This blog dissects Wall Street by providing readers to some of the best articles and insight available on the web. The site will also discuss the University of Chicago GSB experience and matters related to the MBA community.
Goldman Sachs CEO Henry Paulsen has been named the next Treasury Secretary. Paulsen will replace John Snow. Here is a link to the AP article.
posted by Chicago2008 @ 10:00 AM
13 comments
An aide to George W. Bush for four years, Blake Gottesman is headed to Harvard Business School, without a bachelor's degree. Crazy. See the article here.
posted by Chicago2008 @ 12:23 PM
0 comments
I am no fan of CNBC Mad Money's Jim Cramer, but I enjoy watching his show because of the insight it offers and because his impressions drive the market more than a lot of market strategists do. So when I opened today's WSJ opinions page and saw the article on the Euronext-NYSE deal (not official), I was surprised to read such an interesting viewpoint from Cramer. Most of us think of Cramer as the crazy guy that appeals to people that don't know the markets. Sure his show caters to the retail guy with a $20k E*Trade account, but Cramer is a market guru that knows as much about trends as anyone in the business.
Behind the Euronext Deal
When the New York Stock Exchange unveiled its $10.2 billion bid for Euronext, a handful of the most senior, astute analysts in brokerage and finance grilled the Big Board's CEO, John Thain, about the merits of the merger in a morning conference call. The seemingly well-informed participants peppered him with 25 questions about the prospective combination's technology synergies, cost savings, valuations and management responsibilities. Mr. Thain answered every one eloquently and explained everything the proposal had to offer shareholders of his newly minted NYX stock.
Everything, that is, except the reason for the deal.
No one asked; and Mr. Thain never told. But the NYSE merger with some European outfit that no one had ever heard of isn't even about saving a few bucks in overhead. It is imperative for the survival of the venerable Wall Street institution; and why it is imperative can be expressed in one word: Washington.
What the analysts should have asked is how this merger will change an unfathomable situation: that 23 of the 24 firms recently looking for more than a billion dollars in capital chose to list overseas rather in the U.S. We know that nauseating statistic because Noreen M. Culhane, an NYSE executive vice president, revealed it to the SEC at a May 10 hearing. There, she told a panel that "it's pretty irrefutable that there's been a sea change" among the world's financial entities to avoid U.S. regulation by raising capital overseas.
Put simply, we've gone, in a few short years, from being the nation most hospitable to capital formation to one most hostile to it. Our once-freewheeling capitalism has been replaced with a bizarre thicket of rules, laws and prosecutions designed to protect Americans from every conceivable financial risk, even if it means no one can get the rewards and the money goes elsewhere. We've created a tortured anti-capital market where accountants and lawyers try to stop you from saying and doing anything that's aggressive, especially if it is positive, and the government lets companies be sued when anything goes wrong, regardless of the merits. You make a big enough mistake in business judgment and they don't just bring in the SEC; they call in the Justice Department and criminalize behavior that once merited a fine or a simple reprimand. Then the Justice Department sues not only the individuals who allegedly did wrong, but the often clueless board of directors, or worse, the whole firm!
Our socialist friends in Paris, whence Euronext hails, embrace a more fluid form of capitalism. European markets allow for much less onerous regulation and much more creative finance, which is why every private equity firm seeking capital lists on outfits like Euronext. They don't put people in jail for expensing options. They don't subject companies to endless strike suits simply because they missed a quarter. And they don't make companies run a Sarbanes-Oxley accountant-protection-racket gauntlet, which adds millions of dollars in excess fees from the moment they turn public, without any obvious benefit to shareholders.
Of course, the NYX-Euronext merger doesn't just get around the federal government regulations that keep capital from being raised here. Euronext gives the NYSE a backdoor way to the fastest growing financial instruments -- the derivative markets, options and futures -- which a couple of outfits here, the Chicago Mercantile Exchange and the Chicago Board of Trade, have dominated: thanks, again, to protection from Washington.
There's a reason why the derivative tail, the Chicago Merc, has a market capitalization roughly twice that of the NYSE dog: The world is full of billionaire gamblers, and only the Chicago boys can create the new tables that attract them. Given their near-monopoly on most things derivative, the Merc, along with the Chicago Board of Trade, both have pricing power the NYSE can only dream of. Their stocks have become favorites of momentum investors because they raise fees fairly consistently every year. Contrast that with the NYSE and its fierce rival, the Nasdaq, which are constantly lowering fees to compete over new corporate listings.
Euronext gives the NYSE a way to circumvent Washington's regulatory protection of these Chicago rackets, and get into the action. With Euronext as his partner, Mr. Thain can be in the running both for the huge sums being raised in Europe, and for derivatives on worldwide indices, without much additional overhead.
After the Enron and WorldCom scandals, securities industry representatives told politicians and regulators in Washington that, unless they were careful, the money that was routinely raised in New York's capital markets would rapidly go overseas. Most politicians figured that was just a chimera created by Wall Streeters trying to protect their lucrative turf. Nope. Money is indeed fungible, and it did flow to Europe.
The New York Stock Exchange has to go with those flows, even if it means overpaying for Euronext to keep it from falling into the arms of rival Deutsche Borse. Judging by the recent cascade in the NYSE's stock, the betting here is that Mr. Thain will have to pay more than he would like. But without Euronext, he's facing a shrinking pie, lower trading fees and a regulatory environment that simply renders the U.S. uncompetitive with just about any market in the world.
In short, this merger proposal is not a move to save a few hundred million bucks in technology and labor. It is a Darwinian play to beat Washington's chokehold on capital formation and derivative regulation. Euronext may be Mr. Thain's only life raft to keep from drowning in the regulatory current that's sweeping trillions in capital from our country to the bourses of Europe.
