I found some interesting links, which will be a nice break from my usual tirade...
The Harvard Business School has an interview with Josh Lerner regarding the private equity boom. Click here for the podcast. Seems like an ominous term to use; in word association exercises, I associate "boom" with "bust" 100% of the time (although it doesn't apply as well vice versa).
The McKinsey Quarterly website has a few articles I found interesting. Find them here and here. (Requires registration to see full articles.)
DealBook had a short article on how the SEC (the Securities and Exchange Commission in the US) plans to curb the hedge fund industry, by making it more difficult to qualify as a "wealthy investor", by moving the minimum net worth from $1M to $2.5M. Only investors (which includes companies, partnerships and trusts) with a minimum $2.5M net worth can invest in hedge funds. My guess is that this will have very little effect. Even people who are nowhere near that level of wealth are already exposed to hedge funds... through their superannuation/pension funds.
Another DealBook article gives hope to that hardworking lot, the investment bankers, of finding true love in between spreadsheets and tender documents.
Finally, this is one of the best videos of 2006, so I'm putting it here. Watch this first... then watch this and this.
Thursday 4 January 2007
Wednesday 3 January 2007
The big financial topic for 2007 (and hopefully, 2008) will be private equity. Or so says a number of top CEO's interviewed in a recent Australian Financial Review article.
The last year gave us great trophy deals: KKR jumping into Australia and buying the Cleanaway business, and painting a great big bullseye for other firms to aim at; the thwarted attempt at buying out one half of the grocery duopoly (Coles); the buyout of the Flying Kangaroo (Qantas); and so on.
It was also the year when people, having noticed the frequency that "private equity" and "leveraged buyout" was appearing in texts and flowing from everyone's lips, started to ask: what is it; is it good; and will it last. The year 2007 will have people sitting down with popcorn to watch and find the answer.
The "what" is easy. Imagine taking out a home loan. You put in a 10% deposit (more or less), and borrow the rest. You buy a house "with potential", you renovate, add bits and pieces, in the meantime paying the loan off using rent income or other income (most likely your salary). Then you pick a time to sell, and hopefully you sell at a nice profit.
For private equity, replace "house" with "public company", replace "income" with "operating cash flow", and there you have it.
The next two questions are much harder, and will depend on your perspective on the market. If you own a dog of a company, with bad management that you can't seem to get rid off, then a PE firm willing to pay a premium on the market price to take the company off your hands is a blessing. Same thing if you manage the company, are sick of the short-termism of the market, and have grand plans to make the company a success - if only someone would give you the capital and help you realise your dreams.
If, however, you are one of a (currently small but growing) number of people who believe the market is becoming/already is overvalued, then PE firms are to the market what petrol is to fire. Paying premiums for companies that are (in your belief) already overvalued is a sure sign that it's time to short some stocks. If you believe that most companies worth buying have already done all the cost-cutting and window-dressing that can be done, then PE firms will be buying companies that have no upside. If the market tanks during the typical 5-7 year investment horizon held by PE firms, then selling out at a profit (like selling a renovated home at the bottom of the market) will be almost impossible.
And of course, how long it lasts will depend on how long it takes until a major blow-up occurs and sends everyone running for cover.
This year will be an interesting one. Personally, I've been a believer in investments based on fundamentals. On one hand, I think PE firms do that: they buy firms with good foundations but mediocre structure or management, fix it up so the companies live up to their potential, and receive the rewards. They are the ultimate renovators.
But more and more, PE firms are paying higher prices, which to me does not seem like sound investing. It will reduce their ROI unless they do one of two things: borrow more as a proportion of the purchase price ("gearing up", which increases default risk), or somehow offload their investments to someone else at an even higher price. Whether that someone else is another PE firm or the public, whoever ends up with it will be playing a similar game of "pass the bomb" that was played in the late 90's/early 2000's during to dotcom bubble. But then again, I'm sure they know more than me, and that's why they're in the game and I'm not.
On the other hand, I've got to be feverishly optimistic about the prospects of PE in Australia, because my new job lives and dies by it. If the market tanks or PE firms go out of favour, the deal flow stops, and I sit there twiddling my thumbs (or worse, I lose my job and will have to go back to my old job).
