Wednesday, August 02, 2006

Things Are Not Cool

not even a little cool I am not at all quite sure what to make of "Things Are Cool," except that I think it's pretty uncool.  Is it a joke?  I'm unsure.  Things start to go south quickly for me once the author claims to be dating me.  I find this alarming because I was not actually informed I was in a relationship.  Apparently, the sex was equally unmemorable as I have no recollection of it whatsoever.  We must have had a lot of vodka beforehand.  Are you in finance?  Was I any good?  Then there is the picture of "me."  I seem to have spent too much time in a tanning bed and lost all sense of fashion since I started this relationship.

Normally Abnormal

abnormally yummy Abnormal Returns (yummy) delivers a private equity link blitz followed by another one which, among other notables, cites Going Private.  Hard to dislike a blog like this.  Not to mention that their new header is quite pretty.  (I still miss the old New York skyline one though).  I would also be remiss if I did not call the particular attentions of Going Private readers to the excellent look into hedge fund-private equity convergence set gingerly against the backdrop of Carlyle's hedge fund re-entry and penned by "Information Arbitrage," in turn revealed to us via link by the always discerning eye of Abnormal Returns.

Information Arbitrage hits it on the head here, in my view, by identifying one of the key issues as a cultural one.

The first issue comes down to a melding of cultures which are very, very different. Private equity guys are deal guys. They tend to be pretty good communicators. The have a modicum of patience. They understand the concept of delayed gratification, i.e., waiting for the big payout when the investment is liquidiated or a large dividend is scooped out of the portfolio company. Hedge fund managers, conversely, are often lousy communicators, highly impatient, and want to be paid yesterday. OK, so maybe the private equity guys and hedge fund guys won't go bowling together on Wednesday nights.

Good guess.

I expect Going Private readers will find the remaining details captivating and find the predictions, if my prediction on them comes to pass, quite predictive.

Wednesday, August 09, 2006

Activist Activism

the ultimate activist shareholder A number of things have started to spur my interest in activist hedge funds and I have started an internal project involving such funds.  You know the type, the Carl Icahn's and Pershing Square Capitals of the world.  When first I began writing Going Private, it was never my intent to use it as a forum for soliciting reader help.  I, after all, am providing a service to you- not the other way around.  Be that as it may, I am curious if any of Going Private 's readers know if a comprehensive (or nearly comprehensive) list of funds with activist strategies exists, or how a vaguely representative list of such funds might be assembled.  The winning entry will get lunch with Equity Private.  (Well, ok, not really).

Monday, August 14, 2006

Capitalist Insignia

meow! I simply must have it.

Friday, August 18, 2006

Financial Vampires (or Lovers)

lifeblood of financial journalism DealBook points us today to the conclusion by Fortune that there are no winners, no "heros" in the Heinz proxy contest.  Well, except for the shareholders that have seen a 23% gain in stock price since the beginning of the contest.  Shareholder's don't make for sexy financial reporting copy, however.

(Art: "Vampire," 1893-94, Edvard Munch.  Purportedly, was originally titled "Love and Pain" until being allegedly rechristened (so to speak) by friend and poet Stanislaw Przybyszewski as "Vampire."  As I use it here both to foil DealBook's artwork and to make a statement about certain financial writers, it is left to the Going Private reader to determine which is the more appropriate interpretation when applied to Fortune Magazine and the CNN/Money logo that lies above its every article).

Tuesday, August 22, 2006

Beware Dark Figures Bearing Fairness

i think its time you felt my pain The appeal of Mark Cuban's ShareSleuth, that he is making markets "fair" for the little guys (on the backs of which he extracts his short-selling profit), is in the wonderfully romantic but entirely absurd notion that markets can be made "fair."  If you actually give it any thought, in this context "fair" often implies a certain blindness to things like hard work, research, and superior knowledge or expertise gained therefrom.  Everyone, "fairness" proponents would argue, should share in the riches.  Everyone should share in prosperity.  Why should a lucky few enjoy disproportionate gains?  Sounds appealing from an asthetic point of view.  Really, very democratic, in the French sense, even.  Pas vrai?  No, not really.

This is the same logic, tied together with an insidious vein of political savvy, that causes people (mostly those facing an election year) to call for taxes on "windfall profits," as if record revenues for oil firms are somehow a gift from the Tooth Fairy rather than a good deal of strategic planning coupled to a sustained program of massive capital expenditure and exploration efforts.  Now we have a more dangerous strain of this fairness virus: shared pain.

Abnormal Returns gives me no peace, filing their daily link post in the afternoon hours after I thought I had my news hounding done for the day.  Today they point to two Wall Street Journal articles on an emerging trend (subscription required) (which has actually been around a long time) whereby slow to respond investors sue early exiters from a failed (fraudulent?) hedge fund arguing that the early exiters, and I'm not making this up, "should be sharing the pain."

The legal term of art is "restitution for unjust enrichment."  The rub, of course, lies in the definition of "unjust."

Some of the allegations include the suspicion that higher profile investors were "tipped off" and allowed to get out early.  Absent this, however, letting anyone recover on this kind of a legal theory you'd have to collect every Enron shareholder who sold before the plummet and chase down their assets.  So I ask, how far back do you go?  Surely, the original investors in Enron, the very first, are more deserving than the bandwagon jumpers.  Shouldn't they get a larger bit of the pool?  It's only fair, after all.  What about more "deserving" shareholders?  Widows and orphans!  They, certainly, are more deserving.  No?  Suddenly, "fair" becomes a political status question, not a concept of equality (if it ever was).  Are we really saying that we are going to punish the investor who, because she carefully monitors her investments, one day, smelling something sour, catching a nuance in the tone of a manager of the fund on a conference call, decides it's time to lock in gains.  We should, I suppose, transfer her gains to the passive investor who jumped on the next "big thing" and failed to pay any attention to the signs?  Sure, we sympathize with the second investor, but "fair" is in the eye of the beholder once you make it political.

Dangerous, this line of thinking.

Sunday, August 27, 2006

Brilliant Business Journalism

the fast food of financial news Leave it to the Financial Times to mint humor so subtle and sublime (subscription requried), so nuanced and multi-layered as to befuddle the "financial journalists" of the United States into something approaching dumbstruck madness- though astute readers will find this only slight at odds with the natural state of the typical financial journalist psyche.  (Leave it, of course, to Abnormal Returns [yummy!] to point us to this wonderful Sunday find). In this particular case, John Plender weaves a wonderful reductio ad absurdam chain with such skill and craft that both proponents and opponents of private equity are made light of.  It is artful to such a degree that lighter intellects might miss the joke.  Not surprising then that McBusiness Business Week rises to take the bait.  Spins Plender from the Financial Times:

With private equity investors gobbling up bigger and bigger chunks of the corporate world, fuddy-duddies worry that quoted equity will shortly become extinct. The usual party-poopers see a bubble and warn that hubris will soon lead to nemesis. For them, over-ambitious private equity folk deserve their status, shared with hedge funds, as the new bogeymen of the western world.

They have, of course, got it all wrong. The problem with private equity people is, in fact, their timidity. They have been desperately slow to raise their sights when so many institutional investors have been hurling ever larger sums at them in pursuit of better returns than those available in public markets. Why have they failed to tilt at the scores of companies much larger than HCA or NTL that have far less efficient balance sheets, bigger cash flows and a crying need for focus? Consider Microsoft, which has a balance sheet so inefficient that it would make a private equity investor weep.


In short, [Microsoft] has been preoccupied to such a degree with technology – so 1990s – that it has completely failed to take advantage of a period of unprecedentedly low interest rates, of banks that are falling over themselves to lend, of weakening bank covenants and a widespread recognition that leverage is the new alchemists’ gold. It is all too obvious: Microsoft just does not get it.

Before long he's gotten to:

The new management could take the axe to Microsoft’s $6.6bn of wasteful research and development expenditure. The bloated workforce of more than 60,000 could be slashed, to the point where the huge resulting increase in cash flow would at last permit the company to borrow mega-billions.

This brings us to the real joy of private equity: the so-called “dividend re-cap”, a dividend-for-debt swap. The enhanced ability to borrow would permit the newly private company to make the greatest dividend payment of all time. At a stroke it would solve the financial problems of the army of private equity investors who have been trying – hitherto unsuccessfully – to punt their way out of pension fund deficits.

...and the punch line, sarcasm served with a side of sausage, and delivered after a deadpan fry, as only the English can (good thing too because it is also the only cooking they can do):

Only the bankers will need a way out. Their horizons are traditionally fixed more on entrances than exits. Yet even they now have an exit strategy for private equity deals. It is called the credit derivatives market. This allows them to hedge the most outlandish risks. Of course, a curmudgeon might argue that this is morally hazardous since individual banks will take bigger risks in lending for over-leveraged deals because they can now shift risk on to others. So the quality of lending in the system deteriorates overall. But because in a very opaque market nobody knows where the risk ends up, why worry? Grab the dividend while it is on the table and let the devil take the hindmost.

Business Week, in an article dated September 4th (!?) and which displays the brazen gall to be found in the "News and Insights" section displays a dark flash of dazzling daftness:

Could Microsoft be bought out? That's precisely what the Financial Times of London recently called for. A consortium of private equity firms, the FT wrote, could cobble together the $288 billion needed -- nearly nine times more than the largest deal ever made. Why dare? "In truth," wrote the FT, "Microsoft would be worth more off the [public] market than on it."

The fact that anyone is talking seriously about such a colossal deal might in itself signify the high-water mark of the private-equity boom.

No, my dear, dear Business Week writer.  The fact that you are talking seriously about this Financial Times article might in itself signify the high-water maker of the "financial journalism" boom.  Honestly, is there no spell, no potion, no chant, no animal sacrifice... no human sacrifice that might rid us of suchlike?  Perhaps a buyout of McMedia ConglomerateGraw-Hill?

Ah, but it gets better.  No, really.  The diva of digital democracy herself, where everyone has a voice, i.e. the Business Week online comments section, yields this wonderful gem:

I've got most of my money invested in MSFT because its safer than a being in a bank.
- A Real Conservative

Ah, the delicious delights of Sunday afternoon.  The only pity is for those who must now travel in London on financial business while bearing the scarlet letter of a United States passport.

I do so love the intellect that recognizes there are wingnuts on either side of the Microsoft and LBO debates, and very few reasoned types in between.  Seeing the double entendre of "bi-polar" in the United States (a two party political system and the propensity to have schizoid breaks of mood) is what makes the Financial Times so charming and full of character.  Well, that and the sort of early-morning-vomit after-a-night-of-screwdrivers-and-peach-martinis color of the newsprint.

Tuesday, August 29, 2006

Expensive Date

note: picture may actually be jude law DealBreaker's John Carney is a big old flirt.  Still, that's ok with me.  Flattery (read: ass kissing) is an important skill in finance.  I have to wag my finger at him today, however, for though he cites me regularly, he has apparently missed my piece on SarOx costs, and their continual rise over time- contrary to the predictions of about everyone that they would decline after a first year peak.  Hasn't happened.  Says Carney: problem with this idea is that evidence has begun to show that the costs of SOX decrease over time. Getting compliant costs more than staying compliant, so the scale of costs and benefits is sliding on both sides. That’s not to say it won’t work but it would take some more work to see if it does.

Says the Study I cite via the Financial Times (subscription required):

Accountancy firms have emerged as surprise long-lasting beneficiaries of the Sarbanes-Oxley Act, as US-listed companies have been forced to pay their auditors larger fees to comply with the tough corporate governance rules, according to a new study.

The findings, in a report by law firm Foley & Lardner, confound predictions that US companies would only face a one-off increase in audit fees and other costs as a result of the legislation, introduced after the Enron and WorldCom scandals.

Friday, September 01, 2006

Reader Oxidation

corrosive effects The SarOx costs discussions that have been penned here on Going Private have generated almost as much reader mail as my musings on the impending death of private equity.  Interestingly, Going Private readers have been almost exclusively anti-SarOx.  Many had personal examples of the slow, vampiric suck SarOx had on their firms.  Noted one valued reader:

I have been following your discussion and various articles on the true costs of SarOx with interest.  I head up sales and marketing for a mid-sized, publicly traded professional services firm that is struggling with the costs of being public.

I cannot give you hard figures but some "circimstantial" evidence to back up your thoughts.

- We know have two outside auditors that essentially sit in our offices looking over the shoulder of the finance and accounting team.  They are supposed to be there working on "other things" but it ends up they are involved in ongoing day to day accounting decisions and of course we are paying for all that time they are there.  We have complained continiously about it but have gotten nowhere.

- As head of sales I am deeply involved in revenue recognition activities on a monthly/quarterly basis and I can tell you that in the last year, the time I spend on these discussions has more than tripled. 

- At 2:00 PM on the last day of Q2, the auditors informed us that we would have to use a brand new method for revenue recognition for all fixed fee software development projects that were over $1,000,000 in value. This required a team of people across 5 different offices (US, Asia and Europe) to work practically non-stop for 4 days to re-calculate the revenue to be recognized.  Further in the 2 months since then, the auditors have continued to "tweak" the model so by this point, the assumptions used to recognize revenue for Q2 are invalid so we have been doing write ups and write downs this quarter to deal with it anyway.

- The guys that I work with in legal and accounting are burned out and tired of it and turnover has increased.  In addition the the added expense for the audit firm itself, we have added staff to help deal with the  increased work load and it is still not enough. 

- The best people we have in finance who I used to work closely with to help craft creative deals for our clients are no too busy to spend much time on that.  The external auditors have priority over our clients and prospects (not all the time but most of the time).

All this has us seriously looking at the business going forward to determine if we can continue to be viable as a public company.

Another reader opines:

...its not just monetary concerns that turn people away from US listings.  The just released CEO Survey in the NYSE magazine (don't ask me why I have a copy) has another stat.  It does corroborate that financially, US listings are a bitch: 70% of the CEO's of NYSE listed companies have said compliance costs have increased over three years ago. But additionally, 89% of the same group say they are spending more TIME on regulatory and compliance manners.

I'm not aware of any study that looks at "soft costs," i.e. time, opportunity cost, additional payroll expense required to deal with SarOx, but I should like to find one.  I have to wonder what the additional hours and CEO grief alone cost a large firm.

Friday, September 08, 2006

Win Ben Stein's Ire

smug portrait As a rule, I usually don't spend a lot of time on reader mail, or on the analysis of it here in these pages.  It always feels self-serving to wax poetic at audience response to one's writing.  For the same reason I don't turn comments on for the entries here.  (A few readers have asked me to, and sometimes I actually consider it).  Recently, however, reader mail has been interesting and insightful enough to warrant more comment.  The three recent posts that have gotten me the most reader interest (as measured by influx of mail) here at Going Private include:

1.  Imminent Death of Private Equity Predicted,
2.  Nicole Kidman Should Run a Hedge Fund, and;
3.  Voodoo Economics.

The majority of replies to "Voodoo Economics," my critique of the piece in last Sunday's New York Times on the evils of management buyouts by econ guru, general figure of shareholder menace and sometime economics teacher actor, Ben Stein, began with some version of:

"Ben Stein is off his rocker, but..."

...and continued to suggest that MBOs really ARE evil, though not for the reasons Mr. (Professor?) Stein would indicate.  My favorite in this vein is, by far, the opening penned by a fellow practitioner.  Specifically:

"While I agree that Ben Stein's butter seems to have slipped off his pancakes..."

I have to say I admire the structural consistency many of Going Private's valued readers display in writing comments to the editor.  The next phase of almost every Ben Stein letter was triggered by prose generally resembling:

"I think you're misinterpreting Stein's [noun]", or;
"Your critique fails to account for [shopping list of items]."

Here are some of the arguments Going Private readers made in defense of Professor Stein:

1.  My critique relies on the existence of "efficient markets" in the philosophical sense.  In other words, my argument falls apart if markets are not perfectly efficient in the economic theory sense.

I'm not sure where this criticism comes from as I thought I pretty clearly explained how one's theory of market efficiency was not operative on the question of MBOs except as to define if "inside information" could actually benefit an insider.  (Proponents of "perfectly efficient" market theory would be hard pressed to show how inside information could be helpful to an insider).  The question is not "are markets fair" it is "are shareholders oppressed by MBOs" compared to other transactions.  A lot can be gleaned from simple resort to comparison between LBOs (to which Stein seems to have less objection) and MBOs.

2.  There is some fundamental unfairness intrinsic to MBOs with respect to shareholders.

I was struck by the similarity of some commentators objections to the attitudes that caused me to pen "Beware Dark Figures Bearing Fairness."  We should all know that in markets, as in life, fairness is a relative, subjective and therefore dangerous term.  Oddly, the trend in the United States seems to be in the other direction, towards an entitlement to returns.

I suspect that the creeping entitlement to "market returns" that has begun to rear its ugly head is, to no small degree, fostered by the increasing linkage of high market returns to defined benefit (as opposed to defined contribution) retirement plans.  The issue is framed nicely in a recent Wall Street Journal opinion piece by McMahon, a senior fellow at the Manhattan Institute:

Public funds, however, are allowed to discount their long-term liabilities based on the assumed annual rate of return on their assets-- which, for most public funds, is pegged at an optimistic 8% or more. In other words, the risk premium in the investment target is compounded in the liability estimate. (This accounting twist also explains how politicians can claim, with straight faces, that pension obligation bonds are a nifty arbitrage play.)

If the liabilities of public pension funds were valued on the same basis as private funds -- using, for example, the 30-year municipal bond rate as the discount rate -- funding requirements would be dramatically higher. Estimates of the nation's real public pension funding shortfall range from an added $500 billion for state retirement systems to at least $1 trillion for all public systems.

The 8% rate of return assumption, while shared by some major corporate plans, is certainly open to question. But public pension fund managers are in a pickle: If assumed returns were reduced, even "fully funded" systems like New York's would find themselves tens of billions in the hole -- as shown by alternative calculations buried in financial reports for Gotham's retirement systems. And so, in the name of protecting taxpayers from having to pay higher contributions in the short term, funds expose them to more volatility and risk over the long term.

Public pension funds used to be run on more of an insurance model, heavily reliant on fixed-income securities. But over the past 40 years, the vast expansion of government at every level has vastly expanded the pool of public pension liabilities. This leads to a vicious cycle: As the employee head count rises and unions lobby for bigger pension entitlements, funds feel pressure to pursue riskier investments with higher returns -- which explains their increasing reliance on stocks, as shown in the nearby chart. But when returns exceed expectations, as in the boom market of the 1990s, politicians and fund trustees feel irresistible pressure to raise benefits again.

Not surprising then, the news that pulling an 8.5% return on a $10+ billion portfolio gets you fired in this day and age.  High returns have become an inalienable right.

I have also wondered to myself what a 1920s era Lloyd's broker would think if teleported to the year 2006 where auto insurance is mandatory in some U.S. states and somehow health care insurance has become a "right."  Same issue.  A "right" to a financial return.  Something for nothing.

We should all know better than to believe that regulation can "level the playing field."  I would love to be able to run as fast as Carl Lewis.  Too bad for me.  There ought to be a law!

I was surprised, therefore, then to find most of the pro-Stein arguments bearing some version of this "fairness" argument.  That the poor shareholders were being fleeced somehow by clever management.  That they were being deprived of returns that were rightfully theirs.  Returns that they "already owned" somehow, even though these returns have yet to materialize.  Arbitrage opportunities that were "rightfully theirs" in the words of one email contributor.

It is this attitude that permits market actors to indulge themselves with fantasies that returns that they themselves are in no position to create or realize, or returns that are not possible without substantial changes in the financial environment, perhaps even returns that they had expected when they bought the stock in the first place, are theirs to capture (even before they have been earned).  This attitude, I believe, is what prompts writers like Stein to decry managers in a position to create returns when taking private a firm that the very shareholders now complaining made impossible to realize in the public capital markets in the first place though behaviors as varied as the fixation on short-term (quarterly) earnings prospects, poison pill arrangements, and pricing the company's stock below book value because of an aversion to risk.

"But you are ignoring the vast information disparity between managers and shareholders," worried one commentator.  (The same commentator that only two paragraphs earlier had insisted that markets were perfectly efficient.  My question as to how the managers could capitalize on "superior information" in a perfectly efficient market went unanswered).

Even in an inefficient market (and I don't believe U.S. capital markets are perfectly efficient) superior information only gets you so far.  And in the United States there are any number of safeguards to prevent abuses here.  Ex ante there is the shareholder vote and board approval requirements.  Ex post there is a long and studied history of shareholder litigation over items like price and deal terms.

"They are sharing non-public information with potential buyers and showing favoritism in picking which buyers to share that information with."

Let's pretend for a moment that this is true.  The redress for this is in Rule 10(b)(5), not in the outright ban of MBO transactions as Stein suggests.  The disclosure of material non-public information to a potential buyer to the exclusion of others falls into the insider trading realm.  Woe to the buyer who continues to bid in such a circumstance.

Shareholders are hypocritical here quite often.  Insisting on full disclosure when "good news" might give them an upside, but quite happy for information to be secret and markets mispriced upwards when they are selling.  In reality, shareholders like Stein don't care if markets are mispriced, they just don't want to be on the wrong side of the mispricing.

"But poor shareholders can be victimized by the tyranny of the majority, even if they didn't want to sell," said one writer.

I am unsympathetic.  Shareholders knew or should have known when they bought the stock that they were subject to the possibility of a MBO (or any M&A transaction) where they would be on the losing side of a Board of Directors decision or proxy fight.  That is "the deal."  One wouldn't expect to be taken seriously if one's political candidate lost an election and one was moved to complain "I should have two votes!  It is not fair that I lost and the voting rules I knew about before the election should be modified retroactively to permit my victory!"  Strange then that this argument is constantly being forwarded in the context of shareholder actions.

Another reader points out something insidiously clever.  Stein, he quips, is outraged at exactly the behavior he, himself, is exhibiting.  Stein bought the stock in the first place convinced that he knew better than other shareholders how to extract value from the stock or that a price disparity would benefit him.  Superior knowledge, therefore, is what Stein wants to profit from.  How then can he, with a straight face, complain when management does the same via an MBO and most shareholders willingly sell?  Stein is entirely free to start an activist fund to do the same, if he can garner the capital.  Should we ban all transactions where homework, good sense and a lot of research give one participant an advantage?  This same reader points out that Stein's argument is "so eerily similar to an argument recently put forth in the 8/28 New Yorker."

Another reader wondered if how these transactions could be fair given that management had all upside risk and no downside risk.  I can't speak for that reader's experience, but I haven't seen an MBO where management didn't have substantial personal net worth at risk.  Sub Rosa has done 4 MBOs since I arrived. All of them contain provisions (like co-investment) that would put the senior managers in the poor house if the deal blows up.  This is not an accident.  We do it, as do other private equity firms, for precisely these incentive reasons.  While not my favorite example of excellence in financial journalism, a recent article in Fortune on the decision of former GE Vice Chairman Dave Calhoon to head up VNU when opportunities in much larger, public firms were available demonstrates this point nicely.  Says Fortune:

Press reports valued his pay package at around $100 million, but its real value is uncertain because Calhoun is also making a substantial investment in VNU (no one is saying exactly how much).


The most interesting question arising from this situation is: Why couldn't a huge publicly traded company make Dave Calhoun an offer he'd accept, but a small privately held firm could? Again, the answer seems obvious. In today's climate of deep shareholder distrust, no public company would dare to offer a prospective boss such munificent terms.


Any public company that now offered a new CEO $100 million would be scourged without mercy by shareholder activists and TV talking heads nationwide.

And as to the question of "skin in the game," and sweetheart deals to management?

Calhoun is as sharp as anyone, and he was negotiating against people representing the Blackstone Group, the Carlyle Group, Kohlberg Kravis Roberts, and the other private-equity firms that bought VNU - collectively the smartest, toughest SOBs in business. Whatever deal they reached is the correct deal because it represents the market at its most efficient, ruthless best. Calhoun stands to make $100 million or more because cold-eyed investors with their own money at stake believe he's worth it.

Increasingly, public capital markets are beginning to look like the laws of thermodynamics (You can't win; you can't break even; you can't get out of the game) with Vegetable Capital actors playing the part of the universe and getting the free lunch.  Managers increasingly are faced with reduced compensation for more risk.  When they do profit it is called "windfall."  Responding totally rationally to this perverse set of incentives, they choose to leave the public markets and, in doing so, find themselves under attack from the likes of Ben Stein, who feels he has been cheated because they didn't sit around and "do what they were supposed to do in the first place," i.e. make money for shareholders while taking less and less pay and adopting more and more personal legal and financial risks and incurring increasing opportunity costs.

Why does this increasingly feel to me like the plot for an Ayn Rand novel?

Manufactured in Switzerland

swiss writing Like clockwork, The Economist touches this week (subscription required) on the issue of the day here at Going Private.  One might be tempted to think that yours truly has an inside track with one of The Economist editors, so regular and aligned are the weekly topics between that publication and your humble author's print here.  (Your author actually prefers the egotistical, and rather unlikely, intrepretation that Economist writers regularly read Going Private to get the pulse of the financial world).

"The efficient market hypothesis can land you in jail," is The Economist's latest stroll across the Going Private commons.  Quoth The Economist:

[The efficient market hypothesis] also has the rare distinction, for an economic theory, of the approval of America's Supreme Court. In 1988, in Basic Inc. v. Levinson, the court endorsed a theory known as “fraud on the market”, which relies on the efficient markets hypothesis. Because market prices reflect all available information, argued the court, misleading statements by a company will affect its share price. Investors rely on the integrity of the price as a guide to fundamental value. Thus, misleading statements defraud purchasers of the firm's shares even if they do not rely directly on those statements, or are not even aware of them.

That ruling has proved a goldmine for America's trial lawyers, who have won fortunes by suing firms for damages when news (often, in practice, a restatement of their accounts) is followed by a sharp fall in their share prices. The fall is treated as proof of overvaluation due to the initial, wrong statement.

Increasingly, a similar logic has been used in criminal cases, as Mr James Olis, [the tax accountant, found guilty of committing fraud while working for Dynegy] discovered. His 24-year sentence stemmed from a calculation of the financial loss caused to investors in Dynegy by Project Alpha, an accounting fraud in which he took part. That financial loss was estimated using the fall in Dynegy's share price on the news that Project Alpha was fraudulent. According to Judge Lake, it was so big that, under sentencing guidelines then in place, Mr Olis had to go to jail for a long time.

This would be all fine and good, perhaps, if the efficient market hypothesis were understood to be fact.  It is, of course, not.

None of [the defense's objections] challenges the use of the efficient markets hypothesis. Yet for years the hypothesis has been under increasingly fierce attack in academia, unnoticed by the legal system. In a recent paper, Bradford Cornell, of California Institute of Technology, and James Rutten, of Munger, Tolles and Olson, a Los Angeles law firm, argue that even highly developed financial markets such as the New York Stock Exchange are not efficient enough to allow courts to use declines in share prices to calculate the financial damage caused by a fraud. In particular, markets often react disproportionately to news, especially bad news. They therefore conclude that estimates of damages based on the hypothesis and on share-price movements will be overstated. If Judge Lake has been spending the summer getting up to date on economics, perhaps Mr Olis will be out of prison much sooner than he must once have feared.

Monday, September 11, 2006



Beginning 8:46:30 a.m. on Going Private, 2,997 minutes of silence.

Wednesday, September 13, 2006


sunset We miss you, Paul.  We will never forget.

Friday, September 22, 2006

Ode To Dr. Mark Klein, M.D.

tick... tick... tick... Persistance being a virtue
I cannot let pass
The many eager laments to markets capital
You pen with such quick ease
Without comment or recognition.

Few DealBook entries on hedge funds or private equity pass without your lightening quick response.  I know it is you long before I reach your familiar multi-lettered monogram, complete with the finance credibility building "M.D." suffix.  I know so very many financially astute M.D.'s, after all.  How could your unique and distinctive tone- a tinge of paranoia, suggesting perhaps recreational reading preferences that, no doubt, include cautious publications exploring the shadowy actors behind the scenes of life, a soft but palpable bitterness the source of which I often wonder after- fail to delivery the delight of a rueful shake of my head and a soft, sad smile?

And what of this Mattheauesque crankiness?  Where is its root?  Perhaps the prominent "M.D." in your monogram hides a subtle clue?  For you are far too quick to the comment draw to be in practice now.  A lost patient?  Screaming horror as anesthesia inadvertently wears off mid-procedure?  Too many fat cats with warm and sticky heart disease?  Too much blood, fatty tissue, blackened lungs?  Or perhaps the vapid triteness of plastic surgery, a decade of enduring the legions of kept women desperately fighting the doomed battle against time, but spending tens of thousands doing it.  Bedside manner never was your thing, maybe.  Or did the futility of it all, surgery in pursuit of vanity, caused you to snap?

These are but uneducated guesses, I admit, but I can hear the omnious ticking if I inadvertantly venture too close.  The relentless marching towards an episode of postal proportions.  At first, I back away, frightened, but am hauntingly drawn back to look.  That familiar sinister and black curiosity: Did anyone die in the highway accident?  What's under that crimson stained white sheet in the road?  Is there a good horror flick on cable tonight?  Why doesn't the search feature on DealBook include the comments?  Scary.  But safely distant.  But then I wonder: What if you live in my neighborhood?  Last desperate act to leave the gas main open and take half the block away rather than give the beloved townhouse- years of medical school and 10 years of practice to finally acquire it- to your soon to be ex-wife?  And if the inclusion of the occasional medical related term in context ("No better example of my belief NBC is total poison for GE shares," for example) is perhaps cause for alarm, then full-blown diagnosis without the benefit of a patient exam ("There’s a good chance, unless he was initially diagnosed with biliary obstruction by an advanced cancer of the head of the pancreas, he survived for years fighting it.") certainly pegs the threat board straight to red. 

Whatever the source of your dark tone, your omnipresence within DealBook is precious.  The entry with but one comment is almost universally yours.  In the sphere of multiple comments, yours is almost always first.  Your message is consistent.  The deck stacked against the powerless citizens of the impotent kingdom which you ineffectively rule from behind the glowing LCD display: The ranks of the disaffected and disillusioned lower-upper class.  You have just enough to realize how little you have.  Defined wonderfully and contemptuously as "...some $400,000-a-year Wall Street stiff... flying first class and being comfortable" by your fictional nemesis, Gordon Gekko.

Your laments are unified by a pervasive and willing helplessness.  What purpose would you have if your enemies, the titans of corporate management and capital markets, were not omnipotent and universally dedicated to your personal ruin?  No, you must not win.  Your audience would shrink away to nothing.  Your fame, what of it there is, would fade quietly.

I salute your unwinable fight, Dr. Mark Klein, M.D., but I fear I must wish you no luck.

Tuesday, September 26, 2006

Fading Amaranth

a reminder that risk actually means risk I was fortunate enough to know several professionals at Amaranth.  I say "fortunate" because they were quite pleasent to work with and knew their stuff.  I say "was" because they don't answer my calls now.  It would be a simple task to join the hoards crowing over the quasi-fall of the fund, but there is a deeper lesson here, and I don't want to neglect it.  Abnormal Returns touches on it today by referencing, in true Abnormal fashion, an entirely different and entirely similar discipline.  Cooking.  Says Abnormal Returns, citing Bill Buford in the New Yorker:

Tim Zagat, the publisher of Zagat Guides, points out that for more than two decades the cost of going to restaurants or getting takeout has risen less than the annual rate of inflation—that it’s much less expensive today than at any other moment in our history to pay other people to prepare our dinner. Never in our history as a species have we been so ignorant about our food.

Abnormal Returns then comments:

Let’s take a minute and think about the world of investing today. At no time in history has it been easier or cheaper to assemble a low cost, indexed, globally diversified portfolio. (This is one of the great accomplishments of the ETF revolution.) The vast majority of investors would be well-served in this approach. However the majority of the media reaching investors serves to tell an entirely different story.

From CNBC, to infomercials to brokerage ads we are constantly bombarded with the notion that investment success is simply a click away.  Any one who has read this blog for any period of time knows that we are in the camp that active investing is far from easy, indeed active investing is, in fact, hard.  That should not deter an individual from pursuing investment expertise, but they should do so with their eyes wide open.

This analogy is a deft one, I think.  Short of the not yet revealed revelation that Amaranth deviated from its investment strategy as defined in its placement memorandum, or that it timed the disclosure of its massive losses to avoid a run on the September 18th deadline for October 31st redemption requests, I find it difficult to point fingers at Amaranth.

I have commented before in these pages on the slow, but sure, creep towards an entitlement to returns in the United States.  As if everyone were somehow possessed of the right to above market returns (or even market returns) and anyone who interfered must be arrested, sued, imprisoned or sent into exile.  An ignorance about the trade off between risk and return is, I suspect, at the heart of these sorts of delusions.  The kind of world view, one that believes that we can apply the laws of thermodynamics to market actors (can't win, can't break even, can't get out of the game) and thereby extract better than market returns from them at no risk to ourselves, seems increasingly acceptable.  (Ignoring for the moment that it is the market actor we box in that is expected to pay).

This is the formula that prompts legislators and other demagogues to propose "windfall profit taxes," "poison pills," restrictions on LBOs and causes people to expect that a fund like Amaranth can return 20%+ returns year in and year out without taking the kinds of risks that may, surprise, surprise, blow it up.

It is interesting to me the sort of double standard we apply to these kinds of melt-downs.  Take such risks and lose and the Wall Street Journal might cite industry experts with: "To have a relative newcomer… receive so much discretion is just shocking to me."  But at the same time we all worship the general who fights against impossible odds and wins.  We cheer for the quarterback to completes the impossible pass.  We love risk, when we win.  We condemn it, when we lose.  Half a dozen traders happily piped in with an "I told you they were reckless!" but no one, least of all investors, seems to remember actually being told that until now.

Despite this, it does surprise me that Amaranth bet "half the farm" on one man's game, and it is quite illustrative that Abnormal Returns would run down a New York Times piece (avoid irritating registration via bugmenot) pointing out that there doesn't seem to be a single big winner (or three) on "the other side of the trade," or another firm that took a career-ending injury loss.  Amaranth was truly out in the cold on this bet.

Be that as it may I think we need to start to remember what risk/reward is.  Particularly as we begin to grapple with the entirely unreasonable expectations that have been heaped on, among other areas, the world of retirement finance by the many blind Barons of Short Termernia.  Ignorance in this area, after all, can be lethal.

Wednesday, September 27, 2006

Amaranth? *yawn*

well paid to be fools Increasingly surprising is the non-story of Amaranth.  I say non-story because, media hand wringing aside, the impact of a "spectacular" (New York Times) "breathtaking" (Wall Street Journal) and "devastating" fall of a $8 billion dollar fund has, in fact, hardly made a splash in the financial system.

So minor was the impact that the Wall Street Journal struggled early on to find any collateral damage at all.  So much so, that the best Margot Patrick could drum up was the fund of funds "Man Group, PLC."  And even there, the Journal only managed to solidly identify a (gasp) $10 million investment in Amaranth.  I am sure more lurks under the opaque surface of firms like Man Group, but what seems clear is that where risk management "failed" at Amaranth (and I'm not so sure it really did, more on this later) the major holders seem to have diversified very well and, at least so far, no major collateral damage seems apparent.

The Journal eventually dug more victims out.  The San Diego pension fund, for example, (not exactly the poster child for excellent management lately) had $175 million at stake with Amaranth, but that's out of $7.7 billion in assets.  Could it be that the financial system is just better able to handle catastrophic failures within single firms like Amaranth today?  And if so, isn't this how financial systems are supposed to be designed?  Doesn't this show us the system is working?  The rational allocation of risk and reward is proceeding apace?

We desire, nay, we demand that firms like Amaranth exist.  We encourage it.  Insist on it.  There is always an appetite for risk, a huge one, even on the level Amaranth was taking it.  I haven't heard it put better than by Barry Ritholtz at The Big Picture (who Abnormal Returns pointed me to) when he describes what talking to potential investors on a hedge fund road show is like for a GP:

Now comes THE QUESTION. This is the one that gets people into trouble:

"We are looking for a number. What should we expect from you in the first 2 years?"

What they want to hear is "I am going to do 30-40% annually, fully hedged."

I don't say that, because it isn't true. (God bless Jim Simons, who actually can honestly say that). That's what too many investors are looking for; its nothing more than the greed factor at work.  They don't say it explicitly, but its true: We want you to outperform the long term S&P500 benchmark by 300-400% annually (and we don't care about mean reversion). We really don't care how you do it. We want outsized profits. WE WANT THE LATE 1990S AGAIN.

Money raisers and some GPs have long ago figured this out. You have a few choices: you can answer the investors' questions honestly -- or to quote Ray Davies, you can give the people what they want (or think they want):

"We expect gains of 35-45%, with minimal risk or leverage. Our black box algorithms  have been backtested, and generate better numbers than that, but we would rather under-promise and outperform."

So what are we really worried about?  That Amaranth took on a lot of risk?  That was their job.  That's what we wanted Amaranth to do.  Required of them.  What surprises me is the ease with which Amaranth swallowed their downside.  So far as I am aware Amaranth didn't even fail to meet a margin call on the way down, which is quite a tall order given the size of the position that blew them up and the extraordinary leverage (up to 8:1) on it.

Within less than 10 days most of the offending business has been wound up and pawned off.  So orderly, in fact, was the disposal that there is at least an "even money" case to be made that Amaranth might still be able to carry on (as some former shadow of itself) with operations.  In short, it sounds a little to me like Amaranth's risk management was working not too badly.  They imploded, rather than exploded.

There is nothing wrong with pure risk plays as long as we don't pretend that the returns therefrom are anything but risky, and we don't bet more than we can afford to lose.  At least today it looks like Amaranth calculated that amount quite exactly.  I wonder if their huge bets on natural gas were, actually, a calculated risk from the start.

Monday, October 02, 2006

Luck as Marketing Illusion

which bets aren't worth making? I continue to be surprised and bemused by the various responses to Amaranth's fall from grace.  I suppose we shouldn't, however, be at all surprised that Jim Cramer has gotten in on the act.  And we all know how Cramer loves to point fingers.  Who is to blame?  Everyone.  DealBook tells us:

First, there are the clients — pension managers at 3M and San Diego County — who “rushed headlong” into the fund. “Pension managers simply don’t have the sophistication and experience to properly assess and monitor hedge funds’ performance,” Mr. Cramer asserts.

Then, he says, there are the investment banks that act as prime brokers, earning fees by providing trading and other services to hedge funds -– “the Morgan Stanleys, Bear Stearnses, and Goldman Sachses of the world.” These “fawning brokerages, of course, have no incentive to tell the clients that a firm like Amaranth is wrong to take down tons of borrowed money to bet on dubious strategies like the totally unknowable weather patterns that determine the direction of natural-gas futures.”


Mr. Cramer also casts blame on hedge-fund consultants as well as managers of funds of hedge funds. This last category of asset managers “can’t understand the hedgies’ strategies either,” he writes. “Most funds-of-funds people would not be smart enough to run hedge funds, yet they’re happy to take the money of those who want to invest in them.”

As for the inevitable calls for government regulation, Mr. Cramer says they are mostly “a waste of time.”

“The only government regulation we need is a prophylactic one: If you aren’t rich or your clients aren’t rich, you shouldn’t be in hedge funds.”

The element I continue to have trouble with here is that anyone is to blame at all.  The view that someone should be held to account beyond what has already passed requires a certain perspective on markets that I do not share.

Cramer's reaction is, unsurprisingly for those of us who know anything about Cramer, badly conflicted.  On the one hand, he insists that fund-of-funds people and pension managers (who many consider among the "smartest money") aren't smart enough to make the investment decisions required to run a hedge fund.  This, the implication that smart but not "smart enough" individuals are not suited for the business, implies that only some kind of ubermensch financial superbeing is.

In my view this is a fiction, the disbelief of which is suspended in no small measure by its tendency to deify hedge fund managers who, unsurprisingly and along with aspiring hedge fund managers, tend to be the whispering sources of this mythology in the first place.  We are to believe, therefore, that "luck" or "fate" simply is not a factor.  I call this the "myth of inaccessibility."  The market gods are only merciful to those who know the sacred rituals and make the appropriate sacrifices with the proper chantings.  To the rest, those outside the secret clergy orders, dazzling returns are closed.  A very catholic approach really, this hedge fund manager as a "proxy to the market gods" setup.  Does this make recent news (subscription required) in the Wall Street Journal (via Abnormal Returns) the second enlightenment movement in capital markets?  The first was, perhaps, the boon of the "after-work" or "at-home" equities speculator as made possible by e-trade.  (And we saw where that ended up).

Luck is only an illusion, in the world in which Cramer lives, blinding the less intelligent.  To those unable to understand the complex dynamics of financial systems like the ubermensch caste.  Of course, some strategies are obviously luck alone to Cramer, and therefore folly (probably because it would be impossible to suspend the disbelief of the public when selling the ability to predict them- and therefore the value of "experts," like Cramer, is measured in figures that approach zero) such as the "unknowable weather patterns that determine the direction of natural-gas futures."  These, Cramer shrieks, would be dubious to bet on.  (As if the movements of the S&P 500 index were an open book to Cramer).  What maniac would borrow money to do so?  (We will politely decline to make references to the titans in the insurance business at this time).  Here, like with the roulette table, luck is real.  This is the "act of god" clause.  Elsewhere, where god is bored with human affairs, or perhaps sleeping, luck is but a mist that clouds those without the proper night vision goggles (which can only be obtained after appropriate study at the appropriate institutions and even then only by the appropriate people).  But is luck just an illusion?  A crutch for the masses?  And if it is, what does this mean for our judgement of Amaranth, hedge funds, financial life in general?

"The man who said 'I'd rather be lucky than good' saw deeply into life," quips successful murderer Chris Wilton.  He continues, "People are afraid to face how great a part of life is dependent on luck. It’s scary to think so much is out of one’s control."

The man who first said "I'd rather be lucky than good," near as I can tell, was Lefty Gomez, the Yankees Hall of Fame pitcher.  It shouldn't be surprising that wherever luck plays a large part, statistics are sure to follow.  That Gomez, well in tune with the practical meaning of luck, would be a baseball player should, therefore, come as little surprise either.  Neither, really, should the revelation that absent luck skill is unhelpful, turn heads.

The best and the brightest can be unmade quickly by the occurrence of an event with three standard deviation probability.  This is as true in baseball as it is in finance.  I suspect, however, statisticians in finance are better compensated than statisticians who cull baseball figures.  Should we be equally surprised then that the myth of inaccessibility is used to sell financial products.  What would we need experts for if not for this disparity?

The best that you can say about such things, I believe, is that while smart is required, it is a hygiene feature really.  It is luck that makes the difference.  All that remains therefore, is to compute the probabilities (read: understand the risks) and make "smart" bets.  We buy into the S&P 500 knowing full well that a terrorist attack might crush the market (and our returns) but we judge this risk as small, and therefore discount it sufficiently to invest regardless of the risk, or mindful of our ability to absorb the loss.  We cope with financial loss either through capital reserves (we can afford it) or future earnings potential (we have enough time to earn it back before our earnings ability is weakened).  The returns are worth the bet if either of these two cushions are in place.  Note that neither of these cushions would be important if our predictive ability were perfect.  (I will come back to this in a moment).  If we still find terrorist risk too distasteful, then what alternative deployments of capital can we find that minimize the downside of that risk and still have suitable returns?

The real question is not "will a terrorist event happen?"  That question is unanswerable without some interesting twisting of space-time.  The real question is how well do we judge risk and, having judged the risk how well have we discounted it.  In other words, how well are we prepared to be on the wrong side of luck?  How in tune with the unknowable, the uncontrollable are we?  That is, do you know what is unknowable and uncontrollable and have you prepared for it?  In a sense, I think you have to be an existentialist to invest well.  Either that or a Woody Allen fan.

So should we complain that Amaranths exist?  I don't believe so.  Providing a bit of pure risk (and giving liquidity to the market for risk so that the risk averse can sell it and the risk hungry can buy it) is absolutely essential and required to provide the tools to design well adjusted portfolios.  Pulling liquidity from natural-gas price risk markets (and thereby hampering the ability of those who have neither the capital reserve cushion nor the future earnings potential to cope with the price risk they are holding from selling it to willing parties) may suggest that somehow there is a difference between weather prediction and equity investing, but it does so at the expense of healthy markets.  We spend a lot of time trying to support this fiction that markets are "fair," (see, e.g., insider trading law) and it is becoming a recurring Going Private theme that these fictions are harmful.  Comfortable, but harmful.

This is why I believe Cramer is confused.  He believes both that you can be smart enough to beat the system, but at the same time admits that the capital reserve cushion is the only way to protect "the public."  “The only government regulation we need," he quips, "is a prophylactic one: If you aren’t rich or your clients aren’t rich, you shouldn’t be in hedge funds."  The fantasy that the market is more "knowable" than the weather serves Cramer, another expert for hire, though.  I just can't decide if he knows it, or if he just believes his own lie.

Thursday, October 05, 2006

Order, Order I Said

backdating graph? no, amaranth salvage. Late night procrastination bears fruit.  This morning that's a Wall Street Journal article on the mostly orderly wind-up of Amaranth's energy position.  The surprise is the speed and motivation for Citidel and J. P. Morgan to pick up the scraps of the wayward hedge fund.  Sayeth Gregory Zuckerman of the Journal (subscription required):

Citadel and J.P. Morgan employed their risk-management systems to estimate the investments' value. Their conclusion: Once transferred from Amaranth, the trades would be more valuable than the market assumed. The new owners would be able to hold them until they proved to be winners, in part because each was bigger than Amaranth and so could afford to wait. J.P. Morgan and Citadel also felt they could hedge, or reduce the risk of the trades, through other investments.

What entrances me about this passage (aside from the lateness of the hour, of course) is the exploration of investment horizon and valuation.  Unleveraged, unburdened by margin calls, Amaranth's bets might yet pan out, particularly now that they have been picked up for pennies on the dollar.

This is an important point that should be considered by the doom-sayers.  There are established players out there who can and will play salvage team for blown short term bets that, but for timing, could have proved winners.  The Journal continues:

To reduce some of their risk, the partners immediately moved to sell some of the investments after concluding that the energy market wasn't buckling, despite worries about ripple effects from Amaranth's woes. Willing buyers quickly emerged. Some were J.P. Morgan's investor clients. Others were traders on the other side of Amaranth's bets eager to cash out and pocket their winnings.

Within days, the firms had sold enough of the portfolio to shift more than 50% of its risk to others, according to someone close to the matter.

The article takes up a subject I will revisit in the belated second part of my long-winded discourse on private equity and hedge funds: timing and its effect on investment decisions.  Take note my fellow late-nighters:  There are risk hungry players in the market who can ride out the storm.  The last sentence of the Journal article is a real keeper.

Monday, November 13, 2006


pavement cracks I am not typically inclined to post links to the many the new financial blogs that emerge like weeds from between the pavement cracks.  Be this as it may, "pure arb" might be worth a look if what appears to be something like quality continues in the analysis of alternative investment related S-1s.  We'll see.

Wednesday, November 22, 2006

Private Equity Down Under

briefed Stan Correy, of ABC National Radio, Sydney, has put together an interesting, if perhaps mildly alarmist, background brief on private equity for what has become the new happy hunting grounds of buyouts, namely, Australia.  I was fortunate enough to be asked to participate.  The result, which includes, among others, the far more famous than I, Andrew Ross Sorkin of DealBook fame, can be read, or heard, on the ABC Radio site.  I suppose I should point out that I might have picked Nicole Kidman as a voice actress for myself if I had the option.

Monday, November 27, 2006

Compensating Alpha

fewer twenties There are any number of avenues of attack open to critics of hedge funds nowadays.  Among the more recently fashionable is the accusation that hedge funds have fees out of proportion to their risks.  Or, more commonly, an unsophisticated barb that seems to resonate much more sharply with the public even if it avoids the question of risk-adjusted returns, that hedge fund managers simply charge too much.

Clients of hedge funds don't seem to be that annoyed, however.  And given the liquidity in the marketplace and the number of funds to choose from, it is difficult for the rational observer to find fault with the holy grail of hedge funds, "two and twenty," given the rather enthusiastic acquiescence of the many "victims" of hedge funds to the structure.  But, alas, Milton Friedman is dead.  There is no viable moderate political party in the United States clever enough to be socially liberal, or at least socially agnostic, and still possessed of the sense required to be truly fiscally conservative.  The second coming of financial paternalism is upon us, dear reader.

Blame for the ills that befall us now will be laid, I suspect, on the shoulders of the easiest targets.  Mysterious and envy inspiring hedge funds certainly find themselves on the short list.  The only question for me at this point is "how much damage can be done in the next six years and how long will it take to repair it?"

Pretending for a moment that a great outcry for hedge fund fee reform did exist amongst clients, what might such a structure look like?

The Economist points out (subscription required) that non-complaining hedge fund clients are, quite expensively, paying for beta, as well as for alpha.  The Economist, as usual, has a point.  Should managers be compensated so richly for, say, a strong quarter in the equity markets where their actual "outperformance" of the market was slim?  Wonders the Economist:

...hedge-fund returns have been increasingly based on beta in recent years. Hedge-fund managers have every incentive to take this route, since they take a percentage of all profits, however they are derived. But beta can be obtained at very low cost via index-tracking funds. Why pay hedge-fund prices?

The last three months provide as good an example as any in recent memory.

I see via Controlled Greed that The New York Times, for its part, whines at the timing of compensation, (avoid annoying registration with the always yummy bugmenot) and outlines an alternate fee structure, one that seems unduly complicated to me, being adopted by newcomer Lisa Rapuano.  Yammers the Times:

Getting paid annually does not always jibe with some styles of managing money like value investing — the art of buying undervalued companies and waiting for them to be properly valued. If managers show poor returns, impatient investors might yank their money before the market recognizes the stock as undervalued. In investing parlance, that is called being dead before you are right.

Lisa Rapuano, a longtime value investor, grappled with these issues and came up with a compensation structure based on the radical notion of delayed gratification. In January, she will start a value-oriented hedge fund that pays her a hefty incentive fee, but only every three years.

Lane Five Capital Management charges a 1.5 percent management fee and takes 40 percent of any profits that exceed her hurdle rate (the Standard & Poor’s 1,500 index) every three years. If the fund has negative returns, she gets nothing — a fact her husband finds very perplexing, according to Ms. Rapuano’s presentation at the Value Investing Congress in New York last week.

Combine this with the now fashionable concept of "portable alpha," and the separation of alpha and beta and it seems reasonable to suggest that separating the fee structures of alpha and beta returns might also be a useful endeavor.  The structure described above does a similar thing though I wonder after claiming 40% of alpha returns.

On a long, and otherwise drab, flight back from London, I wondered to myself what such a structure would look like and what the impact on existing hedge funds would be like from a compensation perspective.

The simplest measure would seem to be the isolation of alpha returns and the application of the "twenty" of the "two and twenty" only to these gains.  Fees for the remainder, the beta, should logically approximate the fees that might be expected of an index fund.  These returns, after all, were hardly the result of managerial acumen, but rather pure good fortune that the investor might well have enjoyed for next to nothing by dropping their capital into a cheap index fund rather than with an expensive manager who shaved 20% off the top simply for getting up in the morning.

Of course, this begs the question: which index is the best measure of beta in these cases and why?  Our earlier example, seems to have a somewhat exotic opinion (she uses the S&P Super Composite).  Of course, the investor should be careful to watch the benchmark selected.  Selecting an overly broad (and therefore less volatile) benchmark might have the effect of boosting the "alpha" component of returns for a manager by reducing the beta.  Clearly, there has to be some rationale for the index selection.  For example, that the manager will actively pick stocks only from the index components.  (This might explain the selection of the S&P 1500, as smaller stocks are probably a more serious target than the mega-caps).  A quick comparison shows that the Super Composite would have generally, but limitedly, reduced the alpha component of returns in this structure (probably because of the inclusion of so many mid and small cap stocks in the index).

The real answer here is probably "it depends."  The strategy of a given fund, and in particular its degree of focus, will likely (should) drive the selection.

Some more interesting wrinkles rise to the surface if you extend the concept of fees calculated on "outperformance" of whichever broader index we have decided to index against.  What is "outperformance" exactly?  I suspect many would be tempted to define it much less broadly than logic would dictate.

What if, for example, our new hedge fund, Sub Rosa Long-Short, LP charges 2% of assets under management and 20% of returns in excess of the S&P 500 for the same time period?  Let us then assume that for Period 3, the S&P 500 slips 9.00%.  Suppose, further, that Sub Rosa Long-Short, LP shows returns of -4.00%.  Should Sub Rosa Long-Short, LP charge 20% of 5.00%, the amount of capital preserved by the astute investment strategy of Sub Rosa and that which would have been lost had the client invested instead in the index?  Is a milder loss relative to the index "alpha?"  It seems that if one is being a purist about the concept of alpha indexed fees, Sub Rosa Long-Short, LP should be entitled to fees on those missing losses, just as that would be entitled to fees on positive abnormal returns.  This is, after all, one of the key marketing points of hedge funds.  They are, in theory, supposed to protect downside.  Should they not be incentivised to do so?

In the next period, then, if the index held at 0.00% but Sub Rosa Long-Short, LP managed to capture 3.00% in gains, should Sub Rosa charge 20% of this 3.00%?  Many traditional two and twenty fee structures don't start running the meter again until the prior "high water mark" is attained again.  But if we are really compensating for "alpha" then the "double dip" of charging on a loss and charging fees again on the way back up over already covered ground actually makes sense.  The client is, after all, now 8.00% above the rest of the market.  Are avoided losses as good as gains when we are scoring alpha?

How do these sorts of fee structures shake out in practice during strong bull markets?  Let's just see.

Credit Suisse publishes the Tremont Hedge Fund Index which shows the average for year to date hedge fund returns to be 9.55%.  The S&P 500 sits at about 9.04% at the moment.  Fees on the average hedge fund (assuming $1 billion under management which probably isn't really average) would look something like this:

hedge fund compensation: alpha v. beta

Kiss $18 million and any bonuses goodbye.  And for the best performers on the index, emerging markets funds with 13.58% returns year to date?

hedge fund compensation: alpha v. beta 2

67% of their incentive fees go right out the window.  Ouch.

Self Serving

lipos make the street The tasty Abnormal Returns points us today to a piece by Matthew Goldstein over at on LIPOs.  It is notable both for its numbers and for its use of the term "LIPO" coined here on Going Private.  Goldstein's short-term analysis (he only looks year to date) is a flaw however, in his article.  It would be interesting to me to see if longer-term returns on IPOs are as dismal, particularly in light of other work I've done on the subject, or if they compare favorably to unlevered IPOs.

Monday, December 04, 2006

No Parole Either

capital checks in... but it doesn't check out... The Unknown Professor over at Financial Rounds points us today to a piece on Market Watch on dual-class shareholder structures in the public equity markets.  Penned by Russ Britt, the "Los Angeles bureau chief for MarketWatch," the piece casts dual-class structures as some sort of control-tax dodge, pitting victimized shareholders against the highly unattractive demon of nepotistic media dynasties in what amounts to a thinly veiled call to arms against the practice.

"Management wants the best of both worlds," said Nell Minow, founder of the watchdog group Corporate Library. "They want the access to capital of the public markets and they want the control of the private markets, and dual-class allows them to get that."

Let's ignore for a moment that it is in fact the shareholders themselves, who willingly buy into the dual class system in the first place, and not some sort of lawyerly slight of hand which "allows [management] to get that."

The reality is that dual-class structures can serve important roles.  Their traditional purpose in the media context, the Market Watch piece grudgingly admits, has been to insulate media control from the short-term whims of the market.  Clearly, any anti-takeover provision which entrenches management will have this effect to some degree.  Stock price, however, is still a strong motivator and to the extent control is important to investors castrated shares will trade at a discount to uncut issues.  This point, apparently, needs to be highlighted for almost everyone who makes "fairness" arguments about these sorts of practices:

Investors have already managed to pick up the assets at a discount because the lack of control has already been priced in, or;
Control in the company issuing the shares is so unimportant that it hasn't impacted the shares.  One might wonder in this eventuality why there would be any need of adjustment.

In fact, to now, through legislation, regulation or fiat, force a change in that structure would unjustly enrich shareholders who knowingly paid non-control prices and have been granted a subsidy by regulators and at the expense of the company and management once control is handed to them.

Consider the S-1 of one of my least favorite companies:

Corporate Structure: We are creating a corporate structure that is designed for stability over long time horizons. By investing in Google, you are placing an unusual long-term bet on the team, especially Sergey and me, and on our innovative approach. We want Google to become an important and significant institution. That takes time, stability and independence.

We bridge the media and technology industries, both of which have experienced considerable consolidation and attempted hostile takeovers. In the transition to public ownership, we have set up a corporate structure that will make it harder for outside parties to take over or influence Google. This structure will also make it easier for our management team to follow the long term, innovative approach emphasized earlier. This structure, called a dual class voting structure, is described elsewhere in this prospectus.

The main effect of this structure is likely to leave our team, especially Sergey and me, with significant control over the company’s decisions and fate, as Google shares change hands. New investors will fully share in Google’s long term growth but will have less influence over its strategic decisions than they would at most public companies.

While this structure is unusual for technology companies, it is common in the media business and has had a profound importance there. The New York Times Company, the Washington Post Company and Dow Jones, the publisher of The Wall Street Journal, all have similar dual class ownership structures. Media observers frequently point out that dual class ownership has allowed these companies to concentrate on their core, long-term interest in serious news coverage, despite fluctuations in quarterly results.

The Berkshire Hathaway company has applied the same structure, with similar beneficial effects. From the point of view of long-term success in advancing a company’s core values, the structure has clearly been an advantage. Academic studies have shown that from a purely economic point of view, dual class structures have not harmed the share price of companies.

The shares of each of our classes have identical economic rights and differ only as to voting rights. Google has prospered as a private company. As a public company, we believe a dual class voting structure will enable us to retain many of the positive aspects of being private.

We understand some investors do not favor dual class structures. We have considered this point of view carefully, and we have not made our decision lightly. We are convinced that everyone associated with Google—including new investors—will benefit from this structure.

This brings me back to the original "have it both ways" quote:

"They want the access to capital of the public markets and they want the control of the private markets, and dual-class allows them to get that."

Yes, exactly.  Have we come to the point where a long-term corporate strategy is so antithetical to capital markets that we must abolish anything that encourages it?  It strikes me reading this again that Nell Minow is trying to strip one of the last real defenses against short-term public market forces in public equities and what I have started calling "the tyranny of the quarterlies,"  away.  Once again, markets are beginning to look like the laws of thermodynamics.  Don't let companies win.  Don't let them break even.  Don't let them get out of the game.

Adding in the changes Herb Greenberg advocates and we'll end up with a second rate capital market s system in no time.  What will we do then?  Why, drive out all the liquidity and collar private equity to prevent public shareholders from being "cheated" by unlocking value that the public markets have all but destroyed.

Moving to London looks much more appealing today.

Tuesday, December 05, 2006


hidden agenda Interesting tidbit on my entry yesterday, spurred by the Market Watch piece with a rather anti-MBO spin.  The industry expert Market Watch quoted, Nell Minow, is apparently also a Going Private reader, as today Minow wrote me to point out that Market Watch had been somewhat "selective" about the way in which the comments had been used.  Color me unsurprised.  Says Minow:

Marketwatch was very selective with my quote -- in the interview I actually said many of the same things you did in your comment, including the point that anyone who buys into it knows what he is getting and that the price reflects the control discount.  And I noted that no world-class American newspaper has ever had anything but dual class stock.  When the Chicago Tribune and LA Times switched from dual class, they suffered immediately.   Just wanted to let you know I think you're right.  While I might not buy into a dual class company, I am delighted that our capital markets permit variety to address the needs of all providers and users of capital.

Despite the constantly strong showings of certain people in the field (Vipal Monga and John Morris over at, among others, come to mind) I am strongly tempted at this point to introduce a category for inept or agenda laden reporting by financial "journalists," that is, if a clever idea for a category title comes to me.

(Art Credit: Hidden Agenda, Paul Martinez-Frias)

Thursday, December 07, 2006

Bird Flu

florida bird flu Given the news that Home Depot may well have been engaging in "backdating" "way back when," I wondered if the viral nature of backdating might have spread to other boards.  If so, which boards?  How long ago?  I don't know, but this graphic I threw together with 2004 data on the subject is fun. (Richard Grasso looks very lonely, doesn't he?)

it is catching

(Graphic credit: They Rule)

Tuesday, December 12, 2006

Bourgeois Pigs

we may yet have use for joseph-ignace guillotin Always yummy Abnormal Returns calls our attention to a reaction from Michael Lewis, of all people, which throws enough heat off of his Bloomberg piece yesterday to fuse income inequality (lately a fashionable armchair socialism yarn for would be populists) with private equity returns and create a dense and opaque argument decrying what I can only brand "return inequality," a structural plague Lewis sees afflicting the market.

Why, wonders Lewis, isn't the "proletariat of Wall Street," the middle class, the "proles" permitted to participate in the private equity boom?  (Amusing to call those with wherewithal enough to invest in stock at all "the proletariat," given that even Marx's definition of bourgeoisie is those who earn their income off of ownership or trade in capital assets).  Lewis tell-tales his answer early on in his piece:

The job of the private-equity investor is -- again, speaking loosely -- to exploit the idiocy of the ordinary investor, and the corporate executives and mutual-fund managers who purport to serve him.

Ignoring, for a moment, that the job of every participant in the market is to "exploit the idiocy" of anyone else in the market dumb enough to display that idiocy in a public forum like the market, Lewis attempts to use Hertz to make the implicit case that an open auction on the most liquid market on the planet somehow perpetuated a massive fraud on the investing public and badly cheated the "ordinary investor," who willingly (even if not enthusiastically) scooped up the debt laden Hertz in one of the most successful LIPOs (from an IRR perspective) on record.  Comments Lewis on the topic:

But it's hard to see how Hertz is a riskier investment simply because it is owned by the Carlyle Group and not by Ford.

I can't speak to the risk effectively, but Lewis, in my view, over-hypes the importance here of "risk" and under-appreciates the "conglomerate discount" imposed on Hertz by Ford, a corporate owner that doesn't exactly represent the shining platinum standard of management acumen in the United States.  All it takes is a quick look to understand why private equity made out well here and, to summarize, that case includes "right place," "right time," "right checkbook balance."

A bit of history, though it has been badly neglected by Mr. Lewis, is probably useful.  Amazingly, Steven Pearlstein over at the Washington Post recently gave a much stronger summary of the Hertz case then anything I've seen in Bloomberg, marking the first time, in a dramatic role reversal, that the Post has slipped to the right of Bloomberg on matters financial.  (Then again, Bloomberg has of late been slipping badly).

Hertz found Ford as a major holder in 1987 back before Ford was rumored to be something other than a total charity case.  (I cannot confirm this rumor as I am too young to remember a time when Ford was something other than a total charity case).  Ford took the company over entirely by 1994, mostly under the thinking that if they didn't Chrysler or GM would.  (GM had, itself, owned Hertz once).  Not the best reason, perhaps, but it could have been a strong showing, handled properly.  It was not.  Partly because of the purpose that had been slated for rental car companies in the United States at this point in history.

Ford, as most of the big three had for decades, treated Hertz as a captive revenue machine (by selling, albeit for not much revenue, cars that couldn't compete in the consumer markets straight to Hertz).  Because of the nuances of "total fleet fuel efficiency laws," this also helped Ford meet fuel standards, dumping fuel efficient but undesirable sedans into Hertz while still selling guzzlers to the lucrative consumer truck and SUV market.  Decades of selling second-rate Tauruses to a captive customer who didn't much care what they looked or drove like didn't exactly prepare Ford to offer a decent car to the mainstream consumer market if something ugly were to happen to consumer tastes or (god forbid) gas prices.

While they couldn't sell well in the consumer markets, as former rental cars the sedans poured by the thousands into the used car market which meant those models had no resale value (a key metric for increasingly value oriented car buyers) compared to e.g., the Toyotas of the world.  Once on the used car market they also canibalized the higher margin new cars the big three were trying to hock.

Two and a half years after slurping it up, Ford IPOd a Hertz minority interest off and bought that interest right back (urgently and without much reason) three years after that.

The initial IPO valued Hertz at nearly 17 times earnings.  Read that last sentence again.  Go ahead.  Absorb it.  Here.  I'll give you a bit of white space.

That was the time of "irrational exuberance."  Travel businesses were on fire at the time.  All those New York investors going to board meetings for their VC interests on the Left Coast, I suppose.  The stock, which IPO'd at $24.00, hit $64.00 inside of 4 years.  Ford used a good bit of the proceeds to buy back Ford shares and attempt to buoy their flagging stock, it worked a bit, but not forever.  The party didn't last and not four years later Hertz was back to $24 and Ford wanted it back  Why, no one seems to know.  They got it by paying something like a 46% premium over the stock price before the Ford offer.  Read that sentence again too.

Moving forward, Hertz saw a 130% increase in net income from 2003-2004 (never mind that these figures were gains against the devastating travel years of 2002 and 2003, they looked sexy in offering documents) and coming off that Ford would be hard pressed not to want to divest the unit again (especially considering its own developing management issues and lackluster performance- due, not unsubstantially, to decades of short-term thinking in the form of piss-poor negotiations over what were eventually to become crushing pension and retirement benefits surrendered year after year to the UAW).

On top of this, Ford, along with the other big three, had no incentive to develop decent, fuel efficient automobiles.  Why bother?  No one cares much if a rental car is a keeper, or if it is particularly fuel efficient.  As long as it is just efficient enough to keep the fleet efficiency rating under the federal requirement by two tenths of a MPG or so.

Desperate for cash, and fending off the bond ratings folk, Ford started the IPO process for Hertz again in 2005, hoping, in typical front-running fashion, that the filing would flush out deep pocketed strategic buyers.  None appeared.  The other big three were up to their eyeballs as well.  Private equity came to "the rescue," but even from this sector there was limited interest.  Only two clubs bid.  The Clayton gang and a group including Bain, Blackstone, Texas Pacific Group and Thomas H. Lee.

Ford sold to Clayton's private equity gang for a net of $5.6 billion.  5.1 or so times earnings.  Read that last sentence again.

Ford could have held onto Hertz and collateralized the automobiles for cheap debt, but instead they sold outright.  The private equity guys and gals, seeing the demand for collateralized debt, collateralized, in turn using those assets to pick up $6 billion in very cheap debt to partially fund the transaction.  Not bad.

Holding out the disparity between the latest IPO price and Ford's selling price as some evidence of injustice ignores the role of the cash crunch Ford was in (owing to their own mismanagement and cannibalistic short-sightedness) and the outstanding timing of the private equity folks, picking up an asset from a motivated seller on the cheap just when the seller needed it gone the most, few questions asked.

There is no better example, in my view, of the absurdity of large conglomerate ownership in recent memory than the fire sales we see- the last vocalizations, as they were, the death rattles of the big three.  Their idiotic forays into the likes of consumer finance (GMAC) are coming to roost.  I, unlike Lewis, am entirely unsympathetic to their plight.

So much for the evil of private equity.  Ford's other option was a cheap IPO or to liquidate Hertz.  Private equity just happened to be the best cash available for the asset given the market's assessment of it.  I'm not crying for the market.  Nor should you.

There seems, of late, to be a revival of a kind of social justice theory based not on risk return, or the value of liquidity, smarts and timing, but the "inequality" some see as implicit whenever a clever group creates and captures value.  Green with envy, these fairness vigilantes target anyone who is written a large enough check, forgetting, time after time, that these transactions are as between willing buyers and sellers in a highly liquid and transparent market.  Ford shareholders barely made a whimper when Ford announced the sale.  Desperate, perhaps, to cash out right after the deal closed to save themselves from their own poor judgment in buying shares of Ford in the first place.

Lewis continues to lament the plight of the casual investor:

One day the private-equity markets may expand to the point where even proles are offered a little piece of the action. That will be the day the action is no longer worth having. Trust me. The ordinary investor is now and forever cast in the role of the peasant at the king's banquet. He's so happy to have any food at all that he fails to notice that bone between his teeth isn't the meal. It's the scraps.

Mr. Lewis should direct his ire towards the SEC, suggesting, perhaps, a repeal of the "accredited investor" requirement for participation in private placements.  Maybe we should let anyone who can scrape up $9.95 put it all in LBO funds.  And if they lose it there?  Lewis, in my view, must decide which evil he is prepared to endure.  Personally, I don't believe his course wise for two reasons.

First, the general public already participates in the private equity boom through the many institutions and pension funds that invest heavily in private equity, but, one hopes, with mostly prudent diversity.  CalPERS certainly has enjoyed it, and so, therefore, have the "poor" California public employees.  Unless, therefore, Lewis wants to suggest that the hopelessly poor household with joint income in the $300,000 range should be dumping all its retirement savings into Texas Pacific Group VII, L.P., he might have to admit that a good 401k or state pension plan is a better option.  Looking to improve the return of the "everyman" through that kind of concentration in LBOs seems absurd to me.  Moreover, I suspect a more measured investment by professionals who, smart or not, spend all their time investing rather than those who treat it as a pastime with financial benefits is the better option.

Second, let us not forget that the public is bathing in the bath they have themselves drawn.  Ford, trying desperately to satisfy a quarterly-report driven public market culture, and a misguided (but very trendy) focus on "all the stakeholders" rather than the owners of the company, increasingly resorted to complex revenue structuring, internal product dumping, short-sighted developmental programs, ruinous pension concessions and market cannibalizing tactics to give the public shareholders and pressure groups what they wanted: quarterlies, now.  Running factories, now.  Jobs, now.  Damn the costs tomorrow.

Moreover, there was far more than the tacit acquiescence of the public shareholders at work here.  This evil was quite active and persistent in its menace.  No manager who proposed a hard line with the UAW at the expense of a brief plant shut-down or four quarters of strong R&D expenditures would have lasted for more than a shareholder meeting cycle or two at Ford, or indeed any major public firm.  Ford's stockholders got their returns when they wanted them.  Back then.  To what extent did they enjoy them because the basic illness of the company was masked by these schemes?  Well, that's for you to decide.  One thing is sure: today the piper is collecting.  Damn that piper.  He's a right nasty bourgeois pig, he is.

(Art Credit: "Liberty Leading the People" Eugène Delacroix, 1830)

The King's English

departures twice a day I have heard the call of the Old World, apparently.  Visa in hand, it seems the first quarter will see me in the Land of Poisonings of Russian Dissidents.  (In an eerie twist, I've actually had drinks in the hotel where the tea cups glow).  My apprehension at the concept grows.  Certainly, London has proved poison for any number of non-English bankers before me.  My options however, find another position or join the press to the UK, leave me with little choice.

"You're the cheapest relocation in the firm," pointed out a Sub Rosa Vice President.  "And how would Armin get along without you?"

It is not clear to me what the fate of Going Private will be after the move.  I began this adventure as a way to give readers, particularly those not already in the business, a peek into the field.  Perhaps, I reasoned, they might reconsider.  Perhaps not.  Either way they might go in with their eyes more or less open.  That purpose, however, seems a little less served by a private equity diary written from London.  Nor, I believe, does that form command much of an audience.  (Not that Going Private is getting 200,000 visitors a day or anything as it is).

Going Private has been rewarding after a certain fashion.  I have turned down or failed to pursue any number of book offers, advertising requests, first dates, media interviews and invitations to cocktails.  I suppose that has been flattering.  Still, I'm not certain I have really made much of a difference in the way I wanted.  But, perhaps that's a self-serving kind of self-pity.  The kind that is pungent with the aroma of vanity.

"Going Private" felt more rewarding than will "London on $2500.00 Per Day," I think.  But, who knows, maybe my valuation is off.  Still, we have a good number of weeks to enjoy before then.

Thursday, December 14, 2006

Crowds Theory

lovefest I must admit to being literally floored by the number and tenor of letters that poured into my poor inbox in the hours after I posted The King's English.  Your support is overwhelming.  Far from the drab self-serving musings I assumed everyone mostly endured in Going Private for the sake of the occasional bright spot, you draw a picture of the blog as a bright and engaging source of light.  To quote one reader/writer:

...a bright, and heartbreakingly lonely beacon of brilliant insight and observation in an otherwise dark, and endless sea of ignorance and financial mediocrity.

    -Anonymous Portfolio Manager

I thought this a bit excessive until I finished going through my inbox.  The comments continue, unabated, in this vein, twice exceeding my incoming mail quota.  Many began with the preface that the author had not, heretofore, the "courage to write to you."  This puzzles me as I always endeavor (though not always successfully) to respond to each email with at least a cursory "thank you."

I would describe for you the many other contributions, but I feel I would do them little justice in summary.  At the risk of sounding immodest and mimicking an old world era inventory of ship's stores (which would explain the amazing commonality of ocean and sea voyage references in the comments) I will merely excerpt:

...given all the deals being done in London (and beyond), your claim that your diary would serve little purpose seems hollow.


...I've been spending a considerable amount of my time everyday savoring your take on private equity and hedge funds.


The business, I imagine, is not without a new set of nuances when transposed into a new land. But the mechanics of the business do not change, do they? I see no reason why your diary should end after a relocation to London. It will just be a bit different. As long as the writing is as lucid, the turns of prose as hypnotic, the content as thought provoking, as they were prior to the move, all will be well.


Quite selfishly, I do hope you intend to continue Going Private on some level, as the site has become more to your readership than you may have intended or even know about. Specifically, your in depth intellectualism and pursuit of reason in an often times irrational world has led me to strive with greater passion to become more of a professional, more of an intellectual, more of a student of private equity and, in fact, finance and politics in general.  Your content and thought process is a refreshing oasis in a sandy sea of contrite and flippant blogs that are as immature as they are uninformative. I look to you daily for thought provoking wisdom and wish it to continue in perpetuity.


...I've grown quite attached to "Going Private" over the past year-or-so. I've always appreciated your insight and wit, and I'm sure I'm not the only one. So I'll keep it short and sweet. If you must leave for the other side of the Atlantic, please don't give up this exercise.


Your highly arrogant and dismissive style coupled with an unabashedly capitalist world view brands everything you touch with the searing scorch of "free market at any cost."  The stench of burning flesh is a constant reminder of your political leanings.  Please forward by email the RSS links to your new site as soon as they are available.

    -Anonymous SEC Attorney

Reading your blog today from here in London, which I've always enjoyed, made it seem like you'd be sent to Siberia.



Well, dear readers, you have prevailed upon me and I am moved.  These are but a few of the literally dozens of emails that came sailing in, overwhelmingly positive.  (Well, except for one Harvard crank).  Thank you one, and all.  You've really made my day.  My week, even.

Now, to think of a new title....

(Photo: Love Parade, Berlin)

Wanted: Activists

not that kind of activist group, sheesh If you work with or are acquainted with an activist investor or a hedge fund with an activist group, Going Private would like to hear from you.  Drop us a quick note on

Friday, December 22, 2006

Solving the "Gift Giving Problem"

share the wealth As a culture we are horribly conflicted.  We denominate value in cash, but consider it dirty and evil.  Cash is a universal storage mechanism for value, except when it comes to gift giving, where somehow, magically, the value is diminished because it is the "thought that counts."  That, by the way, is complete and utter bullshit.  Please, those relatives who are reading this but don't know it is me, I ask you this one thing: don't try to think.

To me this is the ultimate conceit of the "holiday season," that somehow you know better than I what material good I should possess that somehow I have not already thought to acquire for myself.  Yet, asking for a particular good is so frowned upon that hints, suggestions, broad and elaborate fantasies (Wedding registrations.  Third parties employed fifth-grader-passing-notes-with-"Do you like me? Yes [ ] No [ ]" -written-on-them-style to drop subtle, or not so subtle, hints to gift givers: "Ahem.  Ahem.  Well, gee, does Equity have a electric potato peeler Mr. Private?  She likes potatoes, doesn't she Mrs. Private?" Letters to "Santa," etc. etc.) are constructed to mask the process of asking for gifts.  Ignoring for a moment the issues I have with a pathologically sinister construct that spends half a decade or more lying to children about the existence of a fat communist (he is dressed in red and have you ever seen anyone pay Santa if he wasn't ringing a bell?  Get real, he isn't a capitalist, folks) who slips under cover of darkness into the residences of unwitting homeowners to leave gifts (joke is on you, kids, your parents are filthy liars! Hah Hah!) the entire thing is farcical.  But I digress.

Why giving cash is frowned upon is beyond me.  Gift cards just cost money to buy, use and often have onerous restrictions.  And this downward spiral of not-telling, guessing, and the polite white lies surrounding the holiday season (re-gifting, "Oh, I was just telling Linda that I would like to record my signing in the shower!" "No, I don't already have a Human Touch Robotic Massage Recliner(tm).") needs to end.  You and I have to break it, dear readers.  This year.  Accordingly, I am offering a solution:

Give Goldman Sachs (NYSE:GS) stock.

Goldman Sachs stock has a nice ring to it.  You can help the recipients of your present feel like they are a part of the largest bonus grant in history and, though it LOOKS thoughtful and appropriately "gift-like," it is "same as cash" at any brokerage in the land.  Throw in the annual report and a subscription to published proxy materials and you've given the gift that keeps on giving.

(Plus, I've already amassed a substantial position in GS, so as all of you run the shares up buying the issue for your relatives, I'll pocket a tidy sum, and then short it right after the holidays, when the hang-overs wear off sufficiently to allow your in-laws to pick up their phones, fire up their online brokerage accounts and sell the shares so they can go out and buy the Chia Herb Garden(tm) they originally wanted anyhow.  Consider my wonderfully immoral gains your gift to me for the season).

Happy (bah, humbug) Holidays.

Monday, December 25, 2006


from us to you Given the time of year, it is useful to take a few moments to reflect on what is important in life.  One should ponder the, sometimes secret, urgings of the heart.  With that in mind, please accept these Seasons Greetings from Going Private (delivered today, believe it or not, from the Sub Rosa offices).

Saturday, January 20, 2007

Irony on the M25

foreign injury The irony of my December 27, 2006 post "Crash and Burn," is both deep and painful.  Only a few days after posting it, I was involved in a rather severe automobile accident on the M25 outside of London.  I only vaguely recollect what happened.  I woke in the hospital and I've only been well enough to type for a day or so.  I am still facing at least an extended hospital stay and perhaps another surgery.  I'm not sure yet if that will be in the UK or the United States.  What does it say about me that one of the first things I typed when finally well enough to was an entry on Going Private?  Is that more disturbing, or that my first thought after coming to was that my best suit was ruined?

Thanks to those readers who have already sent well wishes.  Pray tell, how did you find out?  Though I've managed to have someone type some email replies that I dictated (this is both laborious and time consuming) I regret I cannot answer them all.  It frightens me that news of my real-life incapacitation managed to get to Going Private readers somehow.  I have no idea where the connection between readership and my "real life" managed to form, outside of the kind nurse who took dictation for me.  Perhaps there's an anonymous "in the know" type out there who doesn't want me to know that they know.  Stranger and stranger.  Slightly creepy.

I knew I shouldn't have gone to London.

Friday, January 26, 2007

Twisting the Four Screws of Private Equity

ouch! There is more than just a taste of conceit buried within the ethos (pathos?) surrounding my decision to conduct a job search even while gainfully (richly?) employed.  I am, after all, currently possessed of a position that would doubtless be the envy of any young woman my age who entertain even a passing interest in a career in finance.  It also seems pretty clear that I was hired at a level beyond what my experience would otherwise have commanded and that I enjoy the fruits of my current position in large measure due to luck and the intervention of one highly placed individual in my firm- Armin.  True, in the three reviews since I have been awarded the firm's highest performance rankings and then rewarded with consummate bonuses, raises and praise, but even these accolades do little to instill in me any kind of career satisfaction.  Less so given the less than warm reception the city of London, its driving public (and, indeed the United Kingdom) has purveyed thus far.  (Perhaps I would have a brighter view of the locale if my experience of it included scenery more diverse than the surgical ward and the inside of a hospital room).

So, after even the most trivial reflection, searching for something "better" seems the height of arrogance and pomposity.  Still, I have my reasons.  In fact, over the last several months I feel I have been as pointedly locked into a course pressing me to explore new career options as my right wrist is now locked into the awkward and ungainly position required to bring it back to something resembling a full range of motion (a development which, incidentally, no fewer than four licensed medical professionals have assured me is characterized by a probability which quickly approaches zero).

Faithful readers will be well aware of my views on the importance of "long-term" and operational foci in the practice of buyouts.  "Pure" buyouts are, in my noclamenture at least, suited to two roles.  First, mechanisms either to effect change in corporate governance or corporate strategy that the public markets, or indeed the current ownership structure be it public or private, have not the patience or contrarian wit to support.  Second, capital and governance structures useful for imposing radical fiscal, personnel and strategic disciplines of a sort not viable in more conventional ownership contrivances.  Clearly, a Venn diagram of these classifications endures a non-trivial area of overlap.  These same faithful readers will be acutely aware of my disdain for the use of leveraged buyout transactions to extract "value" by use of leverage alone.  If there are no operational or structural gains to be had or, indeed, if the transaction's sponsors lack the ability or desire to effectuate the transformation to capitalize on these changes, leverage needlessly increases risk and returns little fundamental improvement in the underlying firm.  These "structure only" transactions are opportunistic speculation, not true value enhancing transformations.

The four screws drilled into my bones that both hold my grotesquely swollen wrist in its present position and inflict upon me extreme pain when tampered with (even the most ginger manipulations cause an inadvertent shriek and 5 minutes of uncontrollably pathetic sobs to issue directly from the darkest reaches of my Id) are taunting analogies for my current career paralysis.  They might as well described the quad factors I think essential to private equity targets.

A fundamental structural issue with the target firm.  Be that in the revenue model, the cost structure, the logistics of supply, distribution, or collections, or personnel structure.

A marketplace, product, strategy or investment path that requires a long-term view to effectuate.

The absence of incentives towards fiscal or strategic discipline.

And, finally, the inability of the current capital structure to make radical changes or endure the long-term needs of the firm.

Tamper with any of these elements in the universe of Sub Rosa targets and shooting pains run up and down the cramped arm of my private equity career satisfaction- an, admittedly artificial, construct as painfully immobile and inflexible as a limb perforated in multiple places with pins of surgical steel.

If the first two of the last three transactions undertaken by Sub Rosa pulled at these screws, the last took a hammer to the entire apparatus.  The IRR source for the transaction could be described in a single word:  Leverage.  Not to mention my reticence to leave New York, where I felt I had barely begun to be acclimated, for the likes of the United Kingdom.  Not, mind you, that the United Kingdom is an intrinsically undesirable place, but I spent much of my younger life getting away from Europe.  To be pulled back is distressing.

Of course, the urge to ignore any kind of moral center one is possessed of when surrounded in the buyout business is highly seductive.  Compensation is beyond generous, the business is sexy in the extreme and any dozen score of young professionals with no moral compass at all would be happy to slide in under the lofty altitude of my ethical perch and take my position for 50% of the salary.  Still, it has been enough of a jar to send convulsions through me- the kind that cause me to forward resumes and attend day-long firm interviews.

I've pestered two kinds of firms.  LBO shops with reputations for turnaround projects and hedge funds with activist strategies centered on corporate governance improvement.  Activist funds seems uniquely reserved in their hiring practices.  Recruiters in the business seem steadfastly unhelpful.  I've managed two meager interviews.  My last such, just before my hop over the pond, ran from 8:30 am until 6:00 pm with dinner following hard upon and was chiefly accentuated by one Vice President's pontificating aloud to the effect that women had no place in private equity as they were forced to negotiate with primarily male sell-side types.  I wish that comment would have emerged early in the process so I would not have had to endure 8.5 hours of interviewing to discover the firm a bastion of misogynistic ex-bankers.

As for the others, surely, they talked the "operational talk," but then all LBO firms now-a-days do that.  Most are quite practiced at it, given the many tries they have had during the road show.  It is quite difficult to tell where the philosophical belief ends and the marketing begins.

A close friend and colleague of mine who has on occasion featured in my entries here and has been my lexicon like resource for all things activism, is also searching for a spot in activist hedge funds and, despite being literally the smartest person I know and easily twice as qualified as I would be for an equity analyst position in such a fund, has been frustrated in his efforts for going on 4 months now.  I fear, therefore, that there is little hope for me.  (Job leads and referrals to recruiters actually worth the salt in my tears much appreciated).  I will, I therefore suspect, have to endure Sub Rosa and its new found love for the abandonment of principles in pursuit of the almighty IRR at any cost (including the undertaking transactions with a paltry .75% of interest rate headroom before the breaking of covenants will ensue).  Well, at least I have my health.  Sort of.

Friday, February 23, 2007

Why Social Investing is the New Tech Bubble

the only green you'll see A slew of recent missives of a quantity sufficient to lead me to believe that printing ink, and not spit, issues forth from the hyperactive salivary glands of "the left," at least now that they have been stimulated, in Pavlovian fashion, by the distant ring of non-zero probabilities which suggest that they might, just might put their grubby little mitts on the magnets necessary to skew the moral compass of the United States to a direction more to their liking (but far again from magnetic north) makes it fairly clear that a massive press for "ethical investing," "social investing," "green investing," "stakeholder democracy," (quite a different animal from shareholder democracy mind you) or whatever you would like to call the new market corrosive noise, is just around the corner.  Be afraid.  Be very afraid.  You would think the likes of the UAW would have learned their lessons, but I assure you, they have not.

As a rule I avoid political discussion in the entries that comprise Going Private unless they have some direct bearing on finance.  I find it, however, almost impossible to keep ignoring the literal onslaught of anti-capitalism that glares menacingly at us from the other side of the looking glass.  I can perhaps be fairly accused of too many viewings of Richard Dawkins' work now that I have taken it upon myself to use these pages in sounding the alarm that the most palpable threat to capitalism and free market economies is poised to spring a lethal ambush in an environment well calibrated to multiply the damage.

We are faced with the most basic of conflicts.  Between rationality, reason and scientific method on one side, and the mud-like foundation of "ethical conduct" or "social responsibility," on the other.  This basic conflict, between the lighter forces of knowledge and discovery and the darkness of ignorance by design and demagoguery, is likely to be the defining cultural exchange of our era, and one that spans disciplines from economics, to politics to morality.  Or, perhaps, it is merely my intoxicating cocktail of a long hospital stay, constant pain and narcotics.

Some time ago, Jon Entine penned "What Should Bill Gates Do?" (subscription required) in the Wall Street Journal, a piece that highlights what must be the most important observation yet penned on the folly that is "social investing," namely that:

The dark secret of "social investing" is that it is neither art nor science: It's image and impulse. It reflects perceptions, not performance.

Why?  Because:

The social investing community also suffers from the hubris that it can separate the good guys from the bad guys.

We would do well to remember that when capital allocation decisions are made on criteria other than underlying economic prospects or value that it is the mob, more than economics, that rule returns.  That which was popular (though impractical) as a business cause last year may well find itself out of favor and without any economic merit this year.  (Some of the denser ethanol projects I have seen recent come to mind).

I ask you, where is my political party?  The fiscally conservative party with the goal of reducing government size by 25% in ten years?  The party that has absolutely no position on religion at all, and doesn't intend to discover one in my lifetime or that of my children to be?  The party that doesn't care who I sleep with or how.  The party that isn't dense enough to start taxing "windfall profits" on the firms that seek out the scarce energy supplies required for the country to grow at a reasonable pace over the next 20 years?  The party that won't regulate the United States out of global capital markets?  The party that won't fuel the Social Investing bubble?

The Benefits of Ruthlessness

talented manager? A loyal reader, "S," joins with me in frowning on "social investing," and backs up the collective distaste in our mouths with some interesting data on portfolios borrowed from the always entertaining Long or Short Capital.  Long or Short's semi-famous "Satan's Portfolio" is the hedge against the Pax World Funds nonsense, and a good thing too.  Looking at the graphic S forwarded me, it is pretty obvious that "investing" in Pax World Funds amounts to giving your money to charity, but without the tax deduction.  Still, perhaps you need some capital losses to carry forward?

Tuesday, February 27, 2007

Reader Mail

hard at play Self-confessed Stanford Grad (first step in getting better is admitting you have a problem) writes:

I noticed your general disdain for "social investing" and wasn't sure if you were condemning the entire industry.  While "socially-responsible investing" is mostly counter-productive, a new group of investors are trying to fund social goals (priority #1) and generate above market - 10%-15% - returns (priority #2).

Good luck.

Wednesday, February 28, 2007

Drama Queens to the Floor, Please

how many days of food did you store? I recognize that it was a dramatic day for some people yesterday (mostly, I expect, the people who had forgotten- or perhaps are too young to have ever seen- what a dramatic correction looks like and those without anything resembling a hedge against dramatically long equity positions) but DealBreaker points us to a bit of dramatic evidence that a few of us are ill-prepared for anything like a dramatic (or, indeed, a moderately dramatic) financial shock.  In response to dramatic fluctuations today in shares of Goldman Sachs (which, do remember dear reader, was trading dramatically between $194 and $210 at the time) one (mercifully, self-preservingly anonymous) floor trader moans:

Goldman fell six bucks. People were going nuts. There were no bids for five or six points. We haven't seen that kind of thing for years. This was no high-flying tech stock. It was Goldman-fucking-Sachs.  For a minute I wondered if they had blown up Broad Street. Maybe Goldman Sachs no longer existed.

A six dollar drop in Goldman?  How perfectly ghastly!  It is positively enough to give a girl the vapours!  I mean really, what can have been expected of you in a moment like that?

One would suppose- erroneously, it would now seem- that those on The Street were made of sterner stuff than this.  The testicles on the famous bull are, after all, made of bronze last I checked- no?  Perhaps, oh, anonymous aspirant to big swinging schmuck status, you better run out and get some duct-tape and plastic sheets for the imminent biological attack, too.  I am certain, however, that once you recover from the shock, say, Friday afternoon or, perhaps, Monday morning, it might be a good time to go long on Anthrax remedies and buy those ethanol stocks "on the dip," right?

Well, I suppose it is for the best.  A 4% correction to wake people up a little might have been a good idea if this is the kind of propensity to lightheadedness that lurks out there.  After all, it could have been something serious.

I should like it quite a bit if we saw some nicely public (but controlled) hedge fund blow ups.  Great time to filter out some of the lightweights and see who was paying attention (or more interestingly, who wasn't).  What faces the U.S. markets today remains to be seen but, I assure you, from the midst of my convalescence here on the other side of the pond and fast in the grips of the warm enveloping anesthetic of my morphine drip machine (yuuuuummmmmy...) I eagerly await the early dispatches- any hint you detect of efforts on my part to avoid looking smug is entirely the result of your overactive imagination.

Oh, and that reminds me.  I think I will cover my Goldman short today.

Thursday, March 01, 2007

An Ode to The Economist

time pays dividends "It is because I have been kept so long in this island, and see no sign of my being able to get away. I am losing all heart; tell me, then, for you gods know everything, which of the immortals it is that is hindering me, and tell me also how I may sail the sea so as to reach my home?" "Then,' he said, 'if you would finish your voyage and get home quickly, you must offer sacrifices to Jove and to the rest of the gods before embarking."

Ah, a journey that, at last, comes to a happy end.  But indeed good things come to those who wait.  If I had, heretofore, any doubts that The Economist is among the best publications on the planet, they are now extinguished.  It is clearly, simply the best publication on the planet.

-----Original Message-----
From: Andrew Rashbass <andrewrashbass (a t)>
Sent: Thursday, March 1, 2007 17:45:29
To: Equity Private <>
Subject: Economist Letter

Dear Equity Private

I was looking for Economist mugs on Google yesterday (don't ask!) and I came across your posting about our thermal coffee-mug and our reply.

I am the publisher of The Economist. I wonder if you would mind passing on my apologies to VP. Clearly our mug was not what VP expected and judging from their experience with it, I can well understand why. The free movement of capital and labour is, as VP implies, central to The Economist's world view. The free movement of coffee inside the supposed vacuum chamber of the mug is not. I should very much like to make amends and send them the memory stick they were after.

I enjoyed reading your blog, by the way.

Best wishes


Andrew Rashbass
Publisher and Managing Director
The Economist

(Quoted Text: Homer, The Odyssey.  Translated by Samuel Butler)

Sunday, March 04, 2007

No, Really

stop saying wordsHonestly, Mordant EconomicsStop saying words.  Seriously, man.  Get some helpFind a purpose, or something.

Monday, March 05, 2007

Bottomless Pits

a clean getaway with your cash The Cleantech Investing blog apparently makes the mistake of thinking that I made the mistake of lumping "green" investing and SRI into the same slop bucket accidentally.  In reality it, should be painfully clear that the Venn Diagram for "green" investing, SRI and "substantial losses" is drawn with one circle.  If this is not obvious to you, your CFA should be revoked.

Thursday, March 08, 2007

Slipping Below the Dew Point

ho hummer Over the last 5 months I have seen more and more "NFD" deals.  NFD is my quick and dirty term for "Non-Financial Drivers," or, when including my likely opinion on the viability of the opportunity: "No Fucking Deal."  These include all of the "Socially Responsible" or "Green" deals that have come across our bow at Sub Rosa.  (Ethanol has been increasingly common but fuel cells, hybrid part manufacturers, hydrocarbon reclamation and solar have have been appearing with increasing frequency too).

One of the deep flaws in investing strategies like "Socially Responsible Investing" or "Green Investing" is less about an intrinsic strategic flaw (though these exist too) than the nexus between the decision to add non-financial criteria to an investment process and human nature.  The general miasma created by focusing on how "green" an investment is (or isn't) or how "socially responsible" it is (or isn't) clouds clear decision making.  This is because these criteria are political, and therefore subject to the whim of policy and public opinion.  I have, of course, discussed this before on Going Private, quoting, among others, Jon Entine who said:

The dark secret of "social investing" is that it is neither art nor science: It's image and impulse. It reflects perceptions, not performance.

Why?  Because:

The social investing community also suffers from the hubris that it can separate the good guys from the bad guys.

Taking the subjective nature of deciding what is or isn't "green," and the moving target that is the definition of "green" this week and you have a recipe for disaster.

Since joining Sub Rosa, I have had occasion to review any number of NFDs.  A common theme in major "green" or "socially responsible" projects is that when someone finally bothers to study the larger impact of the technology or product it becomes painfully obvious that the product or technology is either astonishingly impractical or has a more substantial negative impact on, e.g., the environment than the "non-Green" alternatives already in the marketplace.  If this pattern appears regular in SRI or Green projects, I believe it is because of this miasma effect.  It is, however, easy to avoid the miasma effect.  Ask what the pricing mechanism is for the product.  Is it the market, or something else that is setting pricing?

Let's take an example.  Trying to get back into the swing of work I have been researching hybrid cars, a project I began last spring related to some parts manufacturers we were considering acquisitions of.  Some interesting things came out.  Ford, for example, was at one point taking losses on every hybrid they sold.  I haven't seen recent data but I suspect not much has changed.  Consumers simply won't pay the $5,000 - $6,000 premium for a hybrid just "because," or at least not enough of them will do so to make the product even a break-even proposition.  What was Ford thinking?  Why would this be?

No matter, the savings on gasoline make up the premium cost.  Nope.  Not for a long while.  The Toyota Prius is among the fastest at returning savings to the user.  It takes 5 years and then how much can one expect?  $80.00.

Well, it's worth it.  Buying a hybrid will reduce your impact on the environment and if it takes 5 years to break even, well, that's just fine isn't it?

Sure, it would be, if that were true.  It isn't.

In fact, the major hybrids are really quite unfriendly when you use real metrics to evaluate them.  In this case, energy cost per mile over the lifetime of the vehicle.

CNW Market Research has done a comprehensive study (updated with 2006 model recently) on the "dust-to-dust" energy costs for everything from extracting and refining raw materials to manufacture, assembly, testing, delivery, driving during the life of the car and even disposal.  This is, of course, the metric that should have been used to justify hybrids in the first place (since savings on fuel costs certainly didn't make their manufacture rational).

The study is intensely detailed (a great deal of  time is spent modeling how long a vehicle remains with its first owner and how many times it changes hands before being disposed of, for instance, as each incremental transfer is additional energy expenditure).  Read the 400 page report, absorb the "energy cost per mile" figures and some interesting things emerge:

  • Actual consumption of gasoline is generally less than one third of the total energy consumption in the lifetime of a vehicle
  • The 2006 model hybrid with the lowest energy impact during its life cycle is the Toyota Prius that consumes $2.965 per mile during its life
  • The 2006 model hybrid with the highest energy impact during its life cycle is the Ford Escape that consumes $3.540 per mile during its life
  • For many hybrid vehicles 25% to 30% of the life cycle energy expenditure is consumed in raw material production and manufacture- this is much higher than in non-hybrid vehicles. For foreign built cars this means that emissions in the country of use (the United States, say) are not being eliminated, but rather transferred to the country of manufacture.  Next time a hybrid driver looks smug feel free to remind them that they are likely dumping their emissions into the second or third world.  What kind of pig subjugates the peoples of Mexico and endangers their health to look "green" for their suburban neighbors and smirks about it?
  • Federal (and state) subsidies mean that this energy use and emissions transfer is part of United States monetary policy (and California is exploiting Mexico).

Remembering that the hybrids consume $2.965 - $3.540 of energy per mile during their life cycle it is interesting to consider these figures for other popular vehicles:

Ford Escape: $3.540
Porsche Boxter:  $3.388
Toyota Land Cruiser:  $3.354
Maserati An: $3.219
BMW 5 Series: $3.197
Cadillac Escalade: $3.197
Corvette: $3.196
Toyota Prius: $2.965
Lincoln Navigator: $2.943
Porsche 911 Carrera 4: $2.806
Lincoln Town Car: $2.661
Range Rover Sport: $2.602
Porsche Cayenne: $2.539
BMW X3: $2.513
Hummer H3: $2.069

Interestingly, most large SUVs have a fairly significantly lower lifetime energy impact than do any of the hybrids.

What a wonderful "Green" investment strategy.  Hybrid cars.

Hybrids are such a horrible mess because they mix all the elements required to destroy the market forces.  Subsidies, state and federal.  Green investing.  Substantial research and development to avoid spending money on gasoline, which the market has actually left quite cheap, at the expense of a more expensive product.  (Hint: use cheap resources until they are not cheap anymore).

Gas has to hit $6.00 per gallon before today's hybrids show any cost savings to their owners inside of three years.  Even the most basic sensitivity analysis would expose this.  We can only reason that the likes of Ford either expected $6.00 per gallon in the near future, or simply disregarded the economic analysis in favor of a political one.  Is it any surprise that the resulting product is more expensive in every way worth measuring than its conventional counterparts?  Shouldn't be if you were paying attention.

Friday, March 09, 2007

Environmentalism for the Rich and Famous

its getting hot in here Slowness today motivated primarily by (properly dispensed) narcotics.  Plus, it is Friday, after all.  Still, what is Friday without a little irreverence?  As if I wasn't annoyed enough, a loyal reader points to Paul Kedrosky's Infectious Greed today which relays a rather upsetting account of VC Maven John Doerr.  To wit:

In what was may have been one of the strangest moments at TED in Monterey, an admittedly often strange conference, venture capitalist John Doerr apparently cried yesterday at the end of a speech about climate change. In the talk he repeatedly said "I'm afraid", and then closed by begging emotionally for people and companies to go green...

Oh, how the mighty have made asses of themselves.  Will someone please stop this madness?

Want to get everyone to "go green?"  Either make cheap solar that can compete in the marketplace (I'm talking to you Mr. Doerr) or come up with some other viable alternative.  Subsidize it with a tax break for businesses that get certified green or something if you must, but even that will fall apart eventually if the underlying economics do not hold up.

I am reminded of Bush begging people to stop hoarding gasoline on television.  Hopeless.  Carter wearing a sweater on television, hinting that 68 degrees might be a fine temperature for your home in the winter- not that I'm old enough to remember it, our micro professor played a videotape of it in class.  The market is the market.  Even more so now that the United States enjoys waning influence in global economic affairs.

Since this week has become green smearing week on Going Private, and because I hate Al Gore and all he stands for (because, to me, that looks like hypocrisy), let's examine carbon offsets.  Apparently, I'm in good company pointing the finger at this latest, torturous treatment of economics.  The Economist Blog has been running a mini-series of sorts on it as well.  Recently they quoted Arnold Kling, who was recursively citing them saying:

If you want to fight carbon emissions, then join the Pigou Club and push for taxes on bad energy. If you want to fight carbon emissions at a personal level, then act as if there were a high tax on your use of energy from carbon-emitting sources, and reduce your use of that energy. If you are not really all that worried about carbon emissions, but you get pleasure from making empty, self-righteous gestures, then do what Al Gore does -- buy carbon offsets.

The Economist Blog continues:

Carbon offsets are even more lunatic less effective as a response to flying.  "I am pouring tons of carbon into the air with my transportation needs, so I will therefore . . . increase the supply of electricity in Kansas" doesn't exactly have a fine, logical ring, does it?  In this case, it should be obvious to most readers that this does not work.  The decision to fly marginally increases demand for flying, meaning, if enough people do it, more flights and more carbon; meanwhile, the wind farms you paid to install probably haven't taken a single power plant offline.  Net effect:  more carbon.

The Kling piece in particular is worth a read, not least for its excellent discussion and application of the role of "rent seeking" in sovereign created markets.

If we add to this the knowledge that the carbon offsets Gore buys don't go directly to alternative energy production but to Generation Investment Management, LLP, that begs the question "what the hell is Generation Investment Management?"  Generation Investment Investment Management, LLP, is the investment firm Gore founded which invests in "future proof" companies.  Interesting.  More so when you read Generation's self-descriptions:

We invest in long-only, global, public equities with a concentrated portfolio of 30-50 companies. We aim to buy high quality companies at attractive prices that will deliver superior long-term investment returns. Sustainability research plays an important role in forming our views on the quality of the business, the quality of management and valuation.

Our performance fees align our interests with that of our clients by being based on long term performance.

Well, you don't have to be a genius to read between the lines here and come to a very revealing conclusion.

"We invest in long-only, global, public equities with a concentrated portfolio of 30-50 companies...."

Public equity investment.

"We aim to buy high quality companies at attractive prices that will deliver superior long-term investment returns."

Value/Growth strategy.

"Sustainability research plays an important role in forming our views on the quality of the business, the quality of management and valuation."

Non-financial drivers.

"Our performance fees align our interests with that of our clients by being based on long term performance."

20% Incentive fee.

It is actually pretty clear.  Al Gore wants you to buy carbon offsets because you aren't really buying carbon offsets.

You are investing in Al Gore's long-only hedge fund.

Except, you can't, really.  See, these are carbon offsets for the rich and famous.  Joe Sixpack, unless he's an accredited investor, probably can't invest in Generation Investment Management.  Consider:

GenerationIM is the parent company of Generation Investment Management US LLP ("GenerationUS"), and investment adviser located in Washington, DC and registered with the United States Securities and Exchange Commission under the Investment Advisers Act of 1940.

Well, let's just see what their registration says.

What types of clients do you have? Indicate the approximate percentage that each type of client comprises of your total number of clients:

(1)     Individuals (other than high net worth individuals): 0%
(2)     High net worth individuals: 0%
(3)     Banking or thrift institutions: 0%                     
(4)     Investment companies (including mutual funds): 0%                        
(5)     Pension and profit sharing plans (other than plan participants): 0%                        
(6)     Other pooled investment vehicles (e.g., hedge funds): Over 75%     
(7)     Charitable organizations: 0%
(8)     Corporations or other businesses not listed above: 0%
(9)     State or municipal government entities: 0%
(10)   Other: 0%

You are compensated for your investment services by (check all that apply):

A percentage of your assets under management [X]
Performance based fees [X]

What is the amount of your assets under management and total number of accounts?


And what's the minimum investment?  $3,000,000

Power to the people.

Thursday, March 15, 2007

Winding Up Amaranth

the missing bounty of amaranth We speculated quite a bit on the eventual fate of Amaranth and its many characters after its melt-down.  A hedge fund guru and loyal reader forwards me today a copy of Amaranth's Summer 2001 Offering Memorandum for Amaranth International Limited, the Bermuda entity that served as a "master feeder" fund to Amaranth's Delaware entity.  To wit:

Amaranth International Limited (the “Fund”) is a Bermuda exempted mutual fund company, incorporated on 2 January 1998, the investment objective of which is to maximize expected returns on a risk-adjusted basis. The Fund will seek to achieve its investment objective by investing, directly or indirectly, substantially all of its capital in a Delaware limited liability company (the “Master Fund”), which has an investment objective identical to that of the Fund. The Master Fund is expected to employ a diverse group of trading strategies, within which it may trade a broad range of equity and debt securities, commodities, derivatives and other financial instruments on a global basis. The Fund cannot assure any of its Shareholders that its investment objective will be achieved. The securities and strategies which the Fund and the Master Fund utilize present special and significant risks which investors should carefully consider in conjunction with their  investment, legal and tax advisors. There can be no assurance that the Fund or the Master Fund will meet its objectives (or avoid losses). See “RISK FACTORS.”

It is an older document, and many revisions could have been made in the interim, but some interesting features come out on further examination.  Join us, dear reader, in contemplating these and descring, (but for a moment) the strange world of restricted redemptions.

Of course, redemptions were an interesting point given the eventual fate of Amaranth. 


No Shareholder will have the right to redeem any of its Shares except as described below.

A Shareholder may request the redemption of its Shares as of the first anniversary of the last day of the month those Shares were purchased by the Shareholder and on each anniversary thereafter (each such day being a “Redemption Date”) by notifying the Administrator in writing at least 90 days prior to the Redemption Date.

Furthermore, a Shareholder may request the redemption of a portion of its Shares as of December 31 of any year (each such day also being a “Redemption Date”), up to that number of Shares held by such Shareholder as have an aggregate Net Asset Value equal to 90% of the amount estimated by the Fund to represent the cumulative net increase in the Net Asset Value per Share of that Shareholder’s Shares from the date(s) of their purchase through the last day of that calendar year (less any amounts previously so redeemed) by notifying the Administrator in writing by November 30 of the year in question.

A Shareholder may also request the redemption of all or a portion of its Shares as of the last day of each of January, April, July and October of any year (each such day also being a "Redemption Date") by notifying the Administrator in writing at least 45 days prior to the proposed Redemption Date, provided that the Fund will not permit the redemption on such basis of more than 7.5% of the 20 Net Asset Value attributable to the total Shares outstanding on any such Redemption Date, excluding any Shares being contemporaneously redeemed under either of the two preceding paragraphs on such Redemption Date. In the event that the Administrator receives aggregate redemption requests on this basis in excess of such limit, the redemption amounts will be determined by reference to the relative numbers of Shares held by those Shareholders requesting redemption, rather than by reference to the relative amounts of the redemption requests. Accordingly, the maximum dollar amount a Shareholder will be able to redeem under this paragraph will be determined by multiplying the total dollar amount available for redemption by all Shareholders under this paragraph by a fraction, the numerator of which is the total number of Shares held by such Shareholder on such Redemption Date (prior to giving effect to any redemption under this paragraph), and the denominator of which is the total number of Shares held by all Shareholders so requesting redemption under this paragraph on such Redemption Date (prior to giving effect to any redemption under this paragraph). In the event that a Shareholder has requested redemption of less than the maximum dollar amount available for redemption by such Shareholder under this paragraph, the available amount not redeemed by such Shareholder will be made available for redemption by the other Shareholders so requesting redemption on such Redemption Date, and the additional amount redeemable by any such other Shareholder will be determined by multiplying the total additional amount available for redemption by all such other Shareholders by a fraction, the numerator of which is the total number of Shares held by such other Shareholder on such Redemption Date (prior to giving effect to any redemption under this paragraph), and the denominator of which is the total number of Shares held by all such other Shareholders on such Redemption Date (prior to giving effect to any redemption under this paragraph). Quarterly redemptions under this paragraph are subject to a redemption fee of 2.5% of the redemption proceeds. All such redemption fees will be deducted from the amount withdrawn and will be retained by the Fund.

The Directors may, at their sole discretion, waive part or all of any of the above notice periods or redemption fees, if any, or agree to different Redemption Dates. Each Share will be redeemed at a price equal to the Net Asset Value per Share of the relevant Series being redeemed on the Redemption Date, subject to (i) a charge, if applicable, to be determined at the sole discretion of the Fund, for the expenses of liquidating a proportionate share of the Fund’s assets, (ii) other reserves for contingencies as the Directors, at their sole discretion, deem appropriate, and (iii) adjustments to the value of the Shares being redeemed to reflect such Shares’ proportionate share of increases and decreases in the Net Asset Value of the Fund occurring after the Redemption Date, if the Directors elect the Deferred Redemption System described below (the “Redemption Price per Share”).

The Fund has the right to require the redemption of a particular Shareholder's Shares of any Series, for any reason or no reason at any time a t the sole discretion of the Directors, upon not less than 30 days' written notice. If a Shareholder's Shares are so redeemed, the Bye- laws provide that the Redemption Price per Share payable in respect of such Shares shall be the Net Asset Value per Share of the relevant Series as of the date fixed for the redemption thereof in the notice of mandatory redemption served on the relevant Shareholder by the Fund, adjusted as described above on the same basis as the Redemption Price per Share payable in respect of a redemption requested by the Shareholder.

Redemption proceeds will be paid in cash, by check or wire transfer, or securities or both, as the Fund may at its sole discretion determine. Under normal circumstances, 90% of redemption proceeds will be paid by the Fund to a redeeming Shareholder within 30 days of the relevant Redemption Date, with the balance paid promptly after the completion of the Fund’s audit for the calendar year in which the Redemption Date falls. The amount of such balance is subject to adjustment to reflect any revision of the relevant Net Asset Value per Share between the initial 21 payment of redemption proceeds and the payment of such balance. Redemption proceeds or the part thereof which is paid in cash will be paid in U.S. Dollars, unless the Fund otherwise agrees. See “RISK FACTORS, Valuation Risk.” No interest shall be payable by the Fund with respect to any redemption proceeds.

The Fund may adopt the “Deferred Redemption System” if, as of any Redemption Date, the Fund’s funds are committed directly or indirectly to one or more trading entities that do not permit immediate withdrawal of funds or there exists a state of affairs which, in the opinion of the Fund, constitutes circumstances wherein liquidation by the Fund of its investments is not reasonable or practicable, or would be prejudicial to the Fund. If the Deferred Redemption System is adopted:

a) The Fund will attempt to withdraw from its investments, as of the earliest date on or after the relevant Redemption Date upon which the Fund is permitted to do so, the portion thereof allocable to the Shares of the Shareholder being redeemed;

b) Within 30 days following the relevant Redemption Date, the Shareholder will be entitled to receive an amount of cash, securities or both, as determined by the Fund at its sole discretion, equal to (i) the Shareholder’s proportionate share of all cash, and the fair market value of all marketable securities, held by the Fund as of the Redemption Date, less (ii) its share of the Fund's liabilities as of the Redemption Date and any reserves for contingencies;

c) Any outstanding redemption proceeds due to the redeeming Shareholder following steps (a) and (b) above will be paid within 30 days after the Fund receives the proceeds from the liquidation of Fund investments representing the redeeming Shareholder’s proportionate share thereof. The Bye-laws do not obligate the Directors, when they determine which Fund investments to liquidate in order to satisfy a Shareholder redemption request, to partially liquidate any investments allocable to the Shares being redeemed by the redeeming Shareholder. In any event, the Fund will pay at least 80% of the amount due to a redeeming Shareholder within one year following the relevant Redemption Date and will seek to pay any outstanding balance as soon as is reasonably practicable, thereafter; and

d) The value of the Shares being redeemed will be subject to a “Liquidating Adjustment” representing a credit or charge for such Shareholder’s proportionate share of any increase or decrease in the Net Asset Value of the Fund from the relevant Redemption Date through to the date upon which the Fund liquidates investments for the purpose of satisfying such Shareholder’s redemption request. Under Bermuda law, the Fund cannot redeem its Ordinary Shares if to do so would result in the issued share capital of the Fund being less than the required minimum capital of U.S. $12,000.

Suspension of Dealings

Notwithstanding anything contained herein to the contrary, either the Directors or the Trading Advisor may suspend dealings in Shares in certain circumstances as described under “GENERAL INFORMATION.” No Shares will be issued, valued or redeemed during such suspension.

Going back to the General Information reference we find:

Suspension of Valuations and Dealings

Either the Directors or the Trading Advisor may suspend Net Asset Value per Share calculations for the whole or any part of a period during which any exchange or over-the-counter market on which any significant portion of the investments of the Fund or the Master Fund are listed, traded or dealt in is closed (other than customary weekend and holiday closing) or trading on any such exchange or market is restricted; or there is a temporary operational or other communications breakdown or when circumstances exist as a result of which, in the opinion of the Directors or the Trading Advisor, the accurate valuation of the Fund’s investments (i.e., primarily its investments in the Master Fund) is not possible. No Shares shall be issued or redeemed during such suspension.  (Emphasis mine).

And if the fund, god forbid, might have to be dissolved?

Share Rights

The capital of the Fund is divided into Participating Shares and Ordinary Shares, all with a par value of U.S.$1 each. The holders of such shares shall have the following rights:

(a) The holders of Ordinary Shares and the Class B Participating Shares shall be entitled to receive notice of, to attend and to vote at general meetings of the Fund. Holders of Ordinary Shares are not entitled to a dividend or any other distribution or to any payment in a winding up that exceeds the par value thereof. The Ordinary Shares are not redeemable whether at the option of the Fund or the holder(s) thereof.

(b) In the event of a winding up or dissolution of the Fund, whether voluntary or involuntary or for the reorganization or otherwise or upon a distribution of capital, the holders of the Participating Shares will be entitled to all surplus assets of the Fund after payment of the par value of the Ordinary Shares. Furthermore, the holders of the Participating Shares will be entitled to dividends as the Directors may from time to time declare and the Shareholders will have the right to have their Shares redeemed based on their Net Asset Value per Share (see “SHARES OF THE FUND, Redemptions”). Details of the voting rights of the holders of the Shares are set out under “Voting Rights” below.

Term of the Master Fund, Dissolution, and Liquidation

The managing member may, at its sole discretion, dissolve the Master Fund at any time. In any event, the Master Fund will dissolve on December 31, 2037, or upon the withdrawal, bankruptcy, or dissolution of the last remaining managing member, unless a majority in interest of the remaining members vote to continue the Master Fund.

When the Master Fund is dissolved, the managing member will cause its assets to be liquidated (except to the extent that the managing member elects to distribute assets in-kind) and, after paying debts and expenses and establishing such reserves for contingent or potential liabilities as the managing member, at its sole discretion, deems proper, distributed to the members of the Master Fund in proportion to their respective capital accounts.

There was, as I recall, some question about liability for the Brian Hunter's of the world.  Have no fear, Brian Hunter, (absent fraud):


The Limited Liability Company Agreement provides that the managing member will not be liable to the Master Fund or any member thereof for claims or losses other than those occurring by reason of the managing member’s bad faith, fraud, gross negligence or reckless or intentional misconduct, or by reason of actions so found by a court of competent jurisdiction, after entry of final judgment, to have been taken by the managing member without a reasonable belief that they were properly authorized by the Limited Liability Company Agreement. The managing member will not be personally liable for the return or payment of all or any portion of the capital of or profits allocable to any member of the Master Fund, which payments will be made solely from the assets of the Master Fund.

The Limited Liability Company Agreement further provides that the Master Fund will indemnify, defend, and hold harmless the managing member, its Affiliates and, at the discretion of the managing member, the Master Fund’s agents, employees, advisors and consultants from and against any losses arising as a result of business or activities undertaken on behalf of the Master Fund, other than such losses as result from the bad faith, fraud, gross negligence or reckless or intentional misconduct of such parties, or the violation by such parties of such lesser standard of conduct as under applicable law prevents that indemnification, or as a result of actions so found by a court of competent jurisdiction, after entry of a final judgment, to have been taken without a reasonable belief that they were properly authorized by the Limited Liability Company Agreement. All such rights of indemnification shall survive the dissolution of the Master Fund.

Monday, March 26, 2007

Thief of Thieves

mmm james An astute reader points me to indications that the likes of Abnormal Returns may have prematurely branded the birth of a meme.  A Paul Durman article in the Sunday Times Online dated November 2, 2003 leads with: "Private-equity firms are the new conglomerates."  My own post on the topic (which has been pillaged repeatedly) may itself have been pillaged.

(Picture Credit: Crime dramas are a guilty pleasure of mine.  Four years before "Miami Vice" and fourteen before "Heat, "Michael Mann directed the Chicago crime drama "Thief."  Even as a snobby movie buff it is hard not to call this Cann's (and Mann's) best work.  Don't miss the not-yet-stars that pepper the film either, including Willy Nelson, Tom Signorelli (the Cotton Club), and a very young looking James Belushi.  Watch it first then fire up "Heat" for a little time warp on action movies as a genre).

Sunday, April 08, 2007

Buried Cable

dig it up A highly undesirable series of unfortunate events has led me to the task of researching "software as a service" and "online software," and the rise of the squeaky clean "Ajax."  Any number of pundits, some smart, some not so smart, have hailed the arrival of online software as everything from the death knell for Microsoft (craftily descried, but barely, lurking on Slashdot, by the always yummy Abnormal Returns) to the answer to infectious disease and immortality.  Mark my words, before long Google will be slicing your bread and brewing your coffee from a data center in Fuscha, Seattle.  (We just need enough bandwidth at the retail level to push the coffee to the customer).

Of course, Google is typically described as the chief beneficiary of these developments, and indeed, Google's "Docs and Spreadsheets," as one example, are quite cool to play with.  You will note, dear reader, that my choice of words here is quite deliberate.  For now, these applications are toys and they ignore a general mantra that the strength of a chain is only that of its weakest link or, to be a bit more pejorative, KISS (which Laura the debt bitch yesterday reminded me means "keep it simple, shithead.")

You see, to my way of thinking my data and my processing of said data belong on the machine I own.  The one sitting right in front of me and which (almost) never leaves my side.  For those of us who cannot live without our data, even for a ten minute period, mandating online access to it seems absurd.

"Oh, but with the increasingly pervasiveness of fast internet because of wireless hot-spots and broadband internet..."  Hogwash.  For years the mavens of internet providers everywhere talked about "dialtone reliability," (i.e. your internet simply works whenever you call on it.  Like picking up the phone and getting a dialtone) forgetting, naively in my view, how unreliable plain old telephone service actually was (is).  Introducing a bunch of infrastructure (and therefore more staff, maintenance, support and manufacturing resources) between me and my data (or my processes) just adds more people who reside daily on the left hand side of the bell curve to the critical path between me and the stuff I need to get to in order to get my work done.  (Read: Cost in every sense of the word).

We went through this with Oracle and the "dumb terminal" game.  Once the lines go dark, your terminal is (by definition) dumb.  That means you, dependent on the terminal and lacking even a slide-rule or an abacus since the Oracle sales guy gave you everything you needed with the dumb terminal and a network connection, are also dumb when the lines are dark.  Even if you are very smart you are still dumb because even a human computer like you (yes, you in the basement at 85 Broad, with the 800 GMAT score) is pretty useless without the data.

Haven't we been down this road before?  Back then they were called "big iron," or "mainframes," no?  Yes, I'm sure of it.  I'm sure of it because I've written about it before.

So is Microsoft dying?  Yes.  But Google isn't killing it because "software as a service" (which is merely a clever way to charge you monthly for something you should be able to own in perpetuity because of the strong downward pressure on software costs) is going to destroy Microsoft.  Microsoft is destroying (has destroyed) Microsoft because it has become an uncreative tumor, growth unchecked, resource hungry and greedy without really providing much of the useful functionality that clever, more nimble firms still consider instrumental to the technology industry.  (This should, crystal ball like, give one a glimpse of Google's not-so-distant future, I think).

Still, every time I hear someone sing the praises of software as service revenue I roll my eyes and picture "Ralph," the union back-hoe operator pulling up a fiber optic main, writing a blog post with my e-mail client while sitting on an unconnected airplane, or imagine myself working diligently on my laptop, finishing by candle light a spreadsheet during one of the summer's increasingly common blackouts caused by increasing strain on decades old and barely adequate power infrastructure.

Call me a Luddite, but I think I'll invest in utilities with aggressive grid growth reinvestment policies instead.

Wednesday, April 18, 2007

One More Activist (To Be)

and then there were two Warmest congratulations to close friend of Going Private and close friend to friends of Going Private, "Activist Junkie" on the latest edition to his family.  Look out, activist targets, underperformers and subprime lenders, there's another activist to be waiting in the wings.

Friday, April 27, 2007

Reader Mail (Again)

postal As Going Private readers know, the number of times I reply publicly to reader mail is small, but finite.  However, occasionally I am motivated (usually by the lack of any semblance of an idea for a "real" post) to post and reply to reader mail.  It can generally be assumed that if I am doing this it is because I am feeling guilty about neglecting readers.  Of course, I used to use the "Overheard" section for this purpose, but it was so transparent a cloak for my lack of industry that I have since abandoned the practice.  Alas, I fear today is "Reader Mail" day again.

From:  Daniel Loeb <>

To say that I am honored that such an award has been created in my name
is an understatement.  God Bless You.

Daniel S. Loeb
Third Point LLC

(In response to the Going Private Awards, which include The Daniel Loeb "Chief Value Destroyer" Award).  Do please note that we are still accepting entries for the awards.

"I'm not sure how you've managed to keep up the level of wit and insight in your posts for so long..."

Boredom and plenty of absurd material.

"Are you ambulatory?"

(In reference to my recent injury). Yes.  And I have a huge supply of the most kick-ass recreati... er... therapeutic painkillers.

"Do you have a sweet cane with a skull and a hidden retractable dagger?"

(Also in reference to my recent injury).  No, but the cool stainless steel pins that are sticking out of my hand are quite intimidating during negotiating sessions. I've been nicknamed "Equity Sissorhands."  When I take off the brace on my hand and type (which I am not supposed to do) the pins describe interesting patterns in the air.

"Care to comment on the latest BS from Guy Kawasaki?"

In a fit of mental self-preservation, I now do my very best to ignore that moron.  And, thank you VERY much for breaking my important therapy regimen.

"...the art department just called. They were wondering whether you would sit for a picture?"

(From one of the rare breed of competent media professionals I granted an interview).  No.

"It appears you're well on the way to mending, when sexual allusions appear in a financial blog...."

(Referring to "The Blackberry Monologues").  What sexual allusions?

"By the way, I think [Portfolio Magazine] has noticed your contempt: GP does not make Felix Salmon's blogroll.  I am sure you are pleased."


"You are a Luddite."

(In reference to my piece on "software as a service.")

"Fuck Google. Those are the motherfuckers sitting in Seattle Starbucks trying not to spill shit on their baby macs. But doubting web applications is failing to recognize blatantly obvious trends and efficiencies that have yet to be exploited because of personal biases."

(In response to the same post- lots of pundits disliked my irreverent treatment of this "important technology,"- one so much so that they sent me a bibliography- and my suggestion that if the emailer really loved "software as a service" they should invest in Google and see how that works out).

"Hello Friend, This mail might come to you as a surprise and the temptation to ignore it as unserious could come into your mind; but please consider it a divine wish and accept it with a deep sense of humility, It is indeed my pleasure to write you..."

(One of dozens of similar scams I get daily).

"I read your blog quite a bit....I think we share the same kind of humor."

God, I hope not.

"What do you think of Richard Dawkins?"

One has to be impressed with a guy who marries the reincarnation of Romana.

"Being social, for the most part most of humankind wants to be liked, loved and have friends."

This fails, utterly, to explain the Debt Bitch.

"Just wanted to say that I've read every article you've posted now and find everything you write extremely entertaining."

You haven't finished this one yet.

"Durka durka durka, jihad."

(In an email containing no other text).

Monday, April 30, 2007

Experimental Feedback

no feedback, thanks I committed myself long ago to avoiding public comments on Going Private.  It is not that I do not love my readers (though sometimes I don't) but rather that comments seem to have a certain mass that weighs them down towards a very low common denominator.  Limiting feedback to reader mail solves much of the "open mic" problem I see elsewhere on blogs with comments open.  Just because, (the high quality of most reader mail being one reason) I have decided to experiment gently with comments.  Accordingly, heavily moderated comments are open for my last two posts.  Depending on how this goes I may selectively open other posts for comments (or I may not). Enjoy.  Behave.

Tuesday, May 01, 2007


of capitalists

...the best laid plans....

Thursday, May 03, 2007

Private PostSecret

post secretProbably as a consequence of the excellent voyeuristic pleasure that is PostSecret, and the fact that I respond to too much reader mail, Going Private has recently been getting anonymous postcard confessions from finance professionals all over the world.  Previously, I had ignored these, but it seems like a good time to share them (particularly because I don't want to write about Dow Jones today).






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