Executive Summary: Investing in existing portfolio companies involves a lot of groundwork to be done by the Venture Capital General Partners. Below is an experience recounted by a VC investor, followed by some of my thoughts on the tale well told.
The VC Doubling Down Experience
Fred Wilson has a great post on "doubling down" vis-a-vis portfolio companies:
http://www.avc.com/a_vc/2009/08/doubling-down.html
The Analytical Backgrounders
If you have read a previous generic post linked below, you will definitely enjoy an experienced VC investor sharing his experience above in making the decisions:
1. Creating Value through Operational Improvements: http://randomjunkyramblings.blogspot.com/2009/04/panel-creating-value-through.html
2. Microeconomics, Synergies and Operational Portfolio: http://randomjunkyramblings.blogspot.com/2009/05/microeconomics-synergies-and.html
Identifying a subset of "core"/ "sustainable" (your mileage may vary) investments from a portfolio during tough times is not an easy process even for great investors. The key aspects of Fred's post are:
1>raise funds during tough times, and,
2> choose to pump in more money into the newly identified "core" investments, instead of making new investments.
3> "restructure" existing investments in some way- e.g. strategy, team, cost.
To better understand the VC decision making process, here are some questions you may ask:
1> Fundraising For An Existing Portfolio
- Would you have your "core" investments list, and their follow up round funding needs in hand, when you raised funds?
- Would your fundraising account for possible iterations to this list? E.g. Would your fundraising process include discussions on potential exits and the potential returns to LPs from these exits?
2> Portfolio Picking as Cherry Picking
- Portfolio Company Consultations: Would you choose which investments needed more money from you on a case by case basis? Would this process be any different from board level discussions on company performance, except for more stringent criteria being thrown into the mix?
- Follow on funding Factors: Would the lack of (or unfavorable term sheet conditions in) follow up rounds of funding due to economic conditions force you into considering more investments in the same companies than you normally would?
- Finance Portfolio Constraints: Would you exit firms that had strong potential, but would skew the risk-reward profile of your portfolio?
- Exit Negotiations: What factors would cause you to take a "non core" company off the "for sale" list? i.e. What could cause you to exit the exit negotiations? How many "non core" companies would you have in play for exits at any point of time? Would you keep the window of being part of a follow on syndicated lending team on some "non core" companies?
Another way to quantify this is as follows:
- Company Funding Needs: How may of the newly identified core/ sustainable investment could do without funds from the same VC firm?
- Finance Portfolio Constraints: How many of the investments outside the "core" list had funding needs that the VC firm could not accommodate in the risk-return profile of the reconfigured portfolio, despite strong potential of meeting expected returns?
The Investor Basics
1. (Re)Evaluating financial options can be difficult in tough times over investments you have made which count on an expected future value, but that's par for the course for any investor.
2. The next step is to identify core investments that continue to be strong on performance indicators,and which, in your judgement, will provide strong returns. This too is par for the course for any good investor.
For those who have doubled down in tough times, a simple question to ask would be how many companies you exited went on to provide "spectacular" returns after their exit?
Its NOT So Easy
This only goes on to illustrate that a VC's decision making to exit portfolio ventures is, for starters, pretty difficult on the VC as well.
What do you think?
--
Showing posts with label Investment. Show all posts
Showing posts with label Investment. Show all posts
Sunday, August 09, 2009
Sunday, April 05, 2009
Private Equity Firms and Large Company Acquisitions
Richard Friedman’s key factors for Private Equity funds targeting large companies- financing, downturn lag effects and compensation limits on management, listed here
http://randomjunkyramblings.blogspot.com/2009/03/6-private-equity-firms-and-large.html
- lead to a host of follow up questions.
Are the public capital markets more imperfect than perfect at corporate governance? In more cases than not, have capital markets been reduced to purely reflecting the underperformer reality of a large company as opposed to packing the bite that enforces change? Fragmented ownership is a factor. But is that it? There are numerous cases of an activist investors that have not met their primary objectives (I am not talking about activist investors whose primary objective is greenmail).
If we look at Friedman’s 3 points, and buy the fact that no team can consistently beat economic headwinds to provide massively outperforming returns, would you call private equity firms spectacular market timers? Gives you a simple screen- find a lag effect, and find a management team that’s already furiously at work to beat it, incentivize it to keep the boat steady, and voila! outperformer returns!
Consistent market timing? Really? A simple screen provides outperformer returns? Consistently?
Now, running a large enterprise that is suffering lag effects of a downturn takes some skill. At the simplest level, the private equity investor can certainly simulate an activist investor and provide senior management the backing it needs to rechannel energies from quarter to quarter window dressing into initiative that dovetail with the exit time frame. The private equity takeover can function as the step change that galvanizes the organization into focusing, even functioning as a hedgehog focused on a target.
Even these “operational improvements” count on:
existing management’s ability to direct, or shake up, existing relationships, or,
the investor’s ability to bring in people that can achieve the investor’s objectives.
Contingent upon incentives working, once the deal is struck, execution patterns and outcomes similar to Post Merger Integration efforts should dominate.
