Thursday, March 09, 2006


verses I really hate websites and blogs developed by someone who's written a book, or two.  Particularly if the books suck.  Nowhere is more hype expended to market more useless literary (and I use the term loosely) nonsense to larger numbers of people than in the fields of personal finance and venture capital.  Nevertheless, occasionally, you find something out there worth reading.

Compare the awful and awfully pretentious: Bona tempora volvantur the understated and simply good: O'Reilly Radar

Personally, I think if you are going to adopt latin mottos you either better be a large institution with a massive endowment, or at least be able to speak latin and get the grammar right.  Aut insanit homo, aut versus facit.


Tuesday, March 14, 2006

Ignore the Man Behind the Curtain

situational awareness From Research in Motion on the BlackBerry nonsense:

As to the lingering question of why the patent system should allow such a bizarre set of circumstances to threaten millions of American customers in the first place, we share your concern. The good news is that this topic is currently receiving much more attention from policymakers and the Supreme Court and we hope the patent system will evolve to close the loopholes and become more balanced.

Translation: "What do you mean we failed to respond to a legitimate licensing request from a small fry and it cost us a full year's EBITDA before we could.... Hey wait!  What's that behind you?"

Don't want to pay off $615.5 million for a piece of patent litigation?  Don't spend four years with your head in the sand ignoring a patent holder who asks you politely for royalties.

Thursday, March 16, 2006

Small Change

unicef I have been getting a lot of email questions.  I figured it was time for a silly frequently asked questions section in response to the many silly questions.  It is on the now recently updated about page.

Saturday, March 18, 2006

On the Twelfth Day of Christmas

staying power This year is the 25th anniversary of the HP12C calculator.  Hurray!

Sunday, March 19, 2006


warm cup of death I am really worried about caffeine.  I am worried about it because I have started drinking far too much of it. There is a fantastic, $3,000 pump espresso machine at the estate.  In the last three weeks I have gotten in the habit of pouring myself a deep espresso whenever I walk in, particularly if its before noon.  For three weeks that meant a cup every morning.  By the second week I was having one after lunch as well.  Two cups of strong, but wonderful espresso per day.

I tried to stop last week.  I couldn't.  Seriously, I couldn't.  I would catch myself with a cup and barely remember where and when I had obtained it.  When I finally tracked my consumption I was alarmed to find that I have gotten up to 4 or 5 cups a day.

I am not a hypochondriac by even the most remote stretch of the imagination but I have no doubt at all that I can feel the effect on me.  I can feel a tightness in my chest in the afternoon.  I can feel the anxiety eating at me.  I can feel the impact on my body already.

Maybe Milosevic was drinking espresso.

I need to stop drinking caffeine.  Soon.

Tuesday, March 21, 2006

Certainly Certain

death and taxes Abnormal Returns is yummy.  Random question, however.  Today they quip:

...macroblog shows some movement in expectations for the Fed funds rate at the May meeting. After the (almost) certain increase to 4.75% in March the market is backing of a near certain rise to 5.00% in May.

I think it would be useful to have an ordered ranking of terms like "certain," "almost certain," "near certain," and the like.  Is "almost certain" a greater degree of certainty than "near certain"?  The ordering in the phrase above would suggest so given that the level of a May increase is dependent on the March increase and therefore the expectation of a May increase should be somewhat subject to the imperfect certainty of the March increase.  Then again, perhaps there is an inverse certainty curve?  Does this foreshadow a certainty recession?  Is our examination of certainty and the development of certainty expectations really a certainty derivative?

I'll tell you what is certain: I have too much time or too much chocolate on my hands.  Certainly one of the two.

Wednesday, March 22, 2006


avoiding liability Reuters: Bernanke warns on mixing banking, commerce
CBC News: Bernanke warns about size of U.S. deficit
AP: Bernanke warns community banks on loans
UK Telegraph: Bernanke warns of more rate rises
WSJ: Blunt-Talking Bernanke Warns of Inflation Risks
UK Independent: Bernanke warns on danger of US deficits
Reuters: Bernanke warns on commercial real estate loans

CNN: Greenspan home robbed

Possible conclusions:

1.  Bernanke is your mother in disguise.
2.  Bernanke should be far more worried about crime.
3.  Greenspan news has devolved into fluff.
4.  CNN has devolved into fluff.

(via Crossing Wall Street which was in turn via Abnormal Returns)

Thursday, March 23, 2006


weak pillars Written on the New York Sun, before being posted on Under the Counter:

A professor of entrepreneurial management at Harvard Business School, William Sahlman, predicted that the surge of interest in private equity and hedge funds would mark the beginning of their decline. He said the proportion of students going into investment banking peaked in 1987 just before the stock market crash that crippled the industry. The proportion going into real estate in the early 1970s peaked just before the crash, and more students than ever started their own Internet companies in 1999, not long before the dot-com bubble burst.

What does this say about the legal profession?

legal bubble

Uh oh....

Friday, March 24, 2006


long hours and ivory towers Burning the Midnight Oil I came across Professor Victor Fleischer's revised paper on private equity and related vehicles and their compensation structure on The Conglomerate Blog.  (I took issue with Fleischer's points in a previous entry) and argued that putting illiquid partnership interests in this sort of tax structure was unwise and probably, given the requirement to divine the intent of partnership carry awards, unenforceable.

At the same time I found an article by Bartlett on the seeming lack of attention of VCs to reputation.  While in this instance there might be an issue, other research (312k .pdf) makes it clear that VCs in particular are quite strongly impacted by the signals they give with respect to reputation, at least with respect to other VCs, and, moreover, they seem to be aware of it.

Sunday, March 26, 2006

Behave Yourselves

park the car in harvard yard An outstanding (if slightly self serving) review on behavioral economics.  But then, what else did you expect (besides outstanding and slightly self serving) from Harvard?

Alpha Mails

darkly enlightening I love Abnormal Returns.  Just no other way to say it.  What other site would dare to tackle a subject like Alpha on a Sunday?

Monday, March 27, 2006

A Private Equity Love Story

love and money Via Color of Law.

A Sharp Talon for Rates

avenger! Hey Kids!  Drop those Oreos and turn off SpongeBob SquarePants.  Now you can learn all about the Federal Reserve from Baldy the Eagle!

(Via the Wall Street Journal, subscription required)

Tuesday, March 28, 2006


Go Maybe it is just me, but should the first link you see when you type "finance" into a Google search be Yahoo! Finance?

Wednesday, March 29, 2006

Boulevard of Broken Deals

strong enough to breaks deals with a double forward slash Elizabeth Spiers' long awaited labor of love is alive.  Dealbreaker thrusts itself onto the scene without so much as a "by your leave" from the Wall Street Journal or the New York times.  Look out Wall Street, it's not just Spitzer who is watching your every move anymore.

I've got tingles!

Sand Hill

day at the beach I would put Sand Hill Slave in my sidebar, but she links to Guy Kawasaki, so forget it.

