This is one other blog dedicated to Private Equity alternatives and difficulties faced by the PE business in this period of stringent credit!
Having worked in the middle-east for a year now, I certainly believe that the next wave of private equity would come from economies having sufficient current account surplus and a vision to spend on utilities, infrastructure and improving weaker area's of the economy. However, as of now, private equity in the frontier markets seems to be taking a bit of breather. I say this as an insider who see's capital pool bring dried up for new launched/to be launched funds in the Middle East. Interestingly, my boss was perplexed this morning as to why Private Equity fund raising was not picking up for Middle Eastern firms? The answer to this is simple - however, complex it might be - Hedge Funds are eating the Private Equity cheese!
Let me explain how:
If I were to open my calendar and look at the hedge fund managers I have met in the year 2008, I find that amazingly 75% of the managers who met me represent a distressed or high yield strategy within the HF strategy universe. And now let me you what these guys are doing that making the PE fund raising more and more difficult. Due to the recent credit crisis, we see that in the developed world, bonds are trading at a significant discount to par. Due to the recent sell off in the convetible markets, one can find convert's trading anywhere between 65 - 75 cents on a dollar making the current yield go upto 15%-25% in most of the cases. Similar scenario is being witnessed in the senior secured market, where paper of fundamentally good companies are trading between 50-60 cents on a dollar relaizing a current yield of 10%-15%. Hedge funds managers have been waiting for this opportunity since long and finally it has arrived. Investors have also become smart; imagine you pay 65 cents for an asset that yield 8 cents for 3 years with a guarantee of getting a dollar back - this trade yields you 26% annualized over 3 years. Tell me would you want to go for a private equity investment or invest in a 26% annual bond of a listed company in developed markets? I am sure you are smart enough! Hedge funds exploiting this opportunity at the moment are raising tremendous pool of money. Recent estimates suggest that High Yield managers are raising any where close to 8 billion of assets.
The private equity market has dried up - specially in the middle east. Distressed Hedge fund investing in one of the reasons newly launched funds are finding it difficult to raise significant assets.
P.S: There are a few other reasons why frontier market Private Equity is stalled; however, I leave that to be discussed in some other blog of mine.
email: patelhiraln@gmail.com
Monday, May 26, 2008
Thursday, May 22, 2008
SPAC'ing Private Equity
Every time one thinks we have reached a peak of financial innovation, something new pops up and makes one realize how foolish it was not to think of it earlier. One such recent financial innovation has been 'SPAC'. SPAC stands for 'Special Purpose Acquisition Company'. The purpose of a SPAC is essentially acquiring some company - may or may not be a public listed company. Most interestingly SPAC are companies without any balance sheet and therefore most regulating stock exchanges didnt allow SPAC to be listed, however, this has changed now - with the first listing of SPAC in July 2007. Just recently both the Nasdaq and the New York Stock Exchange have announced plans to allow listing SPACs in 2008 as 'Blank Cheque' companies.
Why SPAC (and difference from Private Equity)?
SPAC companies are formed particularly for the purpose of acquiring another company(ies). What makes it different from a Private Equity deal is that SPAC is essentially a bet on Listed company (though not always). Unlike private equity the philosophy is not to build a company, however, is to better manage the company. More so, SPAC is a like a buy-out fund in terms of its characteristics. However, as SPAC is a listed entity by itself and it goes to its investors to seek approval for investing in target companies; a Private Equity GP or a Buy-
Out manager doesnt do that. This, most importanly SPAC provides transperancy to the investor regarding the location, size and liquidity. Hence SPAC provides an investor who cant invest into private equity an alternate route to earn potentially similar returns with limited risk on transperancy and frauds by PE funds. Also the lock-up for a SPAC is not as long as private equity and exit for investors is very easy as these SPAC shares are traded on exchanges.
Mechanism of SPAC?
SPAC units are sold as a combination of a share and a warrant to acquire shares in a 'Blind' target. The money raised by the SPAC is held in a trust which essentially invests in Government bonds or other such low risk instruments. The SPAC signs a letter of intent to acquire a company within, typically, 12-18 months of raising money. If these proceeds are not utilized during the said period, the SPAC shall dissolve automatically and the investor would be returned his money + interest accrued on investments made in govt bonds. The SPAC managers typically operate on a private equity / buy out philosophy to look for undervalued companies and acquiring such companies at a reasonable rate. The management team of a SPAC typically receives 20% of the equity in the new entity at the time of acquisition, locked-in for 2-3 years which is very typical to the performance fees paid for Private equity and Buy-out funds.
Is SPAC the future of private equity investments?
Though a vanilla SPAC structure is different from direct private equity investments, variants in SPAC structures are able to mimic private equity funds in a more transparent and easy way. Essentially a SPAC cannot be thought of as an 'Angel investor' and this part of the private equity business will always be the same (again I may think 2 years down the line - how big a fool i was not to think of something which could replace angel investing). However, with all due-respect to private equity firms, I believe SPAC is the future of all private investing. Gone are the days where investors preferred lock-ups, gone are the days of seeking exorbitant returns from private equity funds; investor now prefers liquidity, more so, tranperancy. Investments are becoming more and more liquidity driven rather than performance driven, cost of exit has gone incredibly higher and more interestingly now, a known devil is certainly becoming better than an unknown god.
Why SPAC (and difference from Private Equity)?
SPAC companies are formed particularly for the purpose of acquiring another company(ies). What makes it different from a Private Equity deal is that SPAC is essentially a bet on Listed company (though not always). Unlike private equity the philosophy is not to build a company, however, is to better manage the company. More so, SPAC is a like a buy-out fund in terms of its characteristics. However, as SPAC is a listed entity by itself and it goes to its investors to seek approval for investing in target companies; a Private Equity GP or a Buy-
Out manager doesnt do that. This, most importanly SPAC provides transperancy to the investor regarding the location, size and liquidity. Hence SPAC provides an investor who cant invest into private equity an alternate route to earn potentially similar returns with limited risk on transperancy and frauds by PE funds. Also the lock-up for a SPAC is not as long as private equity and exit for investors is very easy as these SPAC shares are traded on exchanges.
Mechanism of SPAC?
SPAC units are sold as a combination of a share and a warrant to acquire shares in a 'Blind' target. The money raised by the SPAC is held in a trust which essentially invests in Government bonds or other such low risk instruments. The SPAC signs a letter of intent to acquire a company within, typically, 12-18 months of raising money. If these proceeds are not utilized during the said period, the SPAC shall dissolve automatically and the investor would be returned his money + interest accrued on investments made in govt bonds. The SPAC managers typically operate on a private equity / buy out philosophy to look for undervalued companies and acquiring such companies at a reasonable rate. The management team of a SPAC typically receives 20% of the equity in the new entity at the time of acquisition, locked-in for 2-3 years which is very typical to the performance fees paid for Private equity and Buy-out funds.
Is SPAC the future of private equity investments?
Though a vanilla SPAC structure is different from direct private equity investments, variants in SPAC structures are able to mimic private equity funds in a more transparent and easy way. Essentially a SPAC cannot be thought of as an 'Angel investor' and this part of the private equity business will always be the same (again I may think 2 years down the line - how big a fool i was not to think of something which could replace angel investing). However, with all due-respect to private equity firms, I believe SPAC is the future of all private investing. Gone are the days where investors preferred lock-ups, gone are the days of seeking exorbitant returns from private equity funds; investor now prefers liquidity, more so, tranperancy. Investments are becoming more and more liquidity driven rather than performance driven, cost of exit has gone incredibly higher and more interestingly now, a known devil is certainly becoming better than an unknown god.
Wednesday, May 14, 2008
Future perfect...
My recent adventure in NY with some of the US hedge funds brought back memories of last August where everything seemed to be going down ... A part of the meltdown as explained by every manager I met was the impact 'Quant Funds' had on the market..
Incidentally my last visit today (to end my business trip in NY) was at a hedge fund called Renaissance Technologies. This is one of those 'black box' investing idea driven fund where all of the managers managing the funds are PhD's. Most surprisingly none of these PhD's is a finance professional, they all come from Physics or Mathematical background and my first impression of these guys running a huge sum of money (USD 25 Billion) is that either these guys or I am a misnomer in the field of finance. I saw large boxes of computer doing all the trading and immediately thought - is this the way future is going to be!? As I sat across the table with these PhD's I tried to figure out what they do which makes the operation so special - what algorithms go into making these systems work; and again amazingly the answer was 'Price' and 'Volume'. Two variables determining what happens next to the price. It was really amazing how each of those algorithm would generate a trading signal and let us know what the best trading idea is for the next 2-3 days.
It became more and more convincing that what I saw was the future of all trading to happen in probably 10 years time. However, I had my own set of apprehensions. To my surprise, when I asked one of the PhD's that met me about how an algorithm can capture human behaviour, he told me it couldnt and then I wondered as to how one could trade without knowing the market instinct. And at that moment all my conviction in quant systems was gone...
what I took away from this meeting was systems help you decide a lot of things, however, can't be decision makers themselves. Firstly, because (however ironic it may be) systems dont understand emotions, they dont understand that fact that humans behaviour is as random as randomness can get..Secondly, no system in the world can tell you what the corporate earnings are going to be 2 years down the line ... Principally how do u adjust for irrational behaviour? I understood that price captures present human behaviour, however, no one knows what happen's tomorrow...
This is what exactly happened to these quant funds in August, systems failed to take into account the irrationalism in the market. They failed to understand that there is more to markets than price and volume; something we know as fear and greed ... and no matter how good the present is ..future cant be perfect !b
Incidentally my last visit today (to end my business trip in NY) was at a hedge fund called Renaissance Technologies. This is one of those 'black box' investing idea driven fund where all of the managers managing the funds are PhD's. Most surprisingly none of these PhD's is a finance professional, they all come from Physics or Mathematical background and my first impression of these guys running a huge sum of money (USD 25 Billion) is that either these guys or I am a misnomer in the field of finance. I saw large boxes of computer doing all the trading and immediately thought - is this the way future is going to be!? As I sat across the table with these PhD's I tried to figure out what they do which makes the operation so special - what algorithms go into making these systems work; and again amazingly the answer was 'Price' and 'