to recover from their initial shock. This could change again in the coming weeks, as the official default of Evergrande lies ahead if nothing is undertaken. Whether anything will be done by the Chinese government is still unknown. This is of additional importance, as another developer, China Property Group defaulted on 15th October 2021 over $226m in notes and rating agencies have downgraded firms in the Chinese real estate market. The inactivity of the Chinese government may ultimately be a political move, as China tries to restructure its economy and in particular what sectors should be pushed. China may try to focus on the competition with its main competitor, the US, by focusing less on real estate and more on hard technology like artificial intelligence and biotech. The crackdown of tech companies in China may hint at the opposite, although most actions target software-based companies and not necessarily hard-tech companies. Regardless of the recent issues of China, at least from a Western perspective, China has done exceptionally well over the past 20 years as Figure 1 shows. China has increased its power massively with a contribution of more than 10% of the top 100 most valuable companies. Nevertheless, its main competitor, the US, also managed to increase its share by around 10%. Consequentially, Europe lost a huge part of its share from 2000 alongside with Japan, which is almost irrelevant at that point. The massive indebtedness of Evergrande with around $300bn also led to questions on the corporate debt level. Figure 2 shows a comparison of corporate debt expressed in percentages of GDP of different countries from 1991 to 2021. The continued high growth of China, in particular in the last ten years, had to be heavily financed by corporate debt to keep reaching annual growth rates that are similarly high than during 1990s and 2000s. Emerging markets had a similarly strong increase over the years but they did not start at such a high level as China. Other developed economies a relatively moderate increase over the observed period with some minor spikes in times of crises, such as 2000, 2008 and 2020. A second reason for the increased volatility in the market is certainly inflation and the associated concerns with it. In September 2021, the US CPI surged to a 13-year record high with 5.4%, above the 5.3% in August and the expectations for September. The index is very close to the peak of the financial crisis from 2008, while the Core CPI remained at 4% as expected. Yet, the index is still substantially higher than during the global financial crisis of 2008. The general expectations remain as before with potentially further increases until year-end and normalizing inflation rates in 2022. However, the uncertainty in those forecasts has declining compared to earlier in the year which adds instability to the market. Figure 1: Top 100 Companies by Market Capitalization in Percent, Source: Eeagli & Barchart.com, October 2021 Figure 2: Corporate Debt of Companies in Percentages of GDP, Source: Eeagli, Federal Reserve of St. Louis, Economics Research Division, October 2021 Figure 3: US Inflation Rates (US Consumer & US Core Consumer) from 1990 to September 2021, Source: Compound & YCharts, October 2021 Regardless of the current market uncertainty, the equity market keeps doing well. This is evident from the very hot IPO market at the moment. Figure 4 shows the value in USD stemming from US IPOs over the last 25 years. 2020 has been record year by already – solidly outpacing the dot-com bubble years. However, 2021 is on pace to more than double the deal value compared to 2020.  The enormous surge in IPOs is not only a phenomenon of the US, as in the UK, 2021 also set a new record high with regards to IPO valuations. It is also unlikely that the current wave will stop very abruptly, except if there is a major event happening, as there are several indicators from the private equity market that the market is not slowing down. In 2021, private equity companies paid record premiums for public companies for example. In the US, the SEC is looking into letting ordinary investors invest into private equity which would certainly lead to another substantial inflow in the industry, which would push valuations even higher. In the UK, there is some pressure on doing exits in 2021, as by the end of the year, there may be new tax regulations. Figure 4: US IPO Issuance in Billion USD from 1997 to 2021 YTD, Source: Compound, WSJ, Dealogic, Renaissance Capital & SPAC Research, October 2021 Other notable movements happened in the cryptocurrency market. Since the beginning of October 2021, Bitcoin (BTC) gained massively in value after moving between $30k and $50k since May 2021. This surge comes shortly after El Salvador’s announcement of accepting BTC as legal tender and in particular closely ahead of the first BTC Futures ETF listing in the US. This will take place on 18th October 2021. BTC reached a value of almost $63k on Sunday, the 17th October 2021. BTC’s market cap is now again solidly over the $1tn mark with $1.15tn. This is the first time in months, when BTC outperformed other most other cryptocurrency assets, as only Binance Coin (BNB) and Polkadot (DOT) achieved a higher return over the past week from the top 20 cryptocurrencies. Ethereum (ETH) is also doing very well and moves around the $3,700 mark since BTC surged again. Despite BTC surpassing the $60k mark again, it is likely that it will fall below it again, as soon as the ETF launched, as investors are likely to take their profits – similarly as it was the case when El Salvador accepted BTC officially as legal tender. That the Bitcoin ETF by ProShares is based on futures and not backed by regular BTC does not cause much excitement. One reason is that the ETF will likely be trading in contango. Therefore, the ETF is largely attractive for sophisticated investors who can arbitrage the future price movements. Another notable event is the direct listing of the second crypto company after Coinbase (COIN). Bakkt (“BKKT”), a subsidiary of the Intercontinental Exchange, is going public on 18th October 2021. Bakkt is a cryptocurrency derivatives exchange and announced its direct listing in January 2021. It goes public through a SPAV – Bakkt merged with VPC Impact Acquisition Holdings for the purpose of the direct listing with an approximate deal value of $2.1bn. Figure 5: Bitcoin Price from October 2020 to October 2021, Source: Coingecko, October 2021 STONE MOUNTAIN CAPITAL Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London with offices Pfaeffikon in Switzerland, Dubai and Umm Al Quwain in United Arab Emirates. We are advising 30+ best in class single