Thursday, March 30, 2006

Damn the Torpedoes

fire four! I gave Research in Motion a lot of criticism back when they were whining about someone actually enforcing a series of patents they wantonly ignored for years.  My focus was on the arrogance and willful blindness that RIM seemed to display and my speculation that this, as much as anything else, caused them their present woes.  Much as I hate being on the side of any Microsoft employee (much less a senior one) the Journal now has an interesting letter from Nathan Myhrvold on patent law along the same lines.  ("D" reminds me that Nathan is a former MSFT type).  Among the more compelling comments:

Tech companies work extremely hard to use state-of-the-art technology, and either be first to market or a fast follower -- all else falls by the wayside. Big tech companies are happy to hire the best people from rivals, universities and small companies. Their employees attend conferences and study technical papers to stay on the cutting edge. But they pretend that the patents on the technology in those papers, or from universities or small companies, don't exist. Many of the largest tech companies have a standing policy that engineers are not allowed to read patents or check whether their work infringes. Why bother to look, if you know you'll find lots of infringement? Besides the cost, it's a distraction that might hurt time to market. Their strategy is simple -- damn the torpedoes, full speed ahead.


RIM, the company behind the BlackBerry, recently paid $612 million to a company called NTP to settle a patent lawsuit. People love their BlackBerries, so it's tempting to see NTP as a villainous troll, but RIM wears the black hat in this story. It could have settled for a reasonable rate (several of its competitors did). Instead it bet the farm in court and proceeded to lose big. The judge ruled that "this was not a close case" and, further, that RIM's litigation tactics were "egregious" and "fraudulent." When a judge says things like that, most people would settle. Instead, RIM gambled on a series of ever more desperate legal maneuvers and enormously raised the stakes through brinksmanship. Hubris caused its loss, not the patent system.

Someone Broke It

sharp Given the last six months, I could easily spend all day sending tidbits to This is Broken.

Nouveau Wealth Step 4: Writing a Best Selling Book

if it's not worth reading you can find it at the stanford book store After steps 1, 2 and 3 (Develop massive wealth quickly with little to moderate skill; Form Foundation for fashionable charitable cause and expense trips as Foundation business; Buy money losing airline, brewery or sports team and support with personal wealth for as long as it takes to get bored and sell at a loss) step 4 appears to be "Have a best-selling book written."  Last week, I had the chance to peek at a manuscript along these lines that was never published.

My "office" on The Estate is actually the library.  Armin basically "gave" it to me, but it is still filled with a massive and very broad collection of mostly wonderful and some depressingly bad books.  I have stumbled across early Walt Whitman editions in there and something that looks to have been signed by a very young Margaret Atwood.  Also in the stack, right next to the Ginsburg and Levin volumes on Mergers, Acquisitions and Buyouts, was an old FedEx envelope with a "final draft" manuscript written for the head of a large and fairly well regarded, private equity firm (which a business school friend of mine would have given reproductive organs to work for) inside.

Since I had been told that the library was "mine to use," I felt only a little guilty taking it out and starting to work through its 150 or so pages.  What I found was disheartening.

First, what appears to pass for print-worthy business writing in this day and age is enough to make one puke.  Honestly, I felt ill reading it.  The first 25 pages, literally, were the highest order of self-aggrandizement I have seen since... I take it back, I've never seen worse.

Second, if I see one more sentence that takes the form "The [company name] Way," I am going to clean out my checking account and retain the three best professional killers available in the market today to dispose of the author and anyone vaguely connected with the formation of that sentence.

Third, being able to write doesn't seem to be a requirement in order to be a business ghostwriter.  Apparently, this manuscript cost the "author" about $70,000.  I am in the wrong business.

The total value of firms acquired by "David's Equity Playland," the subject of this masterpiece, is mentioned seventeen times in the first two chapters.  No, I'm serious.  I counted.

Here are some other interesting statistics on number of mentions in the first two chapter of:

1. "Author's" net worth: 12
2.  Firm's extraordinarily high retention rate: 15
3.  "That's the [Firm Name] way.": 9
4.  "We do things differently.  We do things the [Firm Name] way.": 3
5.  "Author's" rank on various lists of wealthy people: 4

Something interesting occurred to me around Chapter 5.  The entire book is written with the "Author," who is ostensibly the writer, referred to in the third person and, occasionally, quoted.  The work doesn't even try to make a pretense at being by the "Author" in any text at all after the cover page, where "By David Smith" appear in bold letters.

The manuscript, which tantalizingly promises to let the reader in on the secret of private equity wealth in 15 easy chapters, does nothing more for 4 chapters than recite the most basic of outlines on how one goes about buying a company.  After all this it doesn't even have the common decency to be particularly accurate on most points.

Not to toot my own horn, but the two shaved down "primer" entries I wrote for any readers here who might not be up to speed on the process of private equity M&A, "The Hunt Part I (Chase)" and "The Hunt Part II (The Seduction)" are far more detailed.  And I thought I had cut corners and done a generally bad job of giving the reader any "flavor."

The contradictions in the work are quickly obvious too.  After citing the high retention rate of the firm 15 times, it is later announced that a massive purge in the early years permitted the organization to finally grow beyond those institutional limits.  Early citations of the firm's intense honesty and ethical standards are proven false within 22 pages when it is revealed that the firm's first big acquisition was such a windfall only because of borderline fraud-like deception by the buying team.

A note attached to the manuscript indicated that the author had decided not to publish as it might, "reveal too many secrets about the way we do business."  That, at least, is true.

I finally had the courage to ask Armin about the manuscript.  I thought he would be mad.  I knew that the "author" was a friend, or at least an acquaintance of his.  Instead, he laughed loudly.  "Isn't that a huge pot of shit?"  He meant "crock of shit," I think.

Friday, March 31, 2006


repurposing Though I saw it yesterday, I immediately dismissed the Charles Murray article (subscription required) in the Wall Street Journal on the entitlement state.  The big turn-off is that Murray is selling a book.  I am instantly suspicious of anyone with an idea who, while discussing it, tells the reader to buy their book for the details.  Then today, I began to browse The Journal again and, for some reason, it was listed as unread, so I gave it a quick once-over.  And then a twice-over.  And a thrice-over.  It is disarmingly seductive.


The place to start is a blindingly obvious economic reality that no one seems to notice: This country is awash in money. America is so wealthy that enabling everyone to have a decent standard of living is easy. We cannot do it by fiddling with the entitlement and welfare systems--they constitute a Gordian Knot that cannot be untied. But we can cut the knot. We can scrap the structure of the welfare state.

Instead of sending taxes to Washington, straining them through bureaucracies and converting what remains into a muddle of services, subsidies, in-kind support and cash hedged with restrictions and exceptions, just collect the taxes, divide them up, and send the money back in cash grants to all American adults. Make the grant large enough so that the poor won't be poor, everyone will have enough for a comfortable retirement, and everyone will be able to afford health care. We're rich enough to do it.