Mr. Cramer is chief markets commentator of TheStreet.com and host of CNBC's "Mad Money."
posted by Chicago2008 @ 12:01 PM
0 comments
The WSJ first reported yesterday that financial services focused, Keefe, Bruyette & Woods would be yet another middle market, boutique investment bank to go public. Already several other middle market firms have filed to go public, including, most recently Evercore Partners, Ryan Beck, and SG Cowen. JMP Securities is rumored to want to float shares as well. These middle market boutiques would join the ranks of Jefferies, Piper, Thomas Weisel, Greenhill, and Lazard as the pure-play middle-market/boutique investment banks (Lazard and Greenhill are boutiques but anything but middle-market focused).
posted by Chicago2008 @ 11:40 AM
0 comments
The buyout boom has fueled a high yield market that may be getting a little frothy. That's been said time and time again. New paper issued well below investment grade is being issued at relatively low interest rates because people are chasing yield and because the risk spread is so marginalized given the low global interest rate environment. The possibility of massive defaults is scary as these blow-ups can roil the markets (Worldcom, Argentina's defaults several years ago). But with every bust, there is someone who sees it as a boom. Distressed bond traders can't wait for the day when the market corrects itself and some of these bonds go bust. The theory is that one blow-up can correct the high yield market and make the risk parameters and spread more aligned with historical levels.
posted by Chicago2008 @ 11:55 AM
0 comments
Well, even in a depressed market, the M&A boom carries on. There were two rather significant deals in the financial services space today, one was a huge deal and the other relatively small (sub $1 billion) but important in many respects.
posted by Chicago2008 @ 9:52 AM
0 comments
Well, even in a depressed market, the M&A boom carries on. There were two rather significant deals in the financial services space today, one was a huge deal and the other relatively small (sub $1 billion) but important in many respects.
posted by Chicago2008 @ 9:52 AM
0 comments
The market is waiting for one of the biggest IPO's in recent memory from MasterCard international, the credit card giant. "MasterCard plans to offer 61.5 million shares at $40 to $43 a share as the 40-year-old credit card firm completes its transition from a membership association jointly owned by banks to a public company. "
posted by Chicago2008 @ 1:26 PM
0 comments
The New York Stock Exchange is reportedly working on its bid to purchase the Euronext stock exchange. The deal, which has been speculated on for months could spark further consolidation in an industry that has been rapidly changing following the mergers of NYSE-Arca and Nasdaq-Instinet.
posted by Chicago2008 @ 6:39 PM
0 comments
Legg Mason's great prognositactor, the venerable Bill Miller, tells us in his latest commentary that the commodity cycle has had its day. And he may be right. Given gold, silver, oil, copper, etc.'s magnificent rides over the past few months, you would be hard pressed to find a cohort of smart money investors who would double up on these same sectors. Miller's commentary points to the idea that people need to notice cycles before the bullish cycle in a space happens. For example, the right time for oil was in '99 when it was trading at $10 a barrell. Or the tech space in 1994 and 1995, before the bubble burst. So what does Miller like? He says a better "C" is "C", or Citigroup, the behemouth bank that might be ripe for an upswing. Is Miller right? It's too early to tell, but his track record alone should force others to listen to him.
posted by Chicago2008 @ 1:07 PM
0 comments
Pretty sweet idea. First Fuel Banks in Minnesota has a novel business that allows its customers to hedge gas prices at today's prices for the future. What a brilliant plan. People that were smart, were able to lock in rates under a buck and fill up at attractive prices. Check it out.
posted by Chicago2008 @ 4:43 PM
0 comments
Fortune.com tells us what has been known in many circles: The Burger King IPO ain't going to be that attractive. The article specifically states that retail customers will find a difficult time making money on an investment in BK, given that the prospects for the chain are not that great, the fast food industry is not growing very much, and the offering itself is benefiting insiders and not shareholders.
posted by Chicago2008 @ 4:06 PM
0 comments
Found an interesting piece that Marketwatch puts out. It summarizes all of the important pieces from BreakingViews.com.
posted by Chicago2008 @ 3:43 PM
0 comments
Check out www.dailyii.com. It's a new site from our friends at www.ii.com. Pretty interesting. You can read about the new website here
posted by Chicago2008 @ 1:20 PM
0 comments
You may recall the Forever Senior that was featured in the NYTimes several months ago. Johnny Lechner is his name, and he's been a student at a University of Wisconsin satellite school for 12 years. Well now he's going to go on 13, but his thirteenth year will be abroad.
posted by Chicago2008 @ 10:49 PM
0 comments
Well, now I'm convinced that the financial media follows the herd just as much as average investors do.
posted by Chicago2008 @ 10:37 PM
0 comments
I'd have to see it to believe it, but every rumor has to start somewhere. Check out this drivel from the AP here.
posted by Chicago2008 @ 6:28 PM
0 comments
University of Chicago's head of recruiting, Julie Morton, was interviewed by Businessweek. Check it out.
posted by Chicago2008 @ 2:28 PM
0 comments
One of the most popular MBA sites, BusinessWeek.com, had an article on its website stating that it is now accepting applications for MBA Class of 2008 journal writers. The MBA journal on the Businessweek.com website is a great tool. I may consider applying, but I'm not certain yet.
posted by Chicago2008 @ 2:23 PM
0 comments
Kedrosky's Weekend Reading Column. Always has excellent articles to check out.
posted by Chicago2008 @ 5:02 PM
0 comments
The WSJ and NYTimes are reporting that Wachovia may be in talks to acquire California's Golden West Financial. Golden West, a California-based savings and loan institution with over $120 billion in assets. The deal, which is being speculated at a value of $26 billion, would give Wachovia access to the fast growing West Coast, but also increase its exposure to the mortgage industry. With discussions broiling that the mortgage industry could be on the decline, the deal could be considered good timing for Golden West, and perhaps, a curious acquisition by Wachovia.
posted by Chicago2008 @ 4:41 PM
0 comments
The Economist's cover last week was on Goldman and its standing at the apex of the trading world.
Goldman Sachs
Apr 27th 2006
From The Economist print edition
BY ANY measure, Goldman Sachs is a formidable company. The bank knocks the spots off its competitors, whether in pure “investment banking”, the traditional craft of underwriting and mergers and acquisitions in which it made its name, or in its new focus, trading for customers and its own account. Even compared with leaders in other industries, Goldman makes spectacular returns. Among its latest record-busting yardsticks was a 40% quarterly return on equity. The average pay-packet of its 24,000 staff last year was $520,000—and that includes a lot of assistants and secretaries.
This makes the bank an easy target for populist politicians and tabloid newspapers. The real reason why Goldman should matter to outsiders is not because it is a manufacturer of millionaires (good luck to it); but because it stands at the centre of a two-decade-long transformation of the financial markets and a new approach to risk.
Business risks that were once seen as a lumpy fact of life are now routinely sliced up and packaged into combinations that generally suit issuers and investors alike. At the heart of the change has been the development of huge markets in swaps, derivatives and other complex and often opaque instruments that allow the transfer of risk from one party to another. From small beginnings in 1987, the face value of contracts in interest-rate and currency derivatives is now more than $200 trillion—16 times America's GDP. A further $17 trillion is outstanding in (even newer) credit-default swaps, which allow bond investors to lay off the risk of issuers defaulting.
Led by Goldman, investment banks have innovated at a furious pace and changed the mix of their own businesses. They have taken on more risk as they have moved from more transparent markets, in which margins are slim, to more profitable portfolios of derivatives and direct private-equity investments. The face value of Goldman's derivatives exposure is more than $1 trillion, although the bank says that its net exposure, once you offset all its positions, is $58 billion, against shareholders' funds of $28 billion. The bankers' innovations have brought huge rewards to their industry. In the past decade it has garnered revenues of more than $125 billion, more than three times the level in the previous decade.
This huge new risk industry has produced gains for people far away from Wall Street and the City of London. Car companies have been able to hedge away many risks that once were seen as an incurable part of the business—and thus focus on what they do best. Pension funds have been able to shape their portfolios to fit their appetite for risk. Friction is bad for economies; the risk industry reduces it to all our benefits.
Yet the sheer size of the numbers involved does mean it is worth raising three questions. How exactly has Goldman and its industry achieved this? Can it be sustained? And what should happen if something goes wrong?
Like most of its rivals, Goldman is a difficult institution for outsiders to understand. Until 1999 it was a private partnership. With public ownership came greater reporting responsibilities, but precisely what Goldman is up to remains obscure. The bank likes to say that it still relies a lot on traditional investment banking, but Goldman's accounts show that its profits come increasingly from trading. The sharp-suited investment bankers act as a sales force for less-well-dressed colleagues who work out how to make money from swaps, options and direct investments (see article).
Goldman was not the first to realise that new financial techniques had the potential to alter risk management for companies of all kinds. Bankers Trust, now part of Deutsche Bank, was arguably quickest off the mark. But once it joined the risk-management game, Goldman steadily accumulated market nous. It applied this by building a proprietary technology system, shunning the off-the-shelf products used by many of its competitors. People who have left Goldman say that this system is unmatched at rivals. One consequence is that Goldman seems confident that it can take more risks than its competitors do. Its trading revenues are the most volatile among big investment banks and it has the most days when it loses money. Overall, however, it makes the most money.
But for how long? The market doubts the run of huge profits can last. Goldman's shares are valued less richly than those of competitors it so obviously outwits. Moreover, investment banks are less highly valued than less glamorous commercial banks and retail brokerage firms.
This could be because investors think Goldman will struggle to sustain the breakneck innovation that keeps it ahead of others. Goldman's ascendancy is already showing stresses—most recently the struggle to manage conflicts of interests across its business lines. Hank Paulson, Goldman's boss, recently chastised its London team of investment bankers for appearing too aggressive in their offers to buy companies, thereby threatening the bank's reputation for being an adviser. In Japan, for just this reason, some of Goldman's M&A customers have deserted it for rivals.
These kerfuffles show that conflicts of interest can probably be solved by market pressure rather than intervention by regulators. A bigger problem for both investors and regulators has to do with risk itself. Outsiders—and perhaps even insiders—find it hard to judge whether Goldman's business is sustainably good or has thrived thanks to a dose of unsustainable good luck and skill. In addition, the very improvements in risk management that have spread risk far and wide make it harder to know where risk is concentrated or how risks might combine to threaten the system's overall health.
So far central banks have concluded that the system is more robust than it was. But the trading models that have propelled Goldman will be tested one day. At worst, the bank itself—or, more likely, a second-tier rival or a hedge fund—might fall into the kind of dramatic spiral that killed off Long-Term Capital Management (LTCM), a hedge fund, in the late 1990s. Financial markets have always been subject to crises.
Any crisis would affect Goldman, because it is so intertwined with the system. The bank says it keeps plenty of liquid reserves against the dread day. It might well profit from any crisis (it did from LTCM). But the chances are that some banks, somewhere, will get into serious trouble.
If that happens, the losses of any bank will be for its shareholders; they should not expect any bail-out. The wider question has to do with systemic risk. If the much vaunted systems do not work, then the central banks will have to step in (as the Federal Reserve did with LTCM). In the past, though, such collapses did less damage to the financial system than the regulatory over-reaction that followed them. If policymakers were to respond to the next crisis by ushering in a more conservative regime that severely limited financial risk-modelling and risk-management, the global economy would be the poorer for it. That is what should stick in people's minds when the day comes. Until then, why not do something too often forgotten? Love Goldman or hate it, you ought to admire it and the system it epitomises. And hang on tight.
posted by Chicago2008 @ 4:21 PM
0 comments
Nice article from TheStreet.com on a uptick in deals where a traditional asset manager buys a hedge fund.