At the end of the day, I believe PE is just like any other investment strategy: the asset has to be sound, the entry price low, and the exit price high. At the moment, I am beginning to wonder how much all three will hold up.
The last year gave us great trophy deals: KKR jumping into Australia and buying the Cleanaway business, and painting a great big bullseye for other firms to aim at; the thwarted attempt at buying out one half of the grocery duopoly (Coles); the buyout of the Flying Kangaroo (Qantas); and so on.
It was also the year when people, having noticed the frequency that "private equity" and "leveraged buyout" was appearing in texts and flowing from everyone's lips, started to ask: what is it; is it good; and will it last. The year 2007 will have people sitting down with popcorn to watch and find the answer.
The "what" is easy. Imagine taking out a home loan. You put in a 10% deposit (more or less), and borrow the rest. You buy a house "with potential", you renovate, add bits and pieces, in the meantime paying the loan off using rent income or other income (most likely your salary). Then you pick a time to sell, and hopefully you sell at a nice profit.
For private equity, replace "house" with "public company", replace "income" with "operating cash flow", and there you have it.
The next two questions are much harder, and will depend on your perspective on the market. If you own a dog of a company, with bad management that you can't seem to get rid off, then a PE firm willing to pay a premium on the market price to take the company off your hands is a blessing. Same thing if you manage the company, are sick of the short-termism of the market, and have grand plans to make the company a success - if only someone would give you the capital and help you realise your dreams.
If, however, you are one of a (currently small but growing) number of people who believe the market is becoming/already is overvalued, then PE firms are to the market what petrol is to fire. Paying premiums for companies that are (in your belief) already overvalued is a sure sign that it's time to short some stocks. If you believe that most companies worth buying have already done all the cost-cutting and window-dressing that can be done, then PE firms will be buying companies that have no upside. If the market tanks during the typical 5-7 year investment horizon held by PE firms, then selling out at a profit (like selling a renovated home at the bottom of the market) will be almost impossible.
And of course, how long it lasts will depend on how long it takes until a major blow-up occurs and sends everyone running for cover.
This year will be an interesting one. Personally, I've been a believer in investments based on fundamentals. On one hand, I think PE firms do that: they buy firms with good foundations but mediocre structure or management, fix it up so the companies live up to their potential, and receive the rewards. They are the ultimate renovators.
But more and more, PE firms are paying higher prices, which to me does not seem like sound investing. It will reduce their ROI unless they do one of two things: borrow more as a proportion of the purchase price ("gearing up", which increases default risk), or somehow offload their investments to someone else at an even higher price. Whether that someone else is another PE firm or the public, whoever ends up with it will be playing a similar game of "pass the bomb" that was played in the late 90's/early 2000's during to dotcom bubble. But then again, I'm sure they know more than me, and that's why they're in the game and I'm not.
On the other hand, I've got to be feverishly optimistic about the prospects of PE in Australia, because my new job lives and dies by it. If the market tanks or PE firms go out of favour, the deal flow stops, and I sit there twiddling my thumbs (or worse, I lose my job and will have to go back to my old job).
At the end of the day, I believe PE is just like any other investment strategy: the asset has to be sound, the entry price low, and the exit price high. At the moment, I am beginning to wonder how much all three will hold up.
Monday 1 January 2007
My 2006
I got this from fallenbutflying's Xanga site.
What did you do in 2006 that you'd never done before?
I flew to Hong Kong with some church friends for a holiday.
I crushed the vain hopes and futile dreams of many university students presenting nonsensical ideas and half-baked projects, as a judge in the National SIFE Competition.
Did you keep your new year's resolutions, and will you make more for next year?
I don't think I kept them. I don't call my goals "resolutions" because it would assure failure.
Did anyone close to you give birth?
None immediately come to mind, so no. (If I missed someone, well, you should've made me godfather...)
Did anyone close to you die?
No, thankfully.
What countries did you visit?
The colonies:
- Hong Kong (previously British)
- Macau (previously Portuguese)
- New Zealand (currently Australian, but they're still in denial)
What would you like to have in 2007 that you lacked in 2006?
Absolute power.