hedge fund and multi-strategy managers across equity, credit, and tactical trading (global macro, CTAs and volatility). In private assets, we advise 10+ sponsors and general partners across private equity, venture capital, private credit, real estate, capital relief trades (CRT) by structuring funding vehicles, rating advisory and private placements. As of 16th February 2021, Stone Mountain Capital has total alternative Assets under Advisory (AuA) of US$ 60.3 billion. US$ 47.6 billion is mandated in hedge funds and US$ 12.7 billion in private assets and corporate finance (private equity, venture capital, private debt, real estate, fintech). Stone Mountain Capital has arranged new capital commitments of US$ 1.65 billion across hedge fund, private asset and corporate finance mandates and has been awarded over 50 industry awards for research, structuring and placement of alternative investments. As a socially responsible group, Stone Mountain Capital is a signatory to the UN Principles for Responsible Investing (PRI). Stone Mountain Capital applies Socially Responsible Investment (SRI) filters to all off its alternative investment strategies and general partners on behalf of investors.    Our Team   Our Mandates   Our Research   Our News     Contact We are able to source any specific alternative investment search and maintain relationships with dozens of best-in-class hedge fund managers, private equity and private debt general partners (GPs) and real estate and infrastructure developers. We don’t pass any costs on to our investors, since our compensation comes from our mandated managers, GPs and developers. Please contact us, should you require further information about our solutions.   Schedule a call with the team Main UK Tel.: +44 207 268 4905 Main Switzerland Tel.: +41 44 586 45 55 Main UAE Tel.: +971 4383 5386 We have updated our privacy policy to take into account the new requirements of the GDPR. Please take some time to read the policy, which explains what personal data we collect, why we collect it, how we use it and other relevant information. You can review our privacy policy here, our anti-bribery policy here and our commitment to the UK stewardship code here. Stone Mountain Capital LTD is registered (Reference: ZA589246) in the data protection public register of the Information Commissioner's Office ('ICO') in the United Kingdom. No action is required if you wish to remain in contact, however please reply if you want your details removed by contacting us at info@stonemountain-capital.com or by using the unsubscribe button below. In case this newsletter has been forwarded to you and you want to subscribe, please click here. Stone Mountain Capital is a limited company (LTD) registered in England & Wales with registered number 8763463. The registered address is: One Mayfair Place, Devonshire House, Mayfair, London W1J 8AJ, England, United Kingdom. Stone Mountain Capital LTD is authorised and regulated with FRN: 929802 by the Financial Conduct Authority (‘FCA’) in the United Kingdom. Stone Mountain Capital LTD is the Distributor of foreign collective investment schemes distributed to qualified investors in Switzerland. Certain of those foreign collective investment schemes are represented by First Independent Fund Services LTD, which is authorised and regulated by the Swiss Financial Market Supervisory Authority (‘FINMA') as Swiss Representative of foreign collective investment schemes pursuant to Art 13 para 2 let. h in the Federal Act on Collective Investment Schemes (CISA). Stone Mountain Capital LTD conducts securities related activities in the U.S. pursuant to a Securities and Exchange Commission ('SEC') Rule 15a-6 Agreement with Crito Capital LLC, a U.S. SEC registered broker-dealer, and member of Financial Industry Regulatory Authority (‘FINRA’), Securities Investor Protection Corporation (‘SIPC’) and Municipal Securities Rulemaking Board (‘MSRB').  Stone Mountain Capital Partners LLP is incorporated as limited liability partnership in England & Wales with company registration number: OC430515. Its registered office is: One Mayfair Place, Devonshire House, Mayfair, London W1J 8AJ, United Kingdom. Stone Mountain Capital Partners LLP is registered as Appointed Representative with FRN: 934964 of Stone Mountain Capital LTD which is authorised and regulated with FRN: 929802 by the Financial Conduct Authority (‘FCA’) in the United Kingdom.  Stone Mountain Capital Ventures LLP is incorporated as limited liability partnership in England & Wales with company registration number: OC439509. Its registered office is: Devonshire House, ​One Mayfair Place, Mayfair, London W1J 8AJ, United Kingdom. Stone Mountain Capital FZC is registered at: Business Center, Al Shmookh Building, Umm Al Quwain Free Zone, Umm Al Quwain, United Arab Emirates. All information in this perspective including research is classified as minor acceptable non-monetary benefits ('MNMB') in accordance with article 11(5)(a) of the MiFID Delegated Directive (EU) 2017/593 and FCA COBS 2.3A.19. Copyright © 2021 Stone Mountain Capital LTD. All rights reserved. Any business communication, sent by or on behalf of Stone Mountain Capital LTD or one of its affiliated firms or other entities (together "Stone Mountain"), is confidential and may be privileged or otherwise protected. This e-mail message is for information purposes only, it is not a recommendation, advice, offer or solicitation to buy or sell a product or service nor an official confirmation of any transaction. It is directed at persons who are professionals and is not intended for retail customer use. This e-mail message and any attachments are for the sole use of the intended recipient(s). Our LTD accepts no liability for the content of this email, or for the consequences of any actions taken on the basis of the information provided, unless that information is subsequently confirmed in writing. Any views or opinions presented in this email are solely those of the author and do not necessarily represent those of the limited company. Any unauthorised review, use, disclosure or distribution is prohibited. If you are not the intended recipient, please notify the sender by reply e-mail and destroy all copies of the original message and any attachments. By replying to this e-mail, you consent to Stone Mountain monitoring the content of any e-mails you send to or receive from Stone Mountain. Stone Mountain is not liable for any opinions expressed by the sender where this is a non-business e-mail. Emails are not secure and cannot be guaranteed to be error free. Anyone who communicates with us by email is taken to accept these risks. This message is subject to our terms at our Disclaimer.