Quadrille Capital

[2/2] Outside Energy, we think a second Trump presidency would likely be more Tech friendly than the first. In his courtship of Silicon Valley donors, we note that Trump has signaled a favorable approach to some key Tech lobby demands, notably 1/ deregulating cryptocurrencies, 2/ reducing the FTC’s objections to Big Tech M&A, 3/ safeguarding the carried interest model of private equity firms, and 4/ offering H1B visas to all foreign engineering graduates. Trump’s views on AI are not clear and may yet lead to some regulation, but for the most part, from an investor viewpoint, Republican regulatory policy often adds up to “less is more”. The US presidential race remains a close one nonetheless, and while we entertain a reality check of a Trump win, we are not making any policy related changes to the portfolio. Meanwhile, stock market performance concentration is at 30-year highs. For 1H24, 97% of SP500 performance was driven by just 10 stocks; we owned 7 over the period and enter 2H24 with 5. This chronic underperformance of small caps is a big challenge for us, with the Russell 2500 down -4.27% in 2Q24 and up only 2.24% YTD. The Disruption Fund portfolio has 21% in Mega Caps; we are reluctant to add more. We remain balanced with our core themes: 24% Semis, 24% Software, and 21% Cleantech, with variations from last month due to performance. In June, the AI Hardware-Software tug-of-war eased up, as both sectors had a positive month. Semis in the portfolio contributed 2.7%, driven yet again by Nvidia, Broadcom and ASML, while our Software names added 2.6%, thanks notably to ServiceNow, CrowdStrike, Datadog and Palantir. None of the AI software disruptions that so worried investors in April and May have been resolved, but the sector benefited from the rotation out of Cleantech; as mentioned, Cleantech cost us -4.8%. Despite the political uncertainty, we have high confidence in the rationale for our sector allocations. 1/ Semiconductors are the beating heart of AI, the critical enabling tech of the AI revolution. 2/ Despite the “AI is eating software” conundrum, there is no AI without the Cloud, and no Cloud without infrastructure software; our software focus thus remains in databases and cybersecurity. 3/ AI is the most energy hungry invention of our civilization; we remain sanguine that AI = Energy; no president can change this equation. #disruptionfund #ai #energy

[1/2] Gradually, then suddenly, it’s election season. In the UK, France and America, elections are on the front pages earlier than expected. In the UK and France, a protest vote of epic proportion speaks to many ills that stretch beyond the scope of this letter, yet one issue stands out for us technology investors: decades of anemic investments in technology, innovation and sovereignty are accentuating the ravages of post-pandemic inflation. As we have highlighted in previous letters, both deglobalization and decarbonization are deeply inflationary if they are not offset by massive tech investments. The ongoing AI and Semis capex cycle is part of the answer, but robotic automation and renewable energy remain lacking. Having become a Chinese center of excellence, Cleantech adoption in Europe and America is colliding with sovereignty. The AI, tech and energy productivity scramble is thus deeply political, and the electorate is on edge. In America as well, elections are at a tipping point four months early. A very boring rematch of Trump vs Biden took a dramatic turn during the June 28th debate as Joe Biden laid bare his cognitive frailty. With the Democratic Party in panic mode, Trump 2.0 is more real than ever. Markets have begun to price a dovish Fed, no tax hikes, less regulation and fewer subsidies, most notably IRA funding and renewable energy mandates. In both Europe and the US, 10-year interest rates rose throughout the month, and Cleantech suffered a brutal “anti-green” selloff, costing us -480bp of performance. Despite this knee-jerk reaction, we note that the biggest IRA and CHIPS Act beneficiaries have been US red state, and that solar energy prices are below grid parity across nearly all global markets. High interest rates are the main obstacle to faster Cleantech adoption, not subsidies. Our Cleantech investments remain predicated on the 5-year “time to power” delays for major industrial connections to the electric grids, especially AI datacenters. In the last few weeks alone, we have seen Amazon secure a 473MW offshore wind PPA with Engie in Scotland; Microsoft signed yet another nuclear power PPA with Constellation Energy in Virginia; and CoreWeave (Nvidia’s hyperscaler) is retrofitting crypto data centers in Texas to access cheap wind power secured before the AI boom. The world is short electricity; no election can change that. #disruptionfund #ai #energy