posted by Chicago2008 @ 12:10 PM
0 comments
| A salient fact during any boom or revolutionary era in a certain segment of the market is that new trends and facilities catering to the needs of buyers and sellers are bound to be created. In the case of the buyout boom, the growth and interest in the secondary market among private equity players is a perfect example of a burgeoning trend that is getting a "looksie" from institutions trying both to exit investments early or get into established funds. IDD had a nice article on the the growing market for secondaries. It make sense that there would be appetite from both sides. Institutions that have experienced strong returns in a fund but are locked up for several years may find it more advantageous to receive some capital now, and invest in opportunities that they feel may be better investments. On the other hand, other institutions may feel that current PE funds in the fund raising period lack the potential that established funds present, and thus try to enter into a secondary acquisition. I think the difficulty in this market is generating enough liquidity for these private transactions and generating enough information so that an understanding of a fund's NAV can truly be determined. The latter situation seems to be the most difficult and pressing issue. How can an outside investor value the private investments of a PE fund, when the general partners of said fund will be keeping everything close to their chest? And the big issue or course goes along the lines of the old adage that you "should never take a shirt from a naked man." If PE investing is all about information, then it seems logical that the seller knows something that the buyer doesn't about the fund's portfolio. Regardless of all of these uncertainties, the market remains compelling and it will be interesting to see how things turn out. Leap of Faith More investors are jumping into the rather murky secondary market for private equity |
| Suzanne McGee. The Investment Dealers' Digest : IDD. |
For the better part of two decades, the much-ballyhooed secondary "market" for private equity investments has struggled to live up to the moniker. Throughout the '80s and into the late '90s, it was more of a cottage industry-the exclusive domain of a handful of specialist firms that acquired partnership interests in existing venture and buyout funds. Between 1990 and 1997, a mere $3.6 billion was raised by all of the players in the market combined, according to estimates by participants.
As the buyout business flourished in recent years, however, the secondary market more than kept pace. Dedicated secondary funds now routinely top $1.5 billion.
The secondary private equity market that is taking shape today is more than simply a larger version of that of five or 10 years ago. The business is in the midst of a sea change-and a shift in the balance of power between buyers and sellers. But despite increasing liquidity, the market remains extremely opaque. And for the most part, general partners prefer to keep it that way.
The main fuel for change has been an influx of new money. Over the past few years, it has become clear that the secondary business is extremely lucrative, since assets can often be picked up at a discount. Landmark Equity Partners III, a fund formed in 1993 to invest in buyout partnerships, has generated an IRR of 35.7%, according to data disclosed by Calpers. The IRR of Coller International Partners IV, a 2002 fund, approaches 29%. As a result, new entrants and existing players have raised more capital and competition for classic secondary transactions has surged.
Naturally, this has made for more of a seller's market. And as demand and liquidity have increased, sellers' motivations have evolved. Rather than simply dumping underperforming assets, says David Tegeler, co-chair of the private equity group at law firm Proskauer Rose, today investors are more likely to be using the secondary market to fine-tune their exposure to venture and buyout funds. "They may have found that good performance has taken the weighting in private equity well above the target asset allocation," he says. "Or a new chief investment officer may decide to have more of that allocation in venture funds and less in buyout funds. Or they may want to free up capital to invest in new primary funds, or decide that they are going to invest in 10 new funds but don't want to manage 10 more relationships with management groups, so they may want to cut some existing firms from that portfolio."
With the growth in participants, "every time a significant portfolio comes onto the market, it's not unusual to get 12 to 15 interested parties, and you might end up with five bid letters," says Tegeler. "So there is a big incentive for buyers to get in the door early, to seek out opportunities that others haven't spotted, or to persuade a seller that they can add more value in the transaction."
Farther Afield
If only to protect themselves from the onslaught, sellers are increasingly turning to intermediaries for advice. "Our calculation is that of the $7.5 billion in global secondary deals done last year, just shy of 45% of these were handled through advisors," says Colin McGrady, managing director of Cogent Partners, a Dallas-based advisory firm that counsels institutional investors on the secondary private equity arena. Cogent was established four years ago to address what McGrady viewed as a "knowledge gap" on the part of sellers. "Previously, it was hard for sellers to determine whether they were being offered a reasonable price," he says.
The increased competition has naturally meant higher prices, reducing the expected returns of buyers. That has driven some funds to look farther afield. Coller recently completed its first transaction in
In a particularly complex case, secondary player HarbourVest Partners last year structured a multiyear joint venture with UBS in which HarbourVest took on the risk associated with a private equity portfolio. UBS did not want to sell the portfolio, but instead wanted it to generate a bond-like flow of cash. "We structured the terms so that we get the bigger upside potential in return for providing a downside cushion, and ensuring the bank gets the income," says Fred Maynard, managing director at Boston-based HarbourVest.
Pretty much anything and everything is ripe for consideration. "We are pushing the boundaries of the definition of a secondary transaction to include kinds of deals we hadn't thought of before," says Coller's Morgan. These new types of deals are chiefly ownership interests in private companies-which were such anomalies as recently as 2002 that they didn't register on the radars of large secondary funds. But they now account for 25-40% of new transactions for funds such as Coller and HarbourVest. Indeed, some market participants predict a bifurcation of the secondary market into the classic business of buying partnerships and the new market of direct, or "synthetic," secondary private equity investing.
In this new business, buyers end up owning direct stakes in the companies themselves rather than becoming a limited partner in an existing fund. Small-scale transactions of this kind have been intermittent for several years, but big banks have more recently jumped into the game with such transactions as the e1.5 billion sale by Deutsche Bank of 80% of its late-stage private equity portfolio to MidOcean Partners, an acquisition vehicle. The deal, financed by a group of veteran secondary investors that include Coller, HarbourVest and Paul Capital Partners, plus institutional players such as a variety of Canadian pension plans and Northwestern Mutual, left the buyers as new owners or part owners of companies ranging from Jefferson Smurfit to Jenny Craig.
The "new, new thing"
Direct secondaries are "the new, new thing," says Proskauer's Tegeler, who adds that such transactions land in the market for a number of reasons. "Sometimes the sellers are companies that had an in-house corporate venture program, but the strategic focus has shifted and they want to sell their stakes in those companies. In other cases, the seller is a venture or buyout firm that has one or two companies left as tail-end' holdings in an older fund, or a fund group where a key manager with a specialization in, say, healthcare, has left the firm."
These transactions present a host of new challenges for would-be buyers, however. The MidOcean transaction took seven months to complete and, at HarbourVest alone, required five people working on the project full-time. In MidOcean's case, managers came along with the portfolio companies and serve as de facto general partners, managing the assets on a day-to-day basis.
Sometimes, however, secondary funds have to bring in new managers. When Coller snapped up a portfolio of direct investments from AEA Technology last September for GBP40 million, Morgan and his colleagues turned to London-based Nova Capital to serve as general partner and manage the portfolio. "There is no lack of opportunities on the traditional side of the secondary market, but this is the part of the market where we can have a competitive and price advantage, as long as we can solve issues like this," says Morgan.
The direct secondary business is spawning a new kind of fund dedicated specifically to that segment of the market. While firms such as Goldman Sachs and Coller do all types of secondary private equity deals, David Wachter, founder of New York-based W Capital, formed his company in 2001 to acquire portfolio companies from overextended venture and buyout funds stymied because their traditional exit strategies-IPOs and acquisitions-were closed off. "These investors couldn't just sit around waiting for that activity to pick up," says Wachter, noting that the IPO market still has not fully come back and that merger valuations in some sectors remain unexciting. Wachter has raised a total of $300 million and so far acquired 19 portfolios of direct stakes. In contrast to a traditional secondary fund, he and his team manage those assets themselves. "We see ourselves as taking over and starting the time clock again for companies that need more time to realize their potential," he adds.
Although secondary funds are branching out in all directions, they still have to carefully balance the desires of general partners of primary funds. In practice, while general partners can always turn down transactions, this rarely happens. But the threat looms large enough that a big selling point for a secondary fund is its ability to claim that it can close on a purchase within a few weeks and that it has never had a GP refuse to sign off on a transfer.
This has become an issue for some new types of transactions brought to the table in recent years. For example, a push to securitize portfolios of private equity limited partnerships and portfolios began in 2002 but has been unable to gain much traction, largely because general partners view them unfavorably. David Schwartz, a partner at law firm Debevoise & Plimpton, says general partners "have a bias against such transactions," in part because they often require a credit rating-and the process of getting that rating opens up the private equity fund and its assets to a lot of scrutiny by rating agencies. "At the end of the day, the general partners retain a lot of power in this market because they have the ability to turn down a secondary deal at any point."
Knowledge gap
In this increasingly competitive and complex market, with both limited partnerships and direct interests on the block, due diligence has become even more crucial for secondary buyers. Moreover, as valuations have crept higher and discounts become largely a thing of the past, there is less margin for error. "At first, there was the conception that the buyer was always the winner, but now it is becoming clearer that yes, you can actually lose money on these transactions," says Jerry Newman, president of New York-based Willowridge, a secondary fund that specializes in buying smaller partnership portfolios.
Newman is accustomed to doing extensive due diligence on the companies underlying the private equity partnerships he is contemplating buying. He admits, however, that he still usually has a knowledge gap relative to the seller. "The reality is that I will never know everything the sellers might know or the general partners might know-they have lived with those assets for five or six years," he says.
But he is encountering new kinds of risks in this evolving market. For instance, as private equity shops raise more and different types of new funds more rapidly, they might need to shut older funds, selling off portfolio companies earlier than they might have done in past years. This can hurt returns, especially for secondary funds that only recently bought into an older fund. "We can assess what a company will be worth if it is given time to ripen," says Newman. But if a general partner needs to close a portfolio, "we may not be able to capture all that upside," he says.
The difficulties of conducting due diligence are one of the key factors that may constrain the growth of the secondary private equity market. "This business isn't like running a market-neutral hedge fund; the concept is easy to grasp," says
In fact, Granoff argues, as the market continues to grow and the range of transactions expands, it may actually be becoming more opaque. "This may be the only liquid market out there to be able to say that the trend is toward less transparency as it evolves, rather than more," he says.
Despite the efforts of firms such as Cogent, even the flow of transaction data remains imperfect. General partners may want to keep secret even the fact that a secondary sale of an interest in one of their funds took place. They certainly don't want any details of valuations to leak out, in case other investors in the fund seize on a transaction done at even a modest discount to question the general partners' valuation calculations.
Since GPs have the last word on transactions, buyers have no leverage to compel more transparency. "I don't see their willingness to share information getting much better," says HarbourVest's Maynard, which he argues will prevent the market from becoming as efficient as it otherwise might.
But while the market remains inefficient,
(c) 2006 Investment Dealers' Digest Magazine and SourceMedia, Inc. All Rights Reserved.
http://www.iddmagazine.com http://www.sourcemedia.com
posted by Chicago2008 @ 11:19 AM
0 comments
http://peekvid.com
posted by Chicago2008 @ 11:02 AM
0 comments
The Nasdaq - LSE sage continues, and the other players, continue to be part of the storyline as well.
posted by Chicago2008 @ 9:26 AM
0 comments
The esteemed Alan Murray had a nice piece in the WSJ this week. In it, Murray shed light on the buyout bonanza, and, more importantly, the implications behind it. Things are looking up in buyout land, but perhaps only for the buyout kings themselves. Everyone is chatting about KKR's recent IPO of KKR Private Equity Investors. The offering was tripled in size today to $5 billion, given demand from investors. You can track the shares here. However, KKR got it's money and will likely reap the benefits of Joe Schmo's insatiable appetite for buyout deals. And can you blame Average Joe's for salivating at KKR's or any other PE shop's returns? They are high and they are relatively consistent. But as the article below from Alan Murray points out, days could be numbered for many investors in private equity funds. The end result is yet to be seen, but following the herd in the past (see the tech boom and impending bust) has not been the best way to go.
Business Council
Welcomes Buyout Kings
May 3, 2006; Page A2
When the chief executives of the Business Council meet in Washington this morning, they'll have an unusual new member in their midst: buyout king Henry Kravis.
For three quarters of a century, the elite council has been a preserve of big-company CEOs for discussing public policy. But this year, the group has let the barbarians in the gates.
Along with Mr. Kravis, new members include Robert Johnson, founder of Black Entertainment Television, who recently started a buyout fund with backing from the Carlyle Group. Carlyle's David Rubenstein and Blackstone Group Chief Stephen Schwarzman may be inducted soon, as well.
The group's membership change, engineered by General Electric CEO Jeffrey Immelt, is a sign of the times. Private-equity firms are no longer hammering to break into the ranks of respectable big business. They are big business.
And they are getting bigger. Texas Pacific Group just raised a record $14 billion for its new buyout fund. Blackstone and Mr. Kravis's Kohlberg Kravis Roberts are both scrambling to close funds that will top that. KKR is also leading the way in tapping public money, raising $5 billion on the Amsterdam stock exchange.
![[talking business]](http://online.wsj.com/public/resources/images/it_discussions09142004171604.gif){kind=small}
All of which ensures that this will be private equity's biggest fund-raising year in history. It's only a matter of time before the biggest private-equity deal of all -- KKR's $31 billion buyout of RJR Nabisco in 1989 -- loses its place in the record books.
Is this surge in private equity a good thing? Well, maybe. The buyout kings claim they do a better job of running businesses than their public-company counterparts. And investors claim that, for the past five years at least, private-equity investments have delivered clearly superior returns.
But I think there are a few reasons to worry. Among them:
1) The growth in private equity is being driven by the availability of funds, not the availability of deals.
Don't be misled by all the talk of public-company CEOs wanting to go private to escape Sarbanes-Oxley or avoid the short-termitis of the public markets. Honest folks in the private-equity business will admit that the biggest reason buyout firms are raising megafunds this year is because investors are eagerly throwing money at them.
![[logo]](http://online.wsj.com/public/resources/images/it_cnbc-video09142004171604.gif){kind=small}
2) This isn't the "smart" money.
The early folks to get into this game -- like the Yale Endowment or the Oregon state-pension fund -- made tidy profits. The guys piling in now are chasing the herd. They include some corporate-pension funds, as well as large state-pension funds governed by politicians and union bosses and run by civil servants who like being wined and dined and taken on golf outings by the buyout kings.
3) The incentives are skewed.
Buyout-fund fees are not only huge, but also give fund managers a handsome stream of earnings even if they don't succeed in getting superior investment returns. Standard fees can be as much as two and twenty: That means the buyout firm collects a management fee equal to 2% of the fund's invested capital each year, in addition to its 20% of the profit. For a $14 billion fund, that's $280 million a year for just raking in the money, even if its investments fail to perform.
4) It will be a decade before investors really know whether they've made money.
If this were a normal market, bad buyout funds would get poor investment results and go out of business. But in the private-equity world, investors are required to leave their money in place for 10 years. If a fund fails to deliver, the investment manager who made the investment is likely to be long gone before anyone knows better.
Pension-fund managers say they have to invest in private equity because the returns are higher. But that's not necessarily true. Antoinette Schoar, professor of finance at the Massachusetts Institute of Technology, says her research shows that on average, returns to private equity, after taking fees into account, don't beat the S&P 500. The top quartile of funds have done very well, she says, but that's been offset by poor performance in the other three quartiles.
The private-equity guys deserve their seat at the Business Council's table. But whether they will earn the big paychecks investors are giving them remains to be seen. When the day of reckoning comes, some pension funds are likely to find they've squandered their beneficiaries' hard-earned retirement dollars paying stellar fees for less-than-stellar funds.
Write to Alan Murray at business@wsj.com4
| URL for this article: http://online.wsj.com/article/SB114662709161542360.html |
posted by Chicago2008 @ 5:15 PM
0 comments
TheDeal.com is reporting that Friendster, once the social networking site du jour, is backing off its plans to sell its business. The Company had gone so far as to hire Montgomery Securities as its adviser in the sale process.
| Friendster finds no love | |
| |
| |
| |
"People just didn't find it strategically critical to what they were trying to do," said one source close to the situation.
Friendster's dimming prospects also is disappointing for venture capital firms Kleiner Perkins Caufield & Byers and Benchmark Capital, both of Menlo Park, Calif., which in 2003 led a $13 million financing round in the company. Kleiner Perkins, which recently invested an additional $2 million to $3 million in Friendster, did not return a call for comment.
Friendster was one of the first social networking companies when it debuted in 2002 with an online service that links users in a network of friends and acquaintances. But the San Francisco-based company could not build on its early momentum, eventually losing many users because of technical glitches that impaired access to its Web site. Once subscribers left, most didn't return.
According to one industry source who asked not to be identified, several companies that initially expressed interest in buying Friendster were reluctant to take on the company's roughly $6 million in debt. They also balked at the company's relatively modest $10 million asking price, which amounted to a fire sale compared with the $50 million to $100 million Friendster had hoped to get after hiring
"No one wanted to acquire a company that is losing money and will continue to lose money," the source said. "It's one thing to be losing money and gaining market share, but Friendster unfortunately was losing money and losing market share, and that's not a great dynamic."
Despite such woes, David Hornik, general partner with Menlo Park-based venture capital firm August Capital, said Friendster could yet turn things around.
"To a certain extent social networks are driven by popularity and buzz, and that day may already have passed for Friendster," said Hornik, whose firm was an investor in social networking site Tickle Inc., now owned by Monster Worldwide Inc. of New York. "But at the same time they have a large user base, a name people recognize, and they've seen a lot of things that do and don't work. So I don't see why there isn't a good opportunity for them to build a business on."
In September Friendster launched its latest social networking application, Friendster 2.0, which emulated features offered by competitors such as MySpace. News Corp. bought it in September, along with parent company Intermix Media Inc., for $580 million. Friendster is now testing the service.
The upgrade has at least stanched the bleeding. According to Reston, Va.-based online measurement firm comScore Media Metrix, as of March, Friendster had 1.1 million unique site visitors in the
Hornik said that despite Friendster's problems and the soaring popularity of the top social networking sites, there is room for other such services to catch on. He cited Bebo.com LLC, Hi5 Networks and Tagged Inc. of
"Friendster was the reigning champ when MySpace got started and quietly built momentum and eventually became a gorilla," he said. "I don't see why the same thing couldn't happen to MySpace. I don't think MySpace is this impenetrable beast that everyone should run from."
With online advertising booming, venture firms have kept their faith in the emerging Internet sector. Tagworld, which offers photo-sharing, social networking, blog publishing and social "bookmarking," in February received $7.5 million in Series A financing in a round led by Draper Fisher Jurvetson. Also that month Mayfield Fund led a $7 million round in Tagged, a site focused on teenagers.
James Scheinman, vice president of business development and sales at Bebo, said his company is in discussions with investors regarding additional funding. The
Scheinman, who previously worked for Friendster, said Bebo already is the top social networking site in the
"The only reason Friendster didn't work was because the site failed," he said. "The most important thing I learned from Friendster is to have a good engineering team to scale the database and servers and the right architecture. It's not easy. It's really hard to scale these sites this quickly."
| Social scene | |
| Total number of unique visitors to selected social networking sites, as of March 2006 | |
| Website | Unique visitors (in millions) |
| 41,889 | |
| 12,917 | |
| 7,448 | |
| 4,047 | |
| 3,614 | |
| 3,613 | |
| 2,609 | |
| 2,275 | |
| 1,668 | |
| 1,096 | |
| 1,066 | |
| 871 | |
| 661 | |
| 372 | |
| Total Internet audience | 171,421 |
| Audience: All persons at Source: comScore Media Metrix | |
posted by Chicago2008 @ 4:38 PM
0 comments
So the WSJ.com is celebrating 10 years of being online with a variety of features. One that caught my eye was "The Best of the Worst" article on things that have gone bust during the Internet era. Every great revolution, including the Internet Revolution, is wraught with mistakes and failures. The WSJ.com covered the top 10 biggest flops in the technology era.
See the article pasted below or see it here.
The Best of the Worst
What were they thinking?
The Internet spawned so many weird gizmos and bad business ideas that mocking dot-com duds became something of a sport in the post-bubble era. But some ideas still stand out for pure silliness. These are products and services that attracted lots of publicity -- and, in some cases, millions of dollars in funding -- before folding.
![[gif]](http://online.wsj.com/public/resources/images/nowides03202003164521.gif){kind=small}
In the earlier days of the Web, "nobody seemed to care if there was a real business there," said Alan Meckler, chief executive of Jupitermedia Corp. and Internet industry pundit.
If It Seems Too Good to Be True
Take CyberRebate.com, which thought it could make money by giving stuff away for free. The online retailer, founded in 1998, sold an assortment of goods at heavily marked up prices (some items going for up to 10 times their retail values), but promised customers a hefty rebate that often amounted to 100% of the purchase price.
For example, CyberRebate charged about $1,100 for a 13-inch RCA television that normally retailed for a few hundred dollars. Buyers could get a full refund of the purchase price as long as they jumped through some hoops -- rebate forms had to be submitted by a deadline, and checks came 10 to 14 weeks later. CyberRebate banked on the idea that some percentage of buyers would forget to fill out the rebate form, or fail to do so in time, leaving the company to pocket the money.
![[cyber-rebate logo]](http://online.wsj.com/public/resources/images/OB-AA977_cyberr_20060407135838.gif) |
| CyberRebate promised hefty rebates, but didn't deliver. |
But selling items at such wildly inflated prices just about guaranteed customers would go out of their way to get their rebates, quickly sinking CyberRebate into heavy debt. The company, founded by law school student Joel Granik, filed for Chapter 11 bankruptcy protection in May 2001, listing liabilities of $83.4 million. Much of that debt was owed to consumers who were promised rebates but hadn't received them.
Both Mr. Granik and his business partner, Joseph Lichter, settled with the Federal Trade Commission for $40,000 in August 2004 and were barred from running a rebate-based business. Some rebate claimants eventually received partial reimbursement of about nine cents for every dollar, according to a statement on CyberRebate's Web site.
Money Matters
Then there was Flooz.com, which tried to create a form of digital currency. Similar to the also-ill-fated Beenz.com, users could purchase "flooz" and give it to others as a sort of virtual gift certificate. Flooz could only be spent at participating online retailers, which included BarnesandNoble.com and J. Crew.
![[flooz]](http://online.wsj.com/public/resources/images/OB-AA973_flooz_20060407123449.jpg) |
| Flooz signed on actress Whoopi Goldberg to promote its online currency. |
The company managed to raise over $50 million in funding from 1999-2001 and even signed on comedian Whoopi Goldberg as a celebrity spokeswoman before bad times hit.
According to Flooz founder and Chief Executive Robert Levitan, who previously co-founded women's Web site iVillage, the beginning of the end came in spring 2001. That's when Flooz's corporate clients began to cut back on orders for gift certificates to be used in promotional giveaways -- a revenue stream Flooz was counting on -- amid the softening economy. Then a ring of thieves in Russia and the Philippines charged about $300,000 in Flooz to stolen credit cards. The online piggy bank officially declared itself broke in August 2001.
Several other online-payment companies also failed, though PayPal survived, largely because it positioned itself as a money-transfer service. PayPal's offerings became particularly popular with online auction users, and that company was acquired by eBay Inc. in 2002.
"I would have wanted a different outcome," said Mr. Levitan, who has since moved on to start-up Pando Networks Inc., which aims to simplify the sending of email attachments. "But I am proud of what we accomplished."
The Sweet Smell of iSmell
The "iSmell," a product created by the now-defunct Digiscents Inc. in 1999, promised to enhance the Web surfing experience by engaging users' senses of smell.
![[iSmell]](http://online.wsj.com/public/resources/images/OB-AA976_iSmell_20060407123735.jpg) |
| Digiscents created a prototype iSmell but never released the product. |
By plugging iSmell into the computer through a USB port, the device would generate different scents. So in theory, someone looking to purchase beauty products could smell a new perfume before buying it, or videogame fans could conjure up the smell of a ballpark while playing a baseball game.