I have to say, I have recently despaired of watching the massive waste that is a government spending program.  I am entirely certain I will not, myself, see a dime of the social security "contributions" I make.  It seems clear that the lessons of tax reduction are not sinking in.  Even as the whining begins about the need to raise taxes, tax revenue is at a record high even after the tax cuts.  Government spending seems to be a one-upsmanship game for both parties.  Don't even get me started on how a social liberal (read: non-religious fanatic) but fiscally conservative type like myself has absolutely zero representation in the political system today.  (Even the party that claims it wants government out of our lives seems happy to put cameras in every bedroom to make sure we're not fucking someone in some unapproved way.  It makes me wonder why there's not an airline safety card for approved and unapproved acts.  The illustrations would be cool anyway).  It is time for a moderate party in this country.  But I digress.  The Journal continues:

The Plan confers personal accountability whether the recipient wants it or not, producing cascading secondary and tertiary effects. A person who asks for help because he has frittered away his monthly check will find people and organizations who will help (America has a history of producing such people and organizations in abundance), but that help can come with expectations and demands that are hard to make of a person who has no income stream.

I despair of this ever happening.  Or any change really.  America looks headed for bankruptcy.  People are too enamored of a system so complex and inefficient that they can keep manipulating it to their benefit. Change would be "inequitable."  "Inhumane."  I used to think this last accusation quite unfair.  Now I see it for truth.  Corruption, in all its forms, is uniquely human.

Thursday, April 06, 2006

Patently Whiney

guardian of nothing? I really have to say that big-tech needs to give their PR groups big-raises.  The way that the patent debate has been framed in the last 90 days is both impressive and alarming.  Poor billion dollar firms crippled by their inability to perpetuate the railroading they've been glibly giving "small guy" patent holders since the late 1980s.  The latest craze seems to be a requirement that in order to enforce a patent, at least via injunction, one must have commercialized the technology (or perhaps be in the process of attempting it).  This, of course, is folly.  I grow tired of the incessant mewings that eminate from the gaping mouths of firms (like Research in Motion and, worse, EBay, which actually freely admits to having infringed on the patents in question) that have willfully and for years disregarded patents held by smaller players and now want a "pass" when the time has come to pay the piper.  Reasearch in Motion, most recently, has directed its mewing to Congress.

Recall that the purpose of the patent system is to foster innovation.  Limiting protection to entities with the resources to "commercialize" an innovation would, in my estimation, have both a chilling effect on small "garage" innovators, and destroy the (currently rather liquid) market for innovation.

With respect to the chilling effect, small innovators are suddenly confined to "trade secret" protection for their innovations, quite a burdensome thing to maintain and a more difficult thing to market. Lacking patent protection (and the upside incentive it creates) what incentive does the "little guy" who has no hope of ever commercializing something have?

The more interesting (disturbing) issue is the impact on the market for innovation.  Today, built up primarily in the 1990s, the United States possesses a highly developed market for innovation called "venture capital."  The process of matching investment funds with innovation concepts and providing large upsides for all participants is well refined and balanced.  There is a reason one of the first issues a venture capitalist focuses on when evaluating a new investment is "barriers to entry."  This brings up two questions.

1.  What will constitute "commercialization" for the purposes of allowing a patent holder to apply an injunction?  Clearly "big-tech" wants this standard to be quite high.  An actual selling product in the marketplace, probably.  The only real downward direction to go would be something more akin to "efforts reasonably likely to effect commercialization."  Which, of course, is entirely silly.

2.  How will VCs use the negotiating power implicit in the phrase, "Well, without us how are you planning to commercialize it?" in discussions with the "little guy"?  (It should be obvious that this second question is rhetorical).

Friday, April 07, 2006

Unchained Malady

chained togetherFrightening.  Usually, I frown at blogs that spend a lot of time reflecting about their own existence (or putting up hit counters and that sort of thing).  It feels very self-congratulatory.  Very Bono.  So my excuse is that I'm actually quite frightened by the attention.  Today I've been linked to by DealBreaker, DealBook and The Deal.  I guess I've been "Dealed."  I will be very lucky if I don't break my TypePad quota this month (though the consequences of this are somewhat vague) so it feels very odd saying "Wow, thanks."

Wednesday, April 12, 2006

Expensive Sox

clean sox Working on a project yesterday the question of Sarbanes Oxley costs came up.  I had modeled in some of the additional 404 costs in order to measure some of the potential "going private" benefits in a transaction.  Then I got curious about something.  Are Sarbanes Oxley costs reasonable risk-return adjusted investments?

The real way to do this would be to plug in the difference in fraud "beta" pre-Sarbanes and post-Sarbanes and see if the present value of future Sarbanes expenditures meets the value of the reduced risk.  Of course, modeling the "beta" of fraud and determining how much fraud risk is actually eliminated via Sarbanes is not a trivial task. Instead, I took audit expenses pre-Sarbanes, ran them forward 7 years with a 4.00% growth rate per year (this is quite low probably, given that in 2000, 2001 and 2002 audit fees rose an average of 10% each year) and then discounted them back at the S&P 500's rolling 10 year average return of 9.10% (which isn't really the discount rate to be using, but it is easier than computing the average cost of capital for similar firms).  The present value of those expenses for a $5 billion - $10 billion revenue firm turns out to be $16,744,097.  (This isn't really right either since the firms aren't going to stop spending on audit in year 7, I suppose I could use a perpetual growth model here but I'm just bouncing rubble at that point).

I then took the discounted value of 7 years of post-Sarbanes expenditures ($36,837,013, same growth rate issues as above however) and adjusted the discount rate until it equaled the present value calculation of normal audit expenses.  The discount rate required to even the two out was 37.95%

Maybe it is just me, but Sarbanes seems a little steep by this measure.

Friday, April 14, 2006

Overfunded Funds

a swiss franc for your thoughts The Wall Street Journal has an excellent letter from Michael Steinhardt (subscription required) on hedge funds.  It begins with the wonderfully encompassing phrase, "When I started out 40 years ago, a hedge fund wasn't an asset class; it was a fee structure..."  Indeed.  It continues:

Currently, thousands of funds manage $1.5 trillion in assets. But this may have more to do with the incentives to managers than the incentives for investors. Performance money management is the highest paid industry in the world. Yet you don't need a license, a degree or even experience to start a hedge fund. Average fees have risen to nearly 1.5% of assets, which means managers don't merely cover overhead, they make a profit -- before they earn their clients a dime.

Realistically, there are a limited number of truly superior fund managers. Yet legions of managers earn extraordinary compensation for what, as the indices reveal, has been ordinary performance. The numbers tell the story. Last year, hedge funds reportedly earned a record $16 billion in fees tied to assets under management alone -- even as average returns fell to almost half the average of a decade ago.