Stepping back, what are the patterns and markers that a private equity investor can use to manipulate the trade offs across financing, directed human capital (read operational improvements), and macroeconomic conditions to achieve outperformer returns?
The question’s underlying axiom is obvious; it is possible, with some consistency, to provider outperformer returns. You now also have a rudimentary structure (dare I say a quant model? :-)) to value the impact of these three components on final returns.
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
http://randomjunkyramblings.blogspot.com/2009/03/6-private-equity-firms-and-large.html
- lead to a host of follow up questions.
Are the public capital markets more imperfect than perfect at corporate governance? In more cases than not, have capital markets been reduced to purely reflecting the underperformer reality of a large company as opposed to packing the bite that enforces change? Fragmented ownership is a factor. But is that it? There are numerous cases of an activist investors that have not met their primary objectives (I am not talking about activist investors whose primary objective is greenmail).
If we look at Friedman’s 3 points, and buy the fact that no team can consistently beat economic headwinds to provide massively outperforming returns, would you call private equity firms spectacular market timers? Gives you a simple screen- find a lag effect, and find a management team that’s already furiously at work to beat it, incentivize it to keep the boat steady, and voila! outperformer returns!
Consistent market timing? Really? A simple screen provides outperformer returns? Consistently?
Now, running a large enterprise that is suffering lag effects of a downturn takes some skill. At the simplest level, the private equity investor can certainly simulate an activist investor and provide senior management the backing it needs to rechannel energies from quarter to quarter window dressing into initiative that dovetail with the exit time frame. The private equity takeover can function as the step change that galvanizes the organization into focusing, even functioning as a hedgehog focused on a target.
Even these “operational improvements” count on:
existing management’s ability to direct, or shake up, existing relationships, or,
the investor’s ability to bring in people that can achieve the investor’s objectives.
Contingent upon incentives working, once the deal is struck, execution patterns and outcomes similar to Post Merger Integration efforts should dominate.
Stepping back, what are the patterns and markers that a private equity investor can use to manipulate the trade offs across financing, directed human capital (read operational improvements), and macroeconomic conditions to achieve outperformer returns?
The question’s underlying axiom is obvious; it is possible, with some consistency, to provider outperformer returns. You now also have a rudimentary structure (dare I say a quant model? :-)) to value the impact of these three components on final returns.
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Saturday, March 14, 2009
Richard Friedman’s perspective on the Private Equity industry
Richard Friedman’s address (Head of Merchant Banking at Goldman Sachs) turned out to be a whirlwind tour of what he’s seen of the private equity industry over the years, growing from a billion dollars in size in 1991 with 4 key firms to 545 billion dollars in size in 2008 with over 200 major funds. As usual, the barrage of information spawned many questions.
Some things he touched upon:
1> Anticyclical behavior of the industry
The 2001-2003 period had modest activity due to the economic conditions, however, the returns from the investments then varied from 25% to a 100%.
2> Trends in valuations
Alluding to the valuations being optimistic, almost driven by multiples of peak earnings instead of multiples of earnings.
3> Targeting large companies
Specifically points included financing, the 2001-2003 downturn’s lag effects, and compensation limits on management.
Evaluating (read critically questioning) these 3 trends is an interesting exercise, and got me thinking about corporate governance and leadership. More about it in my post on “Private Equity Firms and Large Company Acquisitions”.
The period from 1989 to 1999 saw investments totaling $250 billion, while the 18 month period from 2005 to July 2007 saw 1.2 Trillion dollars worth of investments.
Encouraging an idea out of left field, at the risk of sounding flippant, could you call this the biggest bailout (read takeover, or turnaround, or even protection) of American Enterprise in history? More about it in my blog on “Is Private Equity The American Industry that protects American Enterprise?”
Think About The Future
Equally interesting were thoughts about the future. Where do we go from here?
Bargain Hunting for Investments
Just like the 2001-2003 period, there are bargain purchase opportunities. However, any change of direction from the fund’s stated strategy would concern the LPs.
This leads to a set of follow up thoughts:
What more can GPs do to account for bankruptcy risk?
Does the answer lie in more robust valuation scenarios (akin to the bank stress tests) and due diligence?
Given the increased riskiness of investments, would PE funds start looking like VC funds?
How can GPs and CFOs of the funds work more closely with LPs?
What kind of downside protection can a GP provide an LP?
How do funds deal with liquidity challenges?
Does the senior loan market now resemble that in the 60s and the 70s?
If necessary, how would GPs buy senior debt in their portfolio companies and still ensure incentives are aligned correctly?
How would CFOs of funds categorize their LPs to get buy in on any style drift, assuming that’s a risk they are willing to take, and that there are funds available?
How would your approach be different when it comes to large institutional investors?
Managing Organizations
Given the economic environment, management teams may begin to think that they don’t have the incentives anymore for change. Persistent communication to align the investment perspective and the managers on the ground is a quick start- however; would it make sense to explore other initiatives like team building?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Some things he touched upon:
1> Anticyclical behavior of the industry
The 2001-2003 period had modest activity due to the economic conditions, however, the returns from the investments then varied from 25% to a 100%.
2> Trends in valuations
Alluding to the valuations being optimistic, almost driven by multiples of peak earnings instead of multiples of earnings.
3> Targeting large companies
Specifically points included financing, the 2001-2003 downturn’s lag effects, and compensation limits on management.
Evaluating (read critically questioning) these 3 trends is an interesting exercise, and got me thinking about corporate governance and leadership. More about it in my post on “Private Equity Firms and Large Company Acquisitions”.
The period from 1989 to 1999 saw investments totaling $250 billion, while the 18 month period from 2005 to July 2007 saw 1.2 Trillion dollars worth of investments.
Encouraging an idea out of left field, at the risk of sounding flippant, could you call this the biggest bailout (read takeover, or turnaround, or even protection) of American Enterprise in history? More about it in my blog on “Is Private Equity The American Industry that protects American Enterprise?”
Think About The Future
Equally interesting were thoughts about the future. Where do we go from here?
Bargain Hunting for Investments
Just like the 2001-2003 period, there are bargain purchase opportunities. However, any change of direction from the fund’s stated strategy would concern the LPs.
This leads to a set of follow up thoughts:
What more can GPs do to account for bankruptcy risk?
Does the answer lie in more robust valuation scenarios (akin to the bank stress tests) and due diligence?
Given the increased riskiness of investments, would PE funds start looking like VC funds?
How can GPs and CFOs of the funds work more closely with LPs?
What kind of downside protection can a GP provide an LP?
How do funds deal with liquidity challenges?
Does the senior loan market now resemble that in the 60s and the 70s?
If necessary, how would GPs buy senior debt in their portfolio companies and still ensure incentives are aligned correctly?
How would CFOs of funds categorize their LPs to get buy in on any style drift, assuming that’s a risk they are willing to take, and that there are funds available?
How would your approach be different when it comes to large institutional investors?
Managing Organizations
Given the economic environment, management teams may begin to think that they don’t have the incentives anymore for change. Persistent communication to align the investment perspective and the managers on the ground is a quick start- however; would it make sense to explore other initiatives like team building?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Panel: Fundraising and Capital Flows
A diverse panel, consisting of
1> the head of treasury managing a large pension fund,
2> a managing director for alternative investments at a large fund,
3> a managing director for fund raising at a fund with investments as diverse as late stage VC to middle market companies, and,
4> a managing partner at a fund investing in industrials,
can definitely get you to “stress test” your thought processes on investment decision making in a downturn.
Some quick thoughts and questions that came up thanks to the panel:
1> How do GPs prioritize their investments, across investment decisions and portfolio companies?
2> Switching perspectives, how would LPs recategorize their top decile funds in the changed economic environment?
3> Have GPs and their LPs considered restructuring funds (changing terms, size, etc.)? At what point does restructuring a fund become in everyone’s best interests?
4> How are funds, whether buyers or sellers, over forced sales and bargain prices of investments, resetting their expectations, as well as the expectations of their stakeholders?
Note: Bargain prices of investments for buyers mean that to drawdown the fund fully, you may have to make more deals.
5> How do you deal with strategy creep when a fund is investing in earlier vintages? A fund of funds perspective may help, however, how do you build the processes to manage conflicts with style drifts?
6> Are we seeing many buyers in the secondary market for new fund turnover? How does that impact the secondary market discount?
One panelist, from a treasury department, talked about challenges in allocations to meet $800 million worth unfunded commitments with $300 million in payments to retirees. He boldly ventured that Modern Portfolio Theory may be dead. Given the volatility seen in the market, and pension obligations to manage, he stated that long only strategies do not work and pointed out the need to deploy derivatives strategies in the context. My take on this was that this perspective only underscores the complexities of managing risk with derivative instruments.
Another panelist talked about investing in long lived, low technology assets and managing macroeconomic and counter party risks. The fund raiser panelist talked about a 15 billion dollar 2008 fund, that was initially expected to invest about 4-5 billion a year, which was considering cross fund investments (say a fund WP10 looking at existing funds WP9 and WP8), with advisory board approval.
A panelist from a Germany based fund ventured that some of the winners in the downturn were global macro, and long short hedge funds. His take was that specialized funds were doing well. However, he was concerned about the liquidity of the hedge funds as drawdowns were being discouraged.
The panelist was also actively looking at the secondary market, besides private markets for capital. His assessment was that new fund turnover was at 3-5%. Some of the factors in the decision making:
1> Bottom up analysis on investments
2> Asset covenants
3> Secondary market discounts
4> Structured finance solutions to relieve or defer capital call responsibility and future unfunded obligations.
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
1> the head of treasury managing a large pension fund,
2> a managing director for alternative investments at a large fund,
3> a managing director for fund raising at a fund with investments as diverse as late stage VC to middle market companies, and,
4> a managing partner at a fund investing in industrials,
can definitely get you to “stress test” your thought processes on investment decision making in a downturn.
Some quick thoughts and questions that came up thanks to the panel:
1> How do GPs prioritize their investments, across investment decisions and portfolio companies?
2> Switching perspectives, how would LPs recategorize their top decile funds in the changed economic environment?
3> Have GPs and their LPs considered restructuring funds (changing terms, size, etc.)? At what point does restructuring a fund become in everyone’s best interests?
4> How are funds, whether buyers or sellers, over forced sales and bargain prices of investments, resetting their expectations, as well as the expectations of their stakeholders?
Note: Bargain prices of investments for buyers mean that to drawdown the fund fully, you may have to make more deals.
5> How do you deal with strategy creep when a fund is investing in earlier vintages? A fund of funds perspective may help, however, how do you build the processes to manage conflicts with style drifts?
6> Are we seeing many buyers in the secondary market for new fund turnover? How does that impact the secondary market discount?
One panelist, from a treasury department, talked about challenges in allocations to meet $800 million worth unfunded commitments with $300 million in payments to retirees. He boldly ventured that Modern Portfolio Theory may be dead. Given the volatility seen in the market, and pension obligations to manage, he stated that long only strategies do not work and pointed out the need to deploy derivatives strategies in the context. My take on this was that this perspective only underscores the complexities of managing risk with derivative instruments.
Another panelist talked about investing in long lived, low technology assets and managing macroeconomic and counter party risks. The fund raiser panelist talked about a 15 billion dollar 2008 fund, that was initially expected to invest about 4-5 billion a year, which was considering cross fund investments (say a fund WP10 looking at existing funds WP9 and WP8), with advisory board approval.
A panelist from a Germany based fund ventured that some of the winners in the downturn were global macro, and long short hedge funds. His take was that specialized funds were doing well. However, he was concerned about the liquidity of the hedge funds as drawdowns were being discouraged.
The panelist was also actively looking at the secondary market, besides private markets for capital. His assessment was that new fund turnover was at 3-5%. Some of the factors in the decision making:
1> Bottom up analysis on investments
2> Asset covenants
3> Secondary market discounts
4> Structured finance solutions to relieve or defer capital call responsibility and future unfunded obligations.
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Wednesday, September 24, 2008
The Anatomy of a Financial Crisis/ Good Times, Bad Times
Notes:
The first 5 points of the notes are at end of the novella below.
6> Characters below bear no resemblance... oh, go on and read it for yourself.
The Anatomy of a Financial Crisis, Or,
Good Times, Bad Times (With Apologies to Led Zep)
Minnie, Manny and Moe are bankers in GeeWizLand. They like to lend folks money so that folks can take fun vacations and create a global economy. The 3Ms have been doing this for ages, and they like to lend money to a certain set of people, like Paris Heelton and Britney Spurs, with the odd movie star like Ms. Jolee thrown in.
Funky Fred comes along and tells the 3 Ms that he will be happy to guarantee these vacation loans for a small fee. Given the uncertainty over Paris' Jail time and Britney's asylum ambitions, this sounds like a good idea to the 3 Ms. Funky Fred also decides the he could lend to the 3 Ms. Moe is totally on board with Funky Fred on this. Ms. Winepub showed up at Moe's very ornate door seeking money for a rehab vacation, and Funky Fred's loan would help Moe lend a helping hand to Ms. Winepub.
Times are good. The 3 Ms meet at the 3Ms Factory every Friday night to gorge on Cheesecake and are happy to invite Funky Fred to the party. On one of these evenings, Funky Fred comes up with another innovative, brilliant idea. He will not only allow ordinary folks to become shareholders in his company Fred Smarts, but he will also borrow. There are only 3 bankers in GeeWizLand. The 3 Ms. Funky Fred points out that the smart and funky thing about this borrowing is that he will pick and choose loans, label them 3 As and let Minnie, Manny and Moe choose to lend against the 3 As.
Minnie, Manny and Moe look at each other, and like the idea. After all, Funky Fred is the smart guy running Fred Smarts. He is guaranteeing their loans. He is also a lender and has some insight into the loans business. Minne is thinking she will get to lend against the 3 As in Moe's bag- she had been eyeing superstar Winepub's rehab vacation deal that Moe pulled off. So, they begin to hammer out the idea over more Cheesecake. Funky Fred totally connects with Minnie when he mentions that he thought Ms. Winepub was such a good bet, he lent her money for her second rehab vacation. With the cha-ching at the opening of Pink Floyd's Money ringing in their ears, Funky Fred and Moe exchange high fives. Manny being Manny, throws a plate of cheesecake up in the air, high fives a cute hanger on, and then tosses it over to Funky Fred. Finally, to close the deal, Funky Fred announces, "Folks, I think this is the beginning of a beautiful friendship".
Sweet!
Of course, the 3Ms are not supposed to be thinking about Funky Fred's uncle. Sam. Sam is the Warren Buffet of GeeWizLand. Fred has always been careful to tell them that Sam's a great guy and everything, but Sam and he have no business dealings, and that Sam minds his own business. Anyhow, the 3 Ms think it can't hurt to have Sam for an Uncle.
So, times are good. With all the fees Minnie, Manny Moe and Fred are making, the innovative Friday night cheesecake parties at the 3 Ms Factory are the toast of GeeWizLand.
Along comes Boogie Howser, NPH. Brilliant guy. He wants to take a year long sabbatical- he wishes to go sailing around the world. He intends to use the money from his consulting gigs, playing doctor sans frontiers, mais avec un bateau, at his stopovers to pay the interest on the loan while he is away. Moe likes Boogie. Boogie's past record as GeeWizLand's superdoc is unbeatable. Moe thinks this loan is do-able and happily loans Boogie the money. Moe thinks Boogie is not just Type A, he is Type 3A and labels him as such (AAA). Same goes for the loan- now 3A (TM). Plus, times are good, aren't they?
Now, Boogie breaks a leg at a stopover in Timbucktu. He treats folks who cannot really pay much. He misses a payment, and then some. Ms. Winepub treats her rehab vacation like a vacation, her concerts bomb, and her second album completely bombs. Ms. Winepub is a gem of a person. She will repay her loan. Fred and the 3 Ms think she will too. She's a rockstar and a gem of a person. Really. However, for now she missed a payment and then some.
Moe realizes he is in trouble. Even if its only for now. First there was Boogie, a customer he had not dealt with previously, and now Ms. Winepub was tottering as well. All superstars, each one a gem of a person. Moe suddenly has no money to lend because he is not getting any money in. In fact, Moe may not be able to make his payments on the money he has borrowed.
Funky Fred and Moe have a quiet chat at their Cheesecake Party. Funky Fred realizes he is in trouble too, just like Moe. First there was Ms. Winepub. Now, he has to stand by his guaranty for Moe.
Funky Fred has no money. Not to lend. Not even to make payments to Minne and Manny who were counting on his funky 3 As. Minne and Manny haven't heard about Ms. Winepub's financial mess. They couldn't. To them, she had become one of the funky Type 3As- Not Just a Number, But a TLA (Trademark, Funky Fred). In any case, Minnie and Manny soon realize they are in trouble as well. Funky Fred can't pay them. Now, Minne and Manny can't lend. Maybe they wouldn't be able to make payments in the future either.
The 3 Ms realize that old methods like throwing cheesecake at each other to sort matters out would not work. True to their reputation, the 3 Ms will have to innovate yet again. Minnie, Manny and Moe now step out of their party and head over to Fred's Uncle's- Sam's- place.
Sleepy Sam is awakened by a 3 AM knock at his door and finds Minnie, Manny and Moe looking at him. Sam, a little drowsy, begins to think about why he should bother with the 3Ms. Really. Minnie, Manny and Moe dug their own grave. Then there was Funky Fred, who was always too smart for his own good. Who goes about calling himself Funky Fred? He is not sure if its the sleeping pills reacting with his face cream, but his mind plays a phantasmagoric reel of Young Sam punishing little Funky Fred for making too much money at his lemonade stand by spanking him and getting him to drop Funky from his name for the next school year. The reel ends abruptly with Funky Fred negotiating with the immortal line, "Funky by any other name... is still Funky".
What should Fred's uncle do? A simple "Get lost!" to the 3Ms should do the trick and he can deal with Fred (down with Funky! Now!) in the morning. However, it's not that simple, is it? There's a faint thought in his mind, barely registering thanks to the throbbing headache caused by The Friday Night Party People showing up at his doorstep in the middle of the night. Perhaps his businesses, and wealth are tied to the 3Ms fortunes.
Sam is huge. HUUGE. He has borrowings from the 3Ms. He also has borrowings from distant shores. The distant shores like GeeWizLand. Its a nice town of superstars that always have money. Now, unfortunately due to the Winepubs and the Howsers, the 3Ms don't have money. And the superstars don't have any money to spend because 3Ms aren't giving them any.
Oh and btw, somehow, folks outside GeeWizLand aren't buying Superstars anymore. The Superstars will find a way, but for now, they really have no money.
Sam's businesses, even stable businesses like EyeRuS (How much emptier can you pocket be today? Trademark EyeRuS), are now hurting because Superstars have no money.
Distant Shores (TM, The Distant Shores Syndicate) has a little camera behind a Curtain in Sam's House. It is watching Sam. What will Sam do? Can Distant Shores' members continue lending to Sam the same way they used to? Perhaps distant shores ("More Than That Syndicate") have no options either, just like Sam.
What does all of this mean? This looks like one big snake biting off its own tail! This may also look like something that GeeWizLand and distant shores may have to weather together. For how long? A year? A decade? A generation?
GeeWizLand knows little about distant shores. Those who do know about distant shores tend to go break a leg in Timbucktu. Distant shores think they know GeeWizLand and its Superstars, but that's an illusion as well. However, everyone has a sinking feeling that even if it is for a little bit- with faith in Superstars and everything- everyone is in it together.
What do you think?
Notes, the strange loop version:
1> This writing (Novella, as some readers have called it) is a slightly modified version of an extempore email sent out on July 12 to a MENSA message board to explain, in layman's terms, what was going on in the financial sector at that point of time.
2> This is an incredibly painful time for the financial services industry, the US economy and global economies. This article is just an abstraction. Its a starting point for readers to explore market structure and think analytically about decision making. If this encourages you to build complex models that tie in macroeconomics, consumer behavior and game theory, please drop me a line. We should talk.
3> A lot has happened since July 12. If you have read the story before-I will reemphasize that its not over yet. The article is structured so that you challenge every paragraph and analytically dig into the details. Your comments are welcome and critical.
4> Many thanks to Prof. Rosensweig for teaching.
5> I remember telling someone in a different context (the energy crisis) that if I could fix the problem tomorrow, I would do it. I really, really, really would like to. I can't. I can, however, do my best to learn. "We shall overcome!"
The first 5 points of the notes are at end of the novella below.
6> Characters below bear no resemblance... oh, go on and read it for yourself.
The Anatomy of a Financial Crisis, Or,
Good Times, Bad Times (With Apologies to Led Zep)
Minnie, Manny and Moe are bankers in GeeWizLand. They like to lend folks money so that folks can take fun vacations and create a global economy. The 3Ms have been doing this for ages, and they like to lend money to a certain set of people, like Paris Heelton and Britney Spurs, with the odd movie star like Ms. Jolee thrown in.
Funky Fred comes along and tells the 3 Ms that he will be happy to guarantee these vacation loans for a small fee. Given the uncertainty over Paris' Jail time and Britney's asylum ambitions, this sounds like a good idea to the 3 Ms. Funky Fred also decides the he could lend to the 3 Ms. Moe is totally on board with Funky Fred on this. Ms. Winepub showed up at Moe's very ornate door seeking money for a rehab vacation, and Funky Fred's loan would help Moe lend a helping hand to Ms. Winepub.
Times are good. The 3 Ms meet at the 3Ms Factory every Friday night to gorge on Cheesecake and are happy to invite Funky Fred to the party. On one of these evenings, Funky Fred comes up with another innovative, brilliant idea. He will not only allow ordinary folks to become shareholders in his company Fred Smarts, but he will also borrow. There are only 3 bankers in GeeWizLand. The 3 Ms. Funky Fred points out that the smart and funky thing about this borrowing is that he will pick and choose loans, label them 3 As and let Minnie, Manny and Moe choose to lend against the 3 As.
Minnie, Manny and Moe look at each other, and like the idea. After all, Funky Fred is the smart guy running Fred Smarts. He is guaranteeing their loans. He is also a lender and has some insight into the loans business. Minne is thinking she will get to lend against the 3 As in Moe's bag- she had been eyeing superstar Winepub's rehab vacation deal that Moe pulled off. So, they begin to hammer out the idea over more Cheesecake. Funky Fred totally connects with Minnie when he mentions that he thought Ms. Winepub was such a good bet, he lent her money for her second rehab vacation. With the cha-ching at the opening of Pink Floyd's Money ringing in their ears, Funky Fred and Moe exchange high fives. Manny being Manny, throws a plate of cheesecake up in the air, high fives a cute hanger on, and then tosses it over to Funky Fred. Finally, to close the deal, Funky Fred announces, "Folks, I think this is the beginning of a beautiful friendship".
Sweet!
Of course, the 3Ms are not supposed to be thinking about Funky Fred's uncle. Sam. Sam is the Warren Buffet of GeeWizLand. Fred has always been careful to tell them that Sam's a great guy and everything, but Sam and he have no business dealings, and that Sam minds his own business. Anyhow, the 3 Ms think it can't hurt to have Sam for an Uncle.
So, times are good. With all the fees Minnie, Manny Moe and Fred are making, the innovative Friday night cheesecake parties at the 3 Ms Factory are the toast of GeeWizLand.
Along comes Boogie Howser, NPH. Brilliant guy. He wants to take a year long sabbatical- he wishes to go sailing around the world. He intends to use the money from his consulting gigs, playing doctor sans frontiers, mais avec un bateau, at his stopovers to pay the interest on the loan while he is away. Moe likes Boogie. Boogie's past record as GeeWizLand's superdoc is unbeatable. Moe thinks this loan is do-able and happily loans Boogie the money. Moe thinks Boogie is not just Type A, he is Type 3A and labels him as such (AAA). Same goes for the loan- now 3A (TM). Plus, times are good, aren't they?
Now, Boogie breaks a leg at a stopover in Timbucktu. He treats folks who cannot really pay much. He misses a payment, and then some. Ms. Winepub treats her rehab vacation like a vacation, her concerts bomb, and her second album completely bombs. Ms. Winepub is a gem of a person. She will repay her loan. Fred and the 3 Ms think she will too. She's a rockstar and a gem of a person. Really. However, for now she missed a payment and then some.
Moe realizes he is in trouble. Even if its only for now. First there was Boogie, a customer he had not dealt with previously, and now Ms. Winepub was tottering as well. All superstars, each one a gem of a person. Moe suddenly has no money to lend because he is not getting any money in. In fact, Moe may not be able to make his payments on the money he has borrowed.
Funky Fred and Moe have a quiet chat at their Cheesecake Party. Funky Fred realizes he is in trouble too, just like Moe. First there was Ms. Winepub. Now, he has to stand by his guaranty for Moe.
Funky Fred has no money. Not to lend. Not even to make payments to Minne and Manny who were counting on his funky 3 As. Minne and Manny haven't heard about Ms. Winepub's financial mess. They couldn't. To them, she had become one of the funky Type 3As- Not Just a Number, But a TLA (Trademark, Funky Fred). In any case, Minnie and Manny soon realize they are in trouble as well. Funky Fred can't pay them. Now, Minne and Manny can't lend. Maybe they wouldn't be able to make payments in the future either.
The 3 Ms realize that old methods like throwing cheesecake at each other to sort matters out would not work. True to their reputation, the 3 Ms will have to innovate yet again. Minnie, Manny and Moe now step out of their party and head over to Fred's Uncle's- Sam's- place.
Sleepy Sam is awakened by a 3 AM knock at his door and finds Minnie, Manny and Moe looking at him. Sam, a little drowsy, begins to think about why he should bother with the 3Ms. Really. Minnie, Manny and Moe dug their own grave. Then there was Funky Fred, who was always too smart for his own good. Who goes about calling himself Funky Fred? He is not sure if its the sleeping pills reacting with his face cream, but his mind plays a phantasmagoric reel of Young Sam punishing little Funky Fred for making too much money at his lemonade stand by spanking him and getting him to drop Funky from his name for the next school year. The reel ends abruptly with Funky Fred negotiating with the immortal line, "Funky by any other name... is still Funky".
What should Fred's uncle do? A simple "Get lost!" to the 3Ms should do the trick and he can deal with Fred (down with Funky! Now!) in the morning. However, it's not that simple, is it? There's a faint thought in his mind, barely registering thanks to the throbbing headache caused by The Friday Night Party People showing up at his doorstep in the middle of the night. Perhaps his businesses, and wealth are tied to the 3Ms fortunes.
Sam is huge. HUUGE. He has borrowings from the 3Ms. He also has borrowings from distant shores. The distant shores like GeeWizLand. Its a nice town of superstars that always have money. Now, unfortunately due to the Winepubs and the Howsers, the 3Ms don't have money. And the superstars don't have any money to spend because 3Ms aren't giving them any.
Oh and btw, somehow, folks outside GeeWizLand aren't buying Superstars anymore. The Superstars will find a way, but for now, they really have no money.
Sam's businesses, even stable businesses like EyeRuS (How much emptier can you pocket be today? Trademark EyeRuS), are now hurting because Superstars have no money.
Distant Shores (TM, The Distant Shores Syndicate) has a little camera behind a Curtain in Sam's House. It is watching Sam. What will Sam do? Can Distant Shores' members continue lending to Sam the same way they used to? Perhaps distant shores ("More Than That Syndicate") have no options either, just like Sam.
What does all of this mean? This looks like one big snake biting off its own tail! This may also look like something that GeeWizLand and distant shores may have to weather together. For how long? A year? A decade? A generation?
GeeWizLand knows little about distant shores. Those who do know about distant shores tend to go break a leg in Timbucktu. Distant shores think they know GeeWizLand and its Superstars, but that's an illusion as well. However, everyone has a sinking feeling that even if it is for a little bit- with faith in Superstars and everything- everyone is in it together.
What do you think?
Notes, the strange loop version:
1> This writing (Novella, as some readers have called it) is a slightly modified version of an extempore email sent out on July 12 to a MENSA message board to explain, in layman's terms, what was going on in the financial sector at that point of time.
2> This is an incredibly painful time for the financial services industry, the US economy and global economies. This article is just an abstraction. Its a starting point for readers to explore market structure and think analytically about decision making. If this encourages you to build complex models that tie in macroeconomics, consumer behavior and game theory, please drop me a line. We should talk.
3> A lot has happened since July 12. If you have read the story before-I will reemphasize that its not over yet. The article is structured so that you challenge every paragraph and analytically dig into the details. Your comments are welcome and critical.
4> Many thanks to Prof. Rosensweig for teaching.
5> I remember telling someone in a different context (the energy crisis) that if I could fix the problem tomorrow, I would do it. I really, really, really would like to. I can't. I can, however, do my best to learn. "We shall overcome!"
Sunday, May 04, 2008
Alternative Energy Investments: The BioFuels Story Continues.
There has been a lot of negative publicity on biofuels lately, given the context of high food prices. Here's an interesting story about second generation biofuels (energy from agriwaste) that would strengthen the hands of folks who would like a more realistic perspective on biofuels research:
http://sify.com/finance/debt/fullstory.php?id=14653698
The ruckus on Biofuels, from the Food vs. Fuel perspective, has been causing governments and institutions to rethink biofuels support:
1> http://uk.reuters.com/article/oilRpt/idUKN2232394520080422
2> http://thescotsman.scotsman.com/latestnews/-Brown-sounds-retreat-on.4009080.jp
My take on alternative fuels last year is here:
http://randomjunkyramblings.blogspot.com/2007/12/investments-in-alternative-energy.html
What do you think?
http://sify.com/finance/debt/fullstory.php?id=14653698
The ruckus on Biofuels, from the Food vs. Fuel perspective, has been causing governments and institutions to rethink biofuels support:
1> http://uk.reuters.com/article/oilRpt/idUKN2232394520080422
2> http://thescotsman.scotsman.com/latestnews/-Brown-sounds-retreat-on.4009080.jp
My take on alternative fuels last year is here:
http://randomjunkyramblings.blogspot.com/2007/12/investments-in-alternative-energy.html
What do you think?
Sunday, April 06, 2008
Conference Panel: Asset Allocation and Changing Times, the Limited Partner Perspective
I decided to check with a Limited Partner (LP) on the questions on deal size and frequency that I had thought about at this conference:
http://randomjunkyramblings.blogspot.com/2008/03/conference-panel-investing-in-india.html
Of course, the context was different, but my take was that the issues encountered were the same. The LP smiled and said they had a great CFO. Going back to the Gary Loveman post below, you can't argue with talent:
http://randomjunkyramblings.blogspot.com/2008/04/conference-panel-portfolio-value.html
A General Partner (GP) at another panel said that an LP had mentioned that a lesser return in the depressed economic environment would still validate their investment/ asset allocation. It would be interesting to get insights into the aggregated decisions made by GPs across PE firms and the outcomes down the line.
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
http://randomjunkyramblings.blogspot.com/2008/03/conference-panel-investing-in-india.html
Of course, the context was different, but my take was that the issues encountered were the same. The LP smiled and said they had a great CFO. Going back to the Gary Loveman post below, you can't argue with talent:
http://randomjunkyramblings.blogspot.com/2008/04/conference-panel-portfolio-value.html
A General Partner (GP) at another panel said that an LP had mentioned that a lesser return in the depressed economic environment would still validate their investment/ asset allocation. It would be interesting to get insights into the aggregated decisions made by GPs across PE firms and the outcomes down the line.
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Monday, March 24, 2008
Conference Panel: Investing in India- The Maturation Process, whats next?
The amazing panel, drawing from PE, management consulting and IB firms emphasized that they are taking a long term view of the Indian market and are doing well thought out due diligence on deals to make the best decisions for the funds. Deals have been quite competitive and negotiated.
This approach raises a line of thought regarding the non-core (?) activities of a PE fund. Why am I calling them non-core? Well, most folks would say that the only core activity for GPs is to find good investments and fund them, the rest can go for a toss. Performance is the cornerstone of success. The "official" lore is that the high performing GPs do not really have to bother much about non-core activities.
This query on capital deployment and how much GPs think about it is still worth considering as it seems to be closely tied with fund raising. The response to the query by the GPs can be that they do not really care about capital deployment as they tap into their funds on an deal by deal basis. However, I am inclined to think the GPs have a sense of what the LPs are thinking of when LPs make investments in the PE funds. Sounds like business development, doesn't it?
Anyhow, non-core or otherwise, lets dig into some aspects of the PE business. How do the GPs:
1> Handle uneven deal flow?
2> Manage different relative risk levels across deals?
3> Manage different rates of returns on their deals?
4> Set LP expectations on deal flow and deal sizes, across business environments, while still keeping LPs on board?
What do you think?
From the LP point of view, How do LPs:
1> Manage cash (e.g. lack of predictability in drawdowns)?
2> Allocate capital, from the asset allocation policy and portfolio management point of view, between drawdowns, and for drawdowns?
What do you think?
This approach raises a line of thought regarding the non-core (?) activities of a PE fund. Why am I calling them non-core? Well, most folks would say that the only core activity for GPs is to find good investments and fund them, the rest can go for a toss. Performance is the cornerstone of success. The "official" lore is that the high performing GPs do not really have to bother much about non-core activities.
This query on capital deployment and how much GPs think about it is still worth considering as it seems to be closely tied with fund raising. The response to the query by the GPs can be that they do not really care about capital deployment as they tap into their funds on an deal by deal basis. However, I am inclined to think the GPs have a sense of what the LPs are thinking of when LPs make investments in the PE funds. Sounds like business development, doesn't it?
Anyhow, non-core or otherwise, lets dig into some aspects of the PE business. How do the GPs:
1> Handle uneven deal flow?
2> Manage different relative risk levels across deals?
3> Manage different rates of returns on their deals?
4> Set LP expectations on deal flow and deal sizes, across business environments, while still keeping LPs on board?
What do you think?
From the LP point of view, How do LPs:
1> Manage cash (e.g. lack of predictability in drawdowns)?
2> Allocate capital, from the asset allocation policy and portfolio management point of view, between drawdowns, and for drawdowns?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
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