But how well the device worked, and whether customers would really spend money on it, remains a mystery, because Digiscents never got around to actually releasing the product (a prototype was on display at the 2001 Consumer Electronics Show in Las Vegas).
Hit by skepticism and the weakening economy, Digiscents shut down in 2001. Its creators, biotech entrepreneurs Dexster Smith and Joel Bellenson, now run Upstream Biosciences Inc., which is working to develop tests that can aid in the early detection of cancer.
"It was a heartbreaking experience, because we had put so much into it," said Mr. Bellenson, who said he still hopes to revive the product someday "when the timing is right."
Turns out he's not the only one still hoping bring smell to the world of media. Some movie theaters in Japan this summer will use a device made by telecom company NTT Communications Corp. that will waft odors at audiences viewing the adventure movie "The New World."
CueCat Falls Flat
CueCat was another favorite target for mockery among dot-com critics. The pen-sized device, which was shaped like a cat, was connected to a personal computer via the keyboard port. A user could then flip through magazines or newspapers while sitting near a PC and scan special bar codes on ads, which would automatically bring up relevant Web pages with more information. Users' Web-surfing habits were also monitored, and anonymous data were used for marketing purposes.
![[CueCat]](http://online.wsj.com/public/resources/images/OB-AA972_cuecat_20060407123428.jpg) |
| Millions of CueCat scanners were given away in 2000. |
Digital Convergence Corp., the company behind the product, raked in $185 million in venture capital funds; investors included big names like Coca-Cola Co. and General Electric Co. In 2000, four million CueCats were given out across the U.S. (some handed out free in RadioShack Corp. stores and others sent in promotional mailings).
But the device that generated so much excitement with marketers failed to catch on with consumers. Unenthusiastic reviewers included The Wall Street Journal's Walt Mossberg, who questioned whether anyone would use the device while sitting in front of a PC, and called it "unnatural and ridiculous." And there were other problems, including a security breach at the CueCat Web site that sparked privacy concerns.
Still, the digital feline has since managed a second life. Computer hackers figured out a way to "declaw the cat" by snipping a small wire that lets them use the scanner to reach sites or read any bar code without leaving a trail for marketers. Scores of CueCats are available for purchase on eBay, with sellers touting the device's usefulness as an inexpensive, personal barcode scanner to catalog books, CDs, videocassettes, and DVDs.
"The cat got butchered, but it has spawned a cottage industry," said the device's inventor, J. Hutton Pulitzer, who now operates a patent holding company in Dallas. Mr. Pulitzer (who changed his name in recent years from J. Jovan Philyaw) laments that he let himself get swept up in the Wall Street frenzy of the late 1990s. "Hindsight is just that," he said. "You can't do anything about it."
Surfing in the Bathroom?
![[iLoo]](http://online.wsj.com/public/resources/images/OB-AA974_iloo_20060407123513.jpg) |
| Microsoft's iLoo became a PR problem for the company. |
Big companies -- not just small start-ups -- have had their own share of digital duds. Software giant Microsoft Corp. generated plenty of buzz in May 2003 when it announced plans for the iLoo (an Internet-enabled toilet), but the captivating commode is probably best remembered for the public relations fiasco that followed.
The company's MSN division in the United Kingdom announced plans for a portable toilet complete with a computer, waterproof keyboard and wireless Internet connection, to be used at summer music festivals in England. But the project was soon the butt of jokes around the world. Microsoft initially responded by saying the project was a hoax, then later changed its story, saying the iLoo was in fact real.
A company spokesperson blamed the mixed messages on "international miscommunication." With such a reception, plans for the iLoo were flushed.
Not Just Any 'Audrey'
Then there was the "Audrey." 3Com Corp.'s Audrey was one of several so-called "Internet appliances," or stripped-down PCs intended for email, Web access and calendars.
![[audrey]](http://online.wsj.com/public/resources/images/OB-AA971_audrey_20060407123402.jpg) |
| 3Com's Audrey aimed to bring Web surfing to the kitchen. |
These terminals -- similar products were released by Gateway Inc. and Compaq Computer Corp. -- were marketed toward what the companies believed were technology-shy users, namely senior citizens and housewives. The gadgets promised simple setups, and powered up quickly, without the lengthy boot times required by a full-fledged computer.
The Audrey, released in late 2000, was a futuristic looking nine-by-twelve-inch box with a touch screen and clear stylus; the stylus would blink with a green light when new email was waiting. It retailed for $499.
But users still had to go through the hassle of dealing with an Internet service provider in order to get the gadget online, which added to the cost and made the Audrey more complicated. Also, as prices on traditional computers plummeted, it was hard to justify spending $500 on a stand-alone Internet device.
3Com discontinued the Audrey in March 2001 after sales lagged behind expectations. The device, however, can still be found on eBay auctions and has been embraced by hackers who reprogrammed Audrey to play MP3 files, display photos and control household lights and appliances.
PointCast Disappoints
![[Pointcast]](http://online.wsj.com/public/resources/images/OB-AB065_pointc_20060421152158.jpg) |
| PointCast used a custom browser to serve up news headlines, stock quotes and other information, along with advertisements. |
Who could forget PointCast? Computer geeks everywhere were gaga over the company's "push" technology, which was software that subscribers downloaded onto desktops as a screensaver with feeds from a select list of content providers. The program would then automatically deliver news and headlines over the Web to the user's PC. (The Wall Street Journal was one of PointCast's content partners.)
PointCast, launched in 1996, reportedly spurned an offer from News Corp. -- which wanted to buy the start-up for up to $450 million -- in hopes of making it big with an initial public offering. But users complained the software clogged then-dominant dial-up networks, and marketers began using the technology to flood users with unwanted ads.
PointCast was eventually bought for about $7 million in 1999 by Launchpad Technologies Inc., and the service ceased operation the next year.
Remember other offbeat ideas from the dot-com era? Join our discussion.
Write to Katherine Meyer at katherine.meyer@wsj.com
posted by Chicago2008 @ 4:35 PM
0 comments