Barring that, my apartment; my new, smaller, faster laptop; my PDA; and my Nintendo Wii.
What date from 2006 will remain etched upon your memory, and why?
November 20, 2006. First year anniversary. We went to the zoo (my first time in over 10 years), and thoroughly enjoyed it. Saw a chimp grabbing its own faeces. Quality entertainment throughout.
What was your biggest achievement of the year?
Passing CFA Level 1 exams.
Negotiating my way into Leveraged Finance after two years of frustration.
Managing to convince Rockett Girlfriend that I was worth her time.
What was your biggest failure?
No golf lessons.
Did you suffer illness or injury?
Only of the mind.
What was the best thing you bought?
For myself: my "Friday Night" blue pinstripe shirt with french cuffs. I wore it to Rockett Girlfriend's birthday.
For someone else: the black dress for Rockett Girlfriend to wear to a friend's wedding. Summery, elegant, and totally hot.
Whose behavior merited celebration?
Mr DP, for finally getting married in April, when a few years back even he was saying he may just be single for life. And for having the guts to leave a lucrative legal career in London to be a fulltime pastor in a church there.
Whose behavior made you appalled and depressed?
A certain person who tried some character assassination in order to prevent my promotion.
Where did most of your money go?
Food and giving presents away. Oh and petrol.
What did you get really, really, really excited about?
Changing jobs.
Passing my CFA exam.
Hong Kong.
What song(s) will always remind you of 2006?
Justin Timberlake - Read My Blog (sorry, Be My Love)
Scissor Sisters - I Don't Feel Like Dancing (just way too catchy)
Compared to this time last year, are you:
i. happier or sadder? – happier!!!
ii. thinner or fatter? – fatter...
iii. richer or poorer? – hmmm... about the same
What do you wish you'd done more?
Exercise.
What do you wish you'd done less of?
Waiting.
What was your favorite TV program?
Lost and 24.
Do you hate anyone now that you didn't hate this time last year?
"Hate" is too strong. More along the lines of "vitriolic dislike" and "extreme incompatibility". And yes.
What was the best book you read?
Liar's Poker.
What was your greatest musical discovery?
Pandora.com
What did you want and get?
Business class. Leg room. Heaven.
What was your favorite film of this year?
The Departed.
What did you do on your birthday, and how old were you?
I turned 25. I just had dinner with Rockett Girlfriend and Rockett Family. It was the week before my CFA exam so I couldn't really celebrate.
What one thing would have made your year immeasurably more satisfying?
Golf lessons.
How would you describe your personal fashion concept in 2005?
Subtle and sleek, with a hint of vibrant colour.
What kept you sane?
Rockett Girlfriend. Mr JW and Mr MR, my constant source of career advice and sounding board during those rough times. Mother Rockett and Brother Rockett, for listening to my grand career plans no matter how boring they were.
Which celebrity/public figure did you fancy the most?
Ms Jessica Alba. Drool.
What political issue stirred you the most?
General and English skills testing for migrants applying to be Australian citizens.
Who did you miss?
Stepfather Rockett. Mr DP. My goddaughters.
Who was the best new person you met?
Mr LO. Great company (notwithstanding clipping my kart and costing me the win).
Tell us a valuable life lesson you learned in 2006:
Have faith. Show initiative. Take risk.
What was the nicest thing someone told you about yourself:
"You're not fat, baby." I know she's fibbing, which is why it was so nice. (Granted, I am only 4kgs over my ideal weight, so it's not a big lie.)
The most touching experience you've had this year?
When Brother Rockett told me that I inspire him. I have no idea why, or what I inspire him towards, but it was nice of him to say so.
What did you like most about yourself this year?
I made time for regular healthy pursuits.
I was more patient.
What did you hate most about yourself this year?
I tolerated idiots.
I spent too much money.
Quote a song lyric that sums up your year:
"It's something unpredictable, but in the end it's right, I hope you had the time of your life" - Green Day
Was 2006 a good year for you?
In many ways, yes.
What was your favorite moment of the year?
Debating with Rockett Girlfriend.
What was your least favorite moment of the year?
Standing in the middle of Sydney CBD, ready to have a great night out, and finding hardly anything worth doing or going to. I need to get out of this town.
Where were you when 2006 began?
Ms ML's house for the 1920's themed party.
Who were you with?
The gang.
Where will you be when 2006 ends?
Watching the fireworks down the road from Mr BT's house.
Who will you be with when 2006 ends?
Mr BT and Ms MM. This question is not as fun when done retrospectively.
What was your favorite month of 2006?
October. Spent one weekend being lazy at the beach. Turned off my phone so no work calls get through. Very satisfying.
What was your favorite record from 2006?
New Jack Swing compilation of old skool songs.
How many concerts did you see in 2006?
A couple not really worth mentioning.
Did you drink a lot of alchohol in 2006?
Yes.
Do a lot of drugs in 2006?
No.
Did you do anything you are ashamed of this year?
Perhaps. I'll know for sure when it bites me in the ass later.
How much money did you spend in 2006?
Too much.
What was your proudest moment of 2006?
Watching Rockett Girlfriend present in the SIFE finals in front of major league executives. Smart, confident women are HOT.
What was your most embarrassing moment of 2006?
Failing miserably at bodyboarding.
If you could go back in time to any moment of 2006
and change something, what would it be?
Buying side street junk from HK and now I have nowhere to put them.
What are your plans for 2007?
Work hard(er). Exercise (more). Tend to my spiritual side. Be more involved. Do more stupid things. Be a better wingman.
How are you different now that the year has ended?
I am very slowly thinking of settling down sometime. Within 10 years.
What are your wishes for the new year?
That all successes be well-deserved, and all failures be well-learned.
What did you do in 2006 that you'd never done before?
I flew to Hong Kong with some church friends for a holiday.
I crushed the vain hopes and futile dreams of many university students presenting nonsensical ideas and half-baked projects, as a judge in the National SIFE Competition.
Did you keep your new year's resolutions, and will you make more for next year?
I don't think I kept them. I don't call my goals "resolutions" because it would assure failure.
Did anyone close to you give birth?
None immediately come to mind, so no. (If I missed someone, well, you should've made me godfather...)
Did anyone close to you die?
No, thankfully.
What countries did you visit?
The colonies:
- Hong Kong (previously British)
- Macau (previously Portuguese)
- New Zealand (currently Australian, but they're still in denial)
What would you like to have in 2007 that you lacked in 2006?
Absolute power.
Barring that, my apartment; my new, smaller, faster laptop; my PDA; and my Nintendo Wii.
What date from 2006 will remain etched upon your memory, and why?
November 20, 2006. First year anniversary. We went to the zoo (my first time in over 10 years), and thoroughly enjoyed it. Saw a chimp grabbing its own faeces. Quality entertainment throughout.
What was your biggest achievement of the year?
Passing CFA Level 1 exams.
Negotiating my way into Leveraged Finance after two years of frustration.
Managing to convince Rockett Girlfriend that I was worth her time.
What was your biggest failure?
No golf lessons.
Did you suffer illness or injury?
Only of the mind.
What was the best thing you bought?
For myself: my "Friday Night" blue pinstripe shirt with french cuffs. I wore it to Rockett Girlfriend's birthday.
For someone else: the black dress for Rockett Girlfriend to wear to a friend's wedding. Summery, elegant, and totally hot.
Whose behavior merited celebration?
Mr DP, for finally getting married in April, when a few years back even he was saying he may just be single for life. And for having the guts to leave a lucrative legal career in London to be a fulltime pastor in a church there.
Whose behavior made you appalled and depressed?
A certain person who tried some character assassination in order to prevent my promotion.
Where did most of your money go?
Food and giving presents away. Oh and petrol.
What did you get really, really, really excited about?
Changing jobs.
Passing my CFA exam.
Hong Kong.
What song(s) will always remind you of 2006?
Justin Timberlake - Read My Blog (sorry, Be My Love)
Scissor Sisters - I Don't Feel Like Dancing (just way too catchy)
Compared to this time last year, are you:
i. happier or sadder? – happier!!!
ii. thinner or fatter? – fatter...
iii. richer or poorer? – hmmm... about the same
What do you wish you'd done more?