This is a different business than the one I knew. The goal of capital preservation has entered the hedge fund marketing lexicon, where it doesn't quite belong. Performance should not be measured "relatively" but in absolute terms. The goal should be beating the market -- any market -- and having positive returns. It's not about attracting assets, or boasting to clients that you only lost 5% of their money when the S&P 500 was down 15%. As a hedge fund manager, I felt an obligation to investors to consistently -- and meaningfully -- outperform. This was the only way I felt justified in collecting extraordinary compensation. In the 29 years I was in the business, the S&P 500 posted an annualized return of approximately 11%; my firm posted after-fee annualized returns of 24.5%.

Today, performance is hardly spectacular. Since the stock market bottomed in 2002, hedge funds, as measured by the Credit Suisse/Tremont Hedge Fund Index, underperformed the S&P 500 two out of three years. From 1993 to 2005, the CS/Tremont Index virtually matched the 10.5% total return generated by the S&P 500 Index.


Eventually, investors will refuse to pay high fees for average performance especially when so many better alternatives exist, including "passive investing" strategies. The growing gulf between compensation and performance is an aberration that I don't see lasting -- even if so many have so much invested in seeing that it does.

Saturday, April 15, 2006


silenceLondon is a pretty dead place on Easter weekend.  I am headed home.

Thursday, April 20, 2006

Profoundly Profane

upper class twit of the year Mark Slater, over at Slater Ramblings, is trying to convince me in email that he is so humble and prudish that he was forced self-censored himself in this post to avoid exposing his delicate readers to the highly offensive word "Twit."  Seems pretty clear to me that he originally meant to call me a "Twat," but then what's a vowel or two between friends?

Monday, April 24, 2006

Subjectively Objective

let me just check with my manager Dealbreaker proffers an example tending towards the view that tech valuations have gone bonkers again.  (Or that they never fully pulled back into "unbonkers").  Of course, I am highly suspicious of valuations that don't get at or as close as possible to "intrinsic value" where that is possible.  What's the point if you don't have some kind of ballpark on what the business is capable of.  Ironically, a few readers have emailed me to critique my view of models, their importance and the relationship between modeling and actually operating a business.  I thought some actual statistics on the last two weeks of emails might be interesting.

Readers who indicated:

Equity Private is far too concerned with models: 3
Equity Private is not concerned enough with models: 3
Equity Private's models are not nearly robust enough: 2
Equity Private's models are over-engineered: 4
Equity Private would, in the fullness of time, come to understand how useless models are: 2
Discounted cash flow analysis is important: 4
Discounted cash flow analysis is useless: 3
Project Sinister employees are total idiots for not taking the bonus deferral: 5
Project Sinister employees are geniuses for not taking the bonus deferral: 3
Project Sinister employees are thieving villains who are at this very moment days if not hours away from smashing the drywall to salvage the copper in the Project Sinister offices: 1

Personally, I think the place of models is to introduce just a hint of rationality to what is otherwise a highly subjective analysis.  You have to take them with a grain of salt, to be sure, since their only value is predictive.  But herein lies the hitch.  When you both take models too seriously and start to impose "creative thinking" about how to model a firm, well then you get rather silly results.  This brings me back to the Dealbreaker entry:

The New York Times and New York mag both lead the week with return-of-the-dot-com boom stories about MySpace and DailyCandy, respectively.  Conclusion: it's different this time. Sort of.

It is the new, new economy, apparently.  Dealbreaker, quoting "Reporter Michael Idov" continues:

It’s nearly impossible to apply the usual valuation formulas to DailyCandy. According to the Wall Street Journal, the company projects revenue of “somewhere less than $20 million” this year. Most successful businesses go on sale valued at least ten times their yearly revenue, so by this standard, DailyCandy should cost $200 million or more.

Mr. Idov has given me some wonderful ideas:

General Electric trailing twelve months of revenue: $144.4 billion.
GE market cap (April 24, 2006): $358.8 billion.
Control premium for acquisition of GE (2005 average): 30%
Optimism factor applied to control premium: 20%
Resulting control premium: 36%
Theoretical acquisition cost of GE with control premium:  $487.9 billion.
Cost of restructuring GE to an "internet focused firm": 15% of enterprise value.
Restructuring time frame: 1 year.
Dollar cost of restructuring: $53.8 billion.
Total cost of GE acquisition and restructuring: $541.72 billion.

Potential sale price via "Idov Valuation Methodology" (patent pending): $1,444 trillion billion.  (Fortunately, I have eager Harvard beaver "LK" to correct my typos!)
Gains from sale net theoretical debt: $902.3 billion.
Time period: 1 year.
IRR on transaction: 66.56%
Cash on Cash: 1.67x

Really, as soon as people start getting creative with valuation metrics ($ per annual clicks, $ per "eye pairs," $ per paper-clips purchases) just stop listening.  It is not as if revenue multiples are even a decent way to look at things.  They just aren't.

Tuesday, April 25, 2006

Investing v. Deploying Capital

open floodgates Wonderfully sinister "Under the Counter" presents a missive about hedge funds and ponders if they should really be in the venture capital space.  Is the move a sage effort to diversify or a bit of dangerous overreaching?  Says "UTC":

The Journal claims that hedge funds are often willing to pay more for stakes in new companies than the venture capitalists themselves, prompting one to wonder if the traders have any idea what they're doing.

There are some interesting properties developing with hedge funds.  Because they aren't exactly specialized, hedge funds that "hang on" to other lead investors are effectively deployers of capital, not investors of capital.  They are in the business of putting as much money "to work" as possible.  I see their diversification as a function of the lack of opportunities in their traditional investment space rather than a careful bit of asset class diversification.

What alarms me about this development is that I find it hard to imagine that they possess the monitoring abilities required to manage their investments properly.  The five guys and gals at the leveraged desk for one fund Sub Rosa occasionally taps for debt are certainly not in any position to manage a firm if they have to foreclose.  Nor do I think they are really in a position to effectively fight a long bankruptcy fight or, as should be the case, deploy resources to avert bankruptcy before it strikes.

Says the Journal in another article (subscription required):

Hedge funds often make quicker investment decisions than venture capitalists and can offer more money -- though some say they may not scrutinize private companies enough before investing.


Hedge funds now are mainly trying to deploy the enormous amounts of capital they have raised over the last several years and diversify their investments, since returns haven't been stellar for most public stocks. Hedge funds currently have an estimated $1.5 trillion under management world-wide, compared with about $261 billion for venture-capital firms in the U.S., according to data from HedgeFund Intelligence Ltd. and the U.S. National Venture Capital Association.


...hedge funds often have a more relaxed management style. A venture capitalist "might be camping out in your conference room, asking all kinds of annoying questions," says Bill Burnham, a former managing director with Mobius Venture Capital who is now a private investor. The attitude of a hedge-fund manager, he says, might be, "Here's your check -- email me when you go public."

I am reminded of the view that fostered the growth of massive, inefficient conglomerates.  Massive amounts of capital and acquisition power suggest diversification.  The problem is that financial services giant QRX Megacorp, Inc. probably shouldn't be making salsa.

I can't imagine that this will end well for the less prudent of hedge funds.  The question is, how many prudent hedge funds are there?

Wednesday, April 26, 2006

Exxon Mobil and Politics

what really matters I don't like to get very political in here, but continuing the gratutious linkfest with Abnormal Returns (I can't help it, they have wonderful stuff almost every day) I am fascinated, and creeped out by this graph on Infectious Greed comparing Bush's approval ratings and gas prices.

Silly Correlation theories:
Dual, uncorrelated effects of a single, uncharted, independent variable (Gloom as independent variable):  People with gloomy expectations for the future drive more, pushing up gas consumption and elevating prices.  Gloominess also pushes down Bush sentiment.

Direct correlation effects between the two variables. (Bush approval as independent variable): People work off anti-Bush steam by driving fast.  Increased consumption tightens supply and drives up prices.

Thursday, April 27, 2006

When Focused, Isn't

focus! What is it today with the alternative definition of focus?  First that noise with Google and now Chairman and Chief Executive of Bank of America, Kenneth D. Lewis, is claiming (Wall Street Journal, subscription required) that after $80 billion in acquisitions over the last 24 months, the firm is more efficient and focused on customers than ever.

Monday, May 01, 2006

Total Lack of Surprise

woops Loudeye, the firm run by a Microsoft "prodigy" that threw a entire block party for a self-congratulatory fest when it raised $72 million, before getting another $48 million from Microsoft, and then $25 million from a 2004 stock sale and then another $8.5 million from a recent stock sale, and who knows what other fundings inbetween that I've missed, meets all our expectations this week.  That is, it sells substantially all its assets for $11 million to Muze, Inc. 

I'm going to use this occasion to introduce a new concept.  The "Cuban Overlap Failure Index."  (COFI).  The COFI number for a failed firm is the number of Google hits that firm's name produces when "Mark Cuban" is added to the search term.  Loudeye's COFI: 221.  I'm currently testing the "Kawasaki Overlap Failure Index" (KOFI), but no one spells Guy's name right so it is probably less effective.  Still, Loudeye's KOFI: 83.


concentrate and ask again So can being connected to Mark Cuban or Guy Kawasaki be a strong indicator of impending financial doom?  I'm not sure, but it is a lot of fun to speculate.  So I ran some regressions of the Cuban Overlap Failure Index and the Kawasaki Overlap Failure Index.  (COFI v. KOFI).  Results?  It is better to be in Google searches next to Mark Cuban than next to Guy Kawasaki.  KOFI numbers have an R-Squared of .626 against the losses of some famous dot-bombs.  (,,, Webvan, Flooz, eToys,, Kibu).  COFI numbers don't show very good R-Squared numbers (.199).  Regression graphs below.  I wonder if these have predictive ability?  If so then Losses in $ millions at Failure = 1.296 x KOFI number.  Predictive losses for Google?  $814 billion.

neither one of them looks good

Third Time Could Be the Charm

paris hilton, blackberry lawsuit victim RIM in trouble again?  This time an "actual company" with revenues and developed products and license agreements with AT&T, Nextel and Vodaphone and everything?  Uh oh.  Guess we better start working on patent reform post-haste to prevent inventors from suing anyone to protect their interests.  I still want to LBO Research in Motion.  It is ok though.  Paris Hilton is a Blackberry fan.  All will be well.

Wednesday, May 03, 2006

Today in Capitalism

typecast Happy 537th birthday: Niccolò Machiavelli, Florentine, diplomat, formative figure in modern statecraft, poet, playwrite, lawyer's son, advisor to the Medicis, purported anti-Medici conspirator, convict, torture victim, exiled citizen, author of 23 works of substantial importance, including "Dell'arte della guerra" (The Art of War), "Discorsi sopra la prima deca di Tito Livio" (Discourses on the famous Roman, Titus Livy), "Del modo tenuto dal duca Valentino nell' ammazzare Vitellozzo Vitelli, Oliverotto da Fermo, il Signor Pagolo 'il duca di Gravina Orsini" (Description of the Methods Employed by the Duke Valentino when Murdering Vitellozzo Vitelli, Oliverotto da Fermo, Signor Pagolo, and the Duke di Gravina Orsini), "Asino d'oro" (The Ass of Gold), many dozen more minor works, and, oh yes, author of "Il Principe."

("Ritratto di Niccolò Macchiavelli," Ridolfo del Ghirlandaio, c. 1522; Private Collection, London)

See also: Dealscape 

Pride Goeth Before....

paris hilton failure overlap index? Honestly, Research in Motion, didn't you learn anything?  Answer: Uh, what was the question again?

How Sharper than a Serpent's Tooth

louis rukeyser (1933-2006) I admit it.  I used to watch Louis Rukeyser in "Wall Street Week" all the time when I was younger.  When I started, I was far too young (11) to be watching Louis Rukeyser, or anything remotely related to Wall Street.  My parents thought I was more than a little "off."  I can't even vaguely remember how I got started watching it, but I do remember that the show immediately adjacent to it in the schedule, "Washington Week in Review" had an ubercool opening clip that involved a spinning graphical representation of the Capital Dome, but the content of that show was boring.  Real boring.  A portent of things to come.  Today, about any news about Washington or politics bores me to tears.  I can't get enough of the Journal.

I lost heart, a little, when the pinheads at Maryland Public Television decided to "modernize" Wall Street Week and add some "fresh blood."  What they failed to understand was that the regular Friday appearance of the grandfatherly (I swear, he reminded me of my grandfather quite a lot) and calming figure of Rukeyser, complete with sophistication, poise, complete calm, wit and charm, was just what the country needed after a turbulent week.  I always remember his view as a long one, emphasizing optimism, long-term returns in equities and reminding us to ignore short-term volatility.

Then there was the "Elves Index," I always used to think of the Gnomes of Zurich when I heard that.

Not surprisingly, even though offered a guest spot on the new show, Rukeyser was having none of it, and he wasn't quiet about it either.  "Don't worry folks," he quipped, "I've always said that I wouldn't retire until I was old enough to be an anchor on 60 Minutes. And I've got a long way still to go!"  He was summarily dismissed immediately after.  Occidental Petroleum, long time sponsor, pulled their support of the show, which was pulling in over $6 million in advertising yearly on $2 million in production costs.  They wore formal evening wear on his year-end program every year.  Playboy named him "Best Dressed."  Talk about a class act.

"How sharper than a serpent's tooth to have an ungrateful child- in this case an ungrateful producer," he told Larry King, in reference to Maryland Public Television after his sacking.  But we shouldn't at all be surprised that he was the kind who could quote King Lear to Larry King at the drop of a hat, and throw in a double entendre to boot, I think.  It is not hard to understand why he was mad, and not surprising the pinheads at MPT didn't expect what came next.  As he told King:

We would have had a graceful exit, we'd have said nice things about each other, we would have gone our separate ways. Instead they totally deceived me, deceived my viewers, and then they apparently were astonished that Friday night that I did what I always did, and in my opening personal commentary- and I control the content of the show contractually, plus I have the same First Amendment rights that you and everybody else do- I told people what really had happened, leveled with the viewers, which I've always done for 32 years, part of the strength of the show, I think....

Was it over for him?  Never.

...Ernest Hemingway crashed in the jungle. People thought he was dead. All over the world there were obituaries praising Ernest Hemingway. Then the guy comes out of the jungle, unexpectedly, carrying a bunch of bananas and a bottle of gin and he said, "my luck, she is running good."

He left and moved to CNBC and topped their ratings.  I lost track of him there.  I suppose it was hard to watch a serious financial program on the likes of CNBC.

I never got to go on one of his Investment Cruises, they sounded a little corny, but so did his puns sometimes.  ("If all your money seems to be hair today and gone tomorrow, we'll try to make it grow by giving you the bald facts on how to get your investments toupee.")  I bet the cruise would have been a blast.  And I suspect I am not the only one to think so.

There was just something about him.

But a lot of people of all ages don't want just an MTV approach to life. They want a little more thoughtful program. They want the kind of discussion program you do. They want a little commentary that makes sense and doesn't put them to sleep. So I think there's always going to be room for quality programming, and those who say everything's got to be faster, shorter, jazzier have been around forever, and they usually come and go pretty fast.

We aren't going to find this again soon.

I would like to be remembered as a guy who always leveled with his audience, who tried to represent the customer and nobody else, and who gave it to people straight, no matter who it offended.

- Louis Rukeyser

Monday, May 08, 2006

Banking on Women

as advertised Dear "Leveraged Sell-out":  Your most recent entry is highly offensive to female financial professionals.  It demeans women, particularly those in the world of investment banking, casts them as bitter and disillusioned "wilted flowers," suggests that their primary role is to service men and encourages men to use deception and manipulation to coerce these investment banking women into having sex.  Further, your parody "craigslist" advertisement is a shallow attempt to capitalize on stereotypes often leveled at such professional women.  With respect to this particular demographic, your entry is crude, misogynistic, targets a productive segment of working women and is entirely lacking any of the tenants of modern, progressive-liberal thinking.  Accordingly, please add me to your mailing list immediately or, in the alternative, forward detailed instructions on obtaining an RSS feed of your weblog.

Thank You in Advance,
Equity Private

Wednesday, May 10, 2006

Cannot Post Today

just plunge it in my heart already Andrew Feinberg's comments about Louis Rukeyser have so upset me that I have been unable to post today.

Thursday, May 11, 2006

The New Baroque

authority from above Readers may already be familiar with my feelings about the importance of individualism and rationality as the genesis of an authority built on individualistic, rather than centralized tenants.  Today, reading The Economist, I came across a quote in an article on Google (subscription required) that gives me pause and makes me think that we are faced with a kind of Baroque period in technology.  This is not a technology or venture capital blog, but, as a keen consumer of outsourcing services, the article exhibits a trend, today described by such phrases as "Software as a Service," and perhaps in days of yore as "The Network is the Computer," that makes me nervous.  Very nervous.  To understand why you have to go all the way back to the foundation of Apple.

First, the quote about Google:

Among Google fans, the company has come to epitomise the more mature (ie, post-bust) internet generation, which goes by the marketing cliché “Web 2.0” (see article). In this context, it is assumed to be working on absolutely everything simultaneously, and every new product announcement, no matter how trivial, is greeted as a tiny step toward an eventual world-changing transformation.

At a minimum, this hypothetical transformation would consist of moving computation and data off people's personal computers and on to the network—ie, Google's servers. Other names for this scenario are the “GDrive” or the “Google grid” that the company is allegedly working on, meaning free (but ultimately advertising-supported) copious online storage and possibly free internet access.

I'm not a rabid Apple fan, nor do I have the qualifications to be much of a nerd, but I do share the afterglow associated with the introduction of the "personal computer."  Apparently, I say this because I was far too young to know, long ago there were these things called mainframes.  Mainframes were massive pieces of iron that provided a central source for computing power.  Since they were centralized, and sufficiently complex to defy individual intrepretation, little empires developed centered around the computing resources in large corporates.  They controlled access to computing.  They had power.  That this empire would ever be challenged by smaller, autonomous computing was unthinkable.  So interwoven was this belief that Ken Olsen, founder and CEO of Digital Equipment Corporation famously told the World Future Society "There is no reason for any individual to have a computer in his home," in 1977.

It seems obvious now that the personal computer was destined for ubiquity and centralized resources for obsolescence.  Haven't we had this argument a few times already?  Isn't this the point of capitalism, individuality and free markets that individual market actors have importance?  What better example than the personal computer?  It deconstructed centralized control over computing resources.  (There's nothing more annoying than IT people with the power to nix a merger).  In short, it introduced individualism into the computing world.  So why is Google, along with Microsoft and others, working hard to reverse this trend?  This question is even more puzzling when you look at the many failed attempts to go back to a mainframe model over the last 20 years.

With my data on my hard drive in my computer running on my software, I don't really have to worry about their data backups, their storage provisions, their network connection or their disgruntled employees.  Why would I want to give up my data and my processing to a third party, ever, unless I couldn't get done what I wanted to do on my own, increasingly cheap hardware?  Why introduce dozens of people into the potential failure chain?

I think the answer lies not in what consumers want, for anyone who has lost a long blog entry or a seven page email due to a web-based front end crashing, the wireless network at the airport dying for 30 seconds, some piece of heavy equipment digging up a fiber cable, or a session timing out, has exactly zero interest in using those applications via the network unless it is mandatory, but in what software companies want.  They want to control how data, content effectively, gets processed.

If you follow digital rights management (DRM) at all (I do because of one of our portfolio firms) you know that software makers and content providers have long been trying to control what you process and how you process it on hardware that you already own.  "Piracy" is the usual boogieman used to justify these restrictions.  They started with selling you a "license to use" software rather than actual title to the software itself.  Certain uses could be restricted this way.  That didn't really give them active control so they moved to technological restrictions on use, DRM and burdensome and capricious legal structures (like the Digital Millennium Copyright Act) to protect their poorly designed DRM.

DRM isn't working well.  Primarily because it is an impossible problem to solve while I have, as one SubRosa partner says quoting a security expert who's name some might recognize, "their security in my pocket."  This is as it should be.  My data and my hardware should not be held in trust for me by content providers, the principal of which they generate revenue with in the interim.  But they need this structure to preserve their middle-man revenue model.  Arbiters of content, as it were.  Many of them have lost their distribution monopolies.  Accordingly, they have to move the processing, the repository for software or the data itself into their own hardware.  How can that be done?  Software as a service.  GDrive.  GMail.  Now all your data and all your processing are subject to terms of use and they can enforce these directly.  Scary.  Now my data is a source of revenue.  I have to pay to get at it.  They can use it to develop more sophisticated ways to force me to view, and others to buy, advertising.

Contrast this against the stated benefits of "software as a service," all of which strike me as as much steaming dung.  And what happens when Word 2.0 eats my offering memorandum?  Well, I'll call the help line and utilize the "customer service as a service" India outsourced support rep, of course.

Time for the Second Enlightenment.  With any luck there will be some bloodshed.

Monday, May 15, 2006

Punishing Talent for Fun and Profit IV

duck duck duck goose No less formidable pair than The University of Chicago's Gary Becker and Richard Posner chime in via their excellent blog on CEO pay and, to some extent, take to task the many measures used by the clamoring masses to whine that CEOs are overpaid in the United States.  The two make some interesting observations.

U.S. CEO compensation has increased 6 fold in the last 25 years, a point often made large in the argument that CEOs are fat cats.  Interestingly, and deflating the sting of this argument some, this is almost exactly the increase in size of the average, large publicly held firm in the United States. 

U.S. CEOs make about twice what their foreign counterparts do, but salaries are a much smaller portion of CEO compensation in the U.S. (less than half) than, say, in Europe.  Posner points out that foreign CEO compensation is actually catching up with U.S. compensation, which is an interesting point if you think the foreigners have it right.

Both are quick to give the competition for CEO spots, the "market for management talent" as it were, a nod.  Both are also quick to point out that the increasingly reliance on stock options as a long-term compensation structure accounts for some of the change, but Posner points out that stock price is not necessarily correlated to CEO effectiveness or contribution.  Of course, that is a difficult argument to make without a good control sample, but the point remains.  So what are we to use if not stock options?  Phantom options perhaps?  Tied to metrics we believe are more closely correlated to CEO performance?  What would those be?  Net Profit?  Market Cap?  Revenue?  (Surely not). 

Mystery Science Theater 2006

it's not a state secret Key hint that there might be a issue in the marketing department of a firm: You can't tell, on reading the first three paragraphs of the firm's description of itself, what the hell it does.  Case in point, this missive from a large publically held firm (can you figure out what they do without Googling the text?):

Be sure you're getting the most value from your information—and your IT resources. From proven systems and open software to world-class services and solutions, Firm X provides tight integration and advanced networked solutions for full compatibility with your existing infrastructure. So you can manage your information across its entire lifecycle—while you manage your budget.

Answer below.  (No peeking).

EMC Corporation.

Thursday, May 18, 2006

CNBC: Financial News You Can Lose

the best condition the cnbc set can be in, empty My favorite Bain Capital reader laughingly points out an exchange on CNBC today that pretty much sums up the state (absence) of that offering's financial intelligence.  He cites Bob O'Brien, of Dow Jones, as explaining that while Chipotle's IPO closed at day's end up 22%, the Burger King IPO is only up 7% (intraday) because: "The difference is in the burger... Burger King is stuck in a low growth industry."

Can no one on that program have realized that in the absence of major market moving news the daily gain on an IPO the same day of its initial issue has only to do with how well priced the deal was by the underwriters?  Someone pays these people?  Ugh.

Monday, May 22, 2006

A First

Special Executive for Counter-intelligence, Terrorism, Revenge and Extortion Going Private's readers are generally in the top quartile of people I "meet" on a daily basis.  Not a hard standard to exceed though, since I spend most of my time with bankers and lawyers.  By no means are they some kind of fawning groupie base.  Many of the emails I get are critical or at least in disagreement with my posts.  They have, however, been, almost to a letter, respectful.  So imagine my surprise today when I recieved an email from a reader claiming to have discovered my identity and threatening to "out" me.  Imagine my further surprise when the email went on to demand some kind of payment for this reader's continued discression.  Rather bold, no?

" bad do you not want me to disclose who you are?" he/she writesIt is sort of like being in a bad horror film plot.  I keep picturing a dark room with a badly scarred, bald guy with a big signet pinkie ring methodically stroking a long-haired, white Persian with a diamond collar.  "Put zee private equity blackmail plan inzoo effect."  How thrilling!  And how criminal.  It is all fun and games until someone commits a felony.

Extortion and blackmail are federal offenses and carry federal prison terms varying from 1 to 20 years.  The interstate transmission of threats of this kind is itself a crime, even without any other action.  To wit, 18 U.S.C. 875(d) "Interstate communications" provides in part:

Whoever, with intent to extort from any person, firm, association, or corporation, any money or other thing of value, transmits in interstate or foreign commerce any communication containing any threat to injure the property or reputation of the addressee or of another or the reputation of a deceased person or any threat to accuse the addressee or any other person of a crime, shall be fined under this title or imprisoned not more than two years, or both.

Since the threat was made over email and probably crossed state lines there's probably a federal wire fraud charge for an eager prosecutor to dig up as well.

Sounds like my reader has already made him or herself a three count felon with about 20 seconds of effort.  Woops.  I'm sure badly scarred, bald guys with pinkie rings and Persian cats wearing diamond collars generally have a good legal defense fund socked away though.

This, of course, is before we even get to New York state law or the laws of the state in which my faithful reader is resident.

Of course, pressed to disclose what it was he or she knew about me, where I work or any other details the reader could not provide any answers of substance.  But, 18 U.S.C. 875 doesn't require the threat to be plausible, and there is no capacity requirement, only that the threat was made.  Still a felony.  Woops #2.  I'm sort of assuming it was a careless game.  Still, a dangerous one.

Friday, May 26, 2006

Some Taxing Options

taxing I mentioned in a pervious entry the notion that regulatory overzealousness may have actually have caused the backdating scandal to some degree.  I couldn't remember at the time the article I had seen referencing this.  I found it again on the University of Chicago Law School's faculty blog.

Friday, June 02, 2006

Asset Class Reductions

clark sure has put on weight The Economist reviews (subscription required) the unusual nature of Wall Street's relationship with hedge funds, this time from the perspective of prime brokers.  Much hand wringing about the impact of hedge funds on the financial landscape (from a marketing of financial services perspective) is reviewed but, at least to my way of thinking, the take home bite of the article was this:

Increasingly, middlemen throughout the financial sector have been asked to prove their worth to their customers—or to find other ways of making money for themselves, by proprietary trading or making more use of their balance sheets.

A recent study by IBM Business Consulting Services argues that the vocabulary describing financial markets today—buy side, sell side, hedge funds—could be redundant within a decade. It suggests that, in future, firms will be classed according to whether they add value through “risk assumption” or “risk mitigation”.


Tuesday, June 20, 2006

Tension With No End

any continent that produced airbus can't be all badIt is an alarming thing to sit through a meeting where people are busy talking about you as if you aren't there.  Well, perhaps eerie is a better descriptor.  I sat through nearly 2 hours of conference call discussing Sub Rosa's new Europe venture and, in particular, the staffing of the new office.  At one point it was hinted that the upward career path for the junior staff was in Europe.  "Exclusively."  Two or three pairs of quickly averted eyes looked my way.  I was the youngest employee in the room at the time.

Alas, there is no update.  I am still in limbo.  After the career comment I secretly hope I am sent. Armin seems to be gearing to move himself, and I have to think that means I'll be pulled along.  Another side of me, however, despises the idea.  I feel like I have just gotten settled here.  Not that I have much of a social life, but at least there are the distant hints of it.  To start over again, I just don't know.

I am not a particularly good waiter.  I have to totally sink myself into something distracting (a spa treatment sounds good right about now) to stop worrying.  Now if only I could find the time to spa....

A Remider To Going Private Readers

you can probably get heather's number with the right bribe The email response to my recent posting including Laura "The Debt Bitch," vodka, and some bankers compels me to remind readers of the Going Private "Start Here" page that contains a list of frequently asked questions.  In particular, I think these four should prevent unneeded emailing by you and unneeded email reading by me.

Q. "Is the Debt Bitch Single?"
A. What is this, eight grade again?  Ask her yourself.

Q. "Can I have the Debt Bitch's [email address/phone number/description]?"
A. No.

Q. "Can you give me a hint where you and the Debt Bitch work?"
A. Well, it's a private equity firm.

Q. "Can't you give me a bigger hint than that?"
A. We do buyouts.

Wednesday, July 26, 2006

Deal Hell

lawyer or banker? Equity Private Reader: "Where have you been?  Weeks without a post."
Answer: See Diagram

Art: Illustrations for Dante's Inferno, Gustave Doré (1861)

Tuesday, August 01, 2006

"Fan" Mail

digital anthrax Reader mail is both the joy and horror of writing Going Private.  Monday I got a missive from a European reader/writer that contained an unusual tidbit.  At first I shrugged it off, but after some reflection I have found myself increasingly offended by the tone and implications.  I suppose I should take the left handed compliment in stride given the sullied reputation that private equity types seem to have carefully and laborously cultivated for themselves, but still.

Congratulations on your blog! I do not usually read blogs as I consider them a waste of time and often full of typing errors and the authors' unimaginative views. I came across yours almost by accident and must admit it is fun to read and aesthetically quite pleasant if not poetic. However, the level of linguistic nuance and psychological insight, forgive my reservations, makes it hard to believe you are ‘a real private equity VP’ and not, for example, a well plugged in journalist.

Imagine my shock at being accused of being not just a journalist, but a financial journalist.  The horror... the horror.

Actually, the high level of punctuation and grammatical insight in the letter make it hard for me to believe, and forgive my reservations, that the writer is actually European.

Wednesday, August 02, 2006

Mail Malice

chain mail A loyal reader and occasional critic writes of my link to interest rate discussions yesterday "penned" by Harris Rubinroit.  Apparently it is reader mail week here at Going Private.  Said reader is annoyed with Rubinroit, and me.  To wit:

Your recent post on the Bloomberg article discussing high yield financing that you described as a "tour de force". In the sense that he managed to copy most of a recent S&P article without making a mistake it was indeed a "tour de force". As an exercise in original thought or insightful analysis it was somewhat lacking. Mr Rubinroit appears to have written the article based entirely on secondary sources (such as the S&P article) without much in the way of primary sources or significant input anyone with any connection to the thrilling world of leveraged finance (the quotes from various sources notwithstanding). Amongst the points I would raise with the author would be:

(a) the cost of the HCA senior financing is likely to be significantly higher than L+215bps; I would suggest a figure closer to L+275-300bps. Its just difficult to place $8bn (or whatever the number might turn out to be) of bank debt without offering some premium to the market standard for LBO financing (which is somewhere around L+250 I suspect). Ask your colleague the debt bitch if you don't believe me.

(Note: The Debt Bitch agrees fully, and calls Rubinroit's assertion "Muffielike" in what I can only assume is a reference to Muffie Benson-Perella).

(b) The main reason that borrowing costs for HCA will be higher is because LIBOR is higher, rather than because spreads are higher. LIBOR is higher because US interest rates are higher. As the debt is floating rate, whether the deal was done in April or closes next year, they would have taken a hit from this (leaving aside the impact of any hedges that the company may have put in place) at the next reset date - generally every 3 months.

This was the one part of Rubinroit's argument that I still find compelling.  If the LIBOR spread is 275 basis points it is clearly more expensive than a LIBOR spread of 225 basis points no matter which direction (if any) interest rates are headed.  Of course, Rubinroit's credibility on LIBOR spreads seems awfully questionable now that my astute reader has chimed in. For what it's worth, the Debt Bitch does think spreads for LBOs were quite narrow back in "the spring."  She also sighed a wistful sigh and looked a heartbreakingly wistful and nostolgic look when remembering "those days."

(c) investors in leveraged loans generally are not as picky as the article portrays them to be - many can't afford to be. The CLOs mentioned in the article are heavily incentivised to remain close to 100% invested - they are very levered (c. 9x) investment pools and if they sit holding cash will suffer from significant negative carry, crushing equity returns (and more importantly for the managers, performance fees) and are forced to hold highly diversified portfolios (generally 50+ different borrowers). Finding 50+ high quality sub-investment grade companies can be something of a struggle particularly for 3rd tier and new managers that aren't close to the sell-side and so bad companies continue to get financed and will continue to do so until some of these CLOs start to crack (which will happen as default rates increase).

This is a critical piece of analysis which I (and Rubinroit) entirely neglected.  Shame on me for not pouncing, as I have fretted before about the wholesale sale of LBO debt in the context of covenant lite loans- in particular because the current practice as implemented seems to have more to do with "placing" funds than investing them.

I could go on but I won't suffice to say the article may have summed up a lot that is already well known but didn't provide any insight whatsoever.

However, my issue is not with Mr Rubinroit's article per se, but rather how you presented it: you basically took a summary of recent industry analyses and 2 minute conversations with industry "experts" and summarized it further. No insightful analysis. No commentary or opinion. No witty lampoonery. Not even a sarcastic swipe. This is not what brings readers to your blog. I daresay the bulk have access to Bloomberg or would have seen the article (or one like it) floating around. While you have made your views on debt financing clear in previous posts you really didn't elucidate on them here. What I'm trying to say is I'd much rather have your views on the subject that a summary of S&P stats (lies, damn lies and statistics and all that). I might not always agree with them (I'm one of those nice young men running LBO financing at a hedge fund that you often make (somewhat dismissive) passing comments about), but I'm generally interested in and amused by them, as I think the bulk of your readership are (all 4 other readers would no doubt back me up.....).

I was having an off day, that’s for sure.  Sorry.  But I'll have you know that I have 6 readers now (including me).

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