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Seizing Opportunities: How Economic Downturns Create Lucrative Opportunities for Investors

Economic downturns are inevitable. Woven into the ebb and flow of economic cycles, these periods of decline can bring fear and uncertainty, or they can hold promise.

Teneo’s recent economic outlook report for 2023 asserts that the U.S. faces the potential for either a soft landing or a deep recession. And that outcome will be influenced by how quickly inflation returns to target levels. Considering the uncertain state of play, these downturns create distinct opportunities for innovation and investment.

When the market is down, it can be an opportunity to acquire assets at reduced prices, positioning for future growth. By navigating the challenges and uncertainties of these economic phases, investors can leverage favorable conditions to potentially reap substantial returns when the market regains its vigor.

Economic Downturns Explained

An economic downturn happens when the value of stocks, real estate, and goods drop, productivity slows down or decreases, and the GDP either shrinks, stays stagnant, or expands at a slower pace.

The stock market crash of 1929 led to the Great Depression resulting in unemployment exceeding 12M, thousands of bank failures and a severe contraction in economic activity. The consequences included a decline in global trade, mass poverty and prolonged economic stagnation.

The subprime mortgage market’s collapse in 2007/2008 created a domino effect that spread throughout the global financial system. Our GDP fell 4.3% and the unemployment rate reached 10%. The fallout included a wave of bank failures, a housing market crash, and a deep recession.

These downturns were components of a larger economic cycle – which is the regular variation of the economy between periods of growth and contraction.

Betting on Longshots
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Visionary investor Warren Buffett recognized that economic downturns and public apprehension aren’t just challenging times – rather, they can hold tremendous opportunities for companies.  In 2008 Buffett’s company, Berkshire Hathaway, made a series of investments, including $5B capital injections into both Goldman Sachs and Bank of America. The investment gave Berkshire Hathaway preferred stock with a 6% dividend and warrants to pay $5 billion for 700 million Bank of America shares at $7.14 each. These strategic moves later led to an $11.5 billion profit on that investment in 2017 (not including the dividend payouts). Buffett’s success is just one example of being opportunistic.

When markets experience a decline, many stocks and other investment opportunities may trade at prices below their intrinsic value. This can be great news for seasoned investors who have a long-term investment horizon. By leveraging this opportunity, investors may be able to identify companies with solid fundamentals and acquire them at discounted prices. This approach allows investors to build a portfolio of promising assets that have the potential to yield significant returns in the future.

Finding the right opportunities is not always so straightforward. In 2007 Brian Chesky and Joe Gebbia needed to make their rent in San Francisco. They say necessity is the mother of invention. When hotels were sold out for a big conference, they got creative and rented out an air mattress in their apartment. They called their service “Air Bed and Breakfast.”  The duo emerged as a disruptive force in the hospitality industry by capitalizing on the concept of the sharing economy. Sixteen years later AirBnB is worth over $82B – more than Hilton and Wyndham combined.

Observing these success stores gives investors insight to help better identify companies that exhibit smart market perception, adaptability, and a focus on innovation.  This can help inform investors’ decision making during economic contractions, positioning themselves to capitalize on emerging opportunities and maximize returns. Working with venture capital and PE firms, like Solyco Capital, can be great ways for investors to identify promising startups in sectors poised for growth – despite the economic downturn.

Exploring Diversity and Readying for Recovery

Diversification may help investors to weather economic uncertainty by mitigating risks and improving the risk-return profile of their portfolios. Allocation of investments across asset classes, such as stocks, bonds, real estate, commodities, and venture capital/private equity companies will reduce concentration risk and may provide a hedge.

What goes up, must come down – and our economic cycles have proven to be no different.  Investors who strategically position themselves during downturns by identifying growth sectors, analyzing emerging trends and technologies, staying informed about government policies, and seeking professional advice can capture future growth when the market rebounds.

Mitigating Risks and Awaiting Recovery

Implementing risk management strategies during economic downturns can help to safeguard investments, while staying attuned to market trends, economic indicators, and industry developments is crucial for future planning.

Venture Capital and Private Equity: Catalysts for Growth

Venture capital and private equity opportunities can thrive amidst market downturns. Their emphasis on long-term growth over short-term gains positions them as vehicles for companies to showcase potential and prioritize sustainable development.

Economic downturns are great opportunities for innovative investments – provided that the investor is bold, is willing to take calculated risks, and has a cabinet of trusted professionals to lean on. Warren Buffett and Airbnb demonstrate that embracing innovation in times of uncertainty can pave the way for remarkable success stories. The lessons learned and strategies adopted during these downturns can set the stage for unparalleled growth and prosperity.

About Solyco Capital: Solyco is a private equity group that delivers capital solutions for late-stage startup and growth companies. Solyco Capital leverages Solyco Advisors for strategic, sales and operational support to help drive innovative companies to significant success.

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Working with venture capital and PE firms, like Solyco Capital, can be great ways for investors to identify promising startups in sectors poised for growth – despite the economic downturn.

Chris Van Dusen, Senior Partner

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