Exercise.
What do you wish you'd done less of?
Waiting.
What was your favorite TV program?
Lost and 24.
Do you hate anyone now that you didn't hate this time last year?
"Hate" is too strong. More along the lines of "vitriolic dislike" and "extreme incompatibility". And yes.
What was the best book you read?
Liar's Poker.
What was your greatest musical discovery?
Pandora.com
What did you want and get?
Business class. Leg room. Heaven.
What was your favorite film of this year?
The Departed.
What did you do on your birthday, and how old were you?
I turned 25. I just had dinner with Rockett Girlfriend and Rockett Family. It was the week before my CFA exam so I couldn't really celebrate.
What one thing would have made your year immeasurably more satisfying?
Golf lessons.
How would you describe your personal fashion concept in 2005?
Subtle and sleek, with a hint of vibrant colour.
What kept you sane?
Rockett Girlfriend. Mr JW and Mr MR, my constant source of career advice and sounding board during those rough times. Mother Rockett and Brother Rockett, for listening to my grand career plans no matter how boring they were.
Which celebrity/public figure did you fancy the most?
Ms Jessica Alba. Drool.
What political issue stirred you the most?
General and English skills testing for migrants applying to be Australian citizens.
Who did you miss?
Stepfather Rockett. Mr DP. My goddaughters.
Who was the best new person you met?
Mr LO. Great company (notwithstanding clipping my kart and costing me the win).
Tell us a valuable life lesson you learned in 2006:
Have faith. Show initiative. Take risk.
What was the nicest thing someone told you about yourself:
"You're not fat, baby." I know she's fibbing, which is why it was so nice. (Granted, I am only 4kgs over my ideal weight, so it's not a big lie.)
The most touching experience you've had this year?
When Brother Rockett told me that I inspire him. I have no idea why, or what I inspire him towards, but it was nice of him to say so.
What did you like most about yourself this year?
I made time for regular healthy pursuits.
I was more patient.
What did you hate most about yourself this year?
I tolerated idiots.
I spent too much money.
Quote a song lyric that sums up your year:
"It's something unpredictable, but in the end it's right, I hope you had the time of your life" - Green Day
Was 2006 a good year for you?
In many ways, yes.
What was your favorite moment of the year?
Debating with Rockett Girlfriend.
What was your least favorite moment of the year?
Standing in the middle of Sydney CBD, ready to have a great night out, and finding hardly anything worth doing or going to. I need to get out of this town.
Where were you when 2006 began?
Ms ML's house for the 1920's themed party.
Who were you with?
The gang.
Where will you be when 2006 ends?
Watching the fireworks down the road from Mr BT's house.
Who will you be with when 2006 ends?
Mr BT and Ms MM. This question is not as fun when done retrospectively.
What was your favorite month of 2006?
October. Spent one weekend being lazy at the beach. Turned off my phone so no work calls get through. Very satisfying.
What was your favorite record from 2006?
New Jack Swing compilation of old skool songs.
How many concerts did you see in 2006?
A couple not really worth mentioning.
Did you drink a lot of alchohol in 2006?
Yes.
Do a lot of drugs in 2006?
No.
Did you do anything you are ashamed of this year?
Perhaps. I'll know for sure when it bites me in the ass later.
How much money did you spend in 2006?
Too much.
What was your proudest moment of 2006?
Watching Rockett Girlfriend present in the SIFE finals in front of major league executives. Smart, confident women are HOT.
What was your most embarrassing moment of 2006?
Failing miserably at bodyboarding.
If you could go back in time to any moment of 2006
and change something, what would it be?
Buying side street junk from HK and now I have nowhere to put them.
What are your plans for 2007?
Work hard(er). Exercise (more). Tend to my spiritual side. Be more involved. Do more stupid things. Be a better wingman.
How are you different now that the year has ended?
I am very slowly thinking of settling down sometime. Within 10 years.
What are your wishes for the new year?
That all successes be well-deserved, and all failures be well-learned.
For NYE, two friends and I decided we will forgo the mobs, the hours and hours of walking and waiting (and walking some more), and general stench of alcohol drifting across the CBD. We had a cook-in/movie night instead.
About halfway in the night we were getting calls to come out to the city and join a party. With the road closures and blind-drunk mortals covering the roads, driving there was not an option unless one wanted to recreate scenes from their "Worst Moments Of Asian Holidays".
This set off about an hour's worth of to-ing and fro-ing and general indecisiveness. Contrary to first impressions, we were not simply being old fuddy-duddies. We did actually find the partying aspect appealing. We also thought that maybe one of our friends kept asking us to come out as a subtle way of signalling for rescue away from relatives. We were prepared to do that as well. But the subsequent troubles in getting home was a big concern.
Public transport is only acceptable if you also like having someone's vomit on you. Taxi drivers are price-gouging hyenas, the stench of desperation in the streets sending them into a laughing frenzy as they extort upfront payments of 10 times (or more) the normal trip fare. No thanks. Given it was at least a 45-minute walk, and the risk of thunderstorms looming, we decided to stay home, instead choosing to watch the fireworks from the street five minutes away.
It didn't rain a drop.
Nonetheless, we managed to have a good time. The food came out well and the movies weren't too bad. We certainly did not miss the jostling and the lengthy tiring walks. Resolutions to do more exercise in 2007 were quickly made.
SHAMELESS PLUG
I love Singstar and Buzz on the Sony Playstation 2. We played them at my cousins' place after the New Year family lunch. Nothing brings people together better than competition. Establishing once and for all who is the smartest in the pack was very satisfying (it was me, not that it was in any doubt). And singing along to the video clips of the songs is far, far better than normal karaoke, where you normally sing along to some retarded 80's romance clip populated by ugly people with really bad hair and extremely unbearable acting "skills". Of course, the clip doesn't help your singing prowess in any way.
We could easily do away with the contrived drama, idiotic judges and general ineptitude of Australian Idol by just letting all wannabes compete on Singstar. Let the totally objective and finely calibrated computer chip decide who is the best ("best" being a relative term; s/he may still be utter crappe`, excuse my French). Anything that gets rid of Mark Holden and Kyle Sandilands can only be a good thing. Sorry Marcia.
About halfway in the night we were getting calls to come out to the city and join a party. With the road closures and blind-drunk mortals covering the roads, driving there was not an option unless one wanted to recreate scenes from their "Worst Moments Of Asian Holidays".
This set off about an hour's worth of to-ing and fro-ing and general indecisiveness. Contrary to first impressions, we were not simply being old fuddy-duddies. We did actually find the partying aspect appealing. We also thought that maybe one of our friends kept asking us to come out as a subtle way of signalling for rescue away from relatives. We were prepared to do that as well. But the subsequent troubles in getting home was a big concern.
Public transport is only acceptable if you also like having someone's vomit on you. Taxi drivers are price-gouging hyenas, the stench of desperation in the streets sending them into a laughing frenzy as they extort upfront payments of 10 times (or more) the normal trip fare. No thanks. Given it was at least a 45-minute walk, and the risk of thunderstorms looming, we decided to stay home, instead choosing to watch the fireworks from the street five minutes away.
It didn't rain a drop.
Nonetheless, we managed to have a good time. The food came out well and the movies weren't too bad. We certainly did not miss the jostling and the lengthy tiring walks. Resolutions to do more exercise in 2007 were quickly made.
SHAMELESS PLUG
I love Singstar and Buzz on the Sony Playstation 2. We played them at my cousins' place after the New Year family lunch. Nothing brings people together better than competition. Establishing once and for all who is the smartest in the pack was very satisfying (it was me, not that it was in any doubt). And singing along to the video clips of the songs is far, far better than normal karaoke, where you normally sing along to some retarded 80's romance clip populated by ugly people with really bad hair and extremely unbearable acting "skills". Of course, the clip doesn't help your singing prowess in any way.
We could easily do away with the contrived drama, idiotic judges and general ineptitude of Australian Idol by just letting all wannabes compete on Singstar. Let the totally objective and finely calibrated computer chip decide who is the best ("best" being a relative term; s/he may still be utter crappe`, excuse my French). Anything that gets rid of Mark Holden and Kyle Sandilands can only be a good thing. Sorry Marcia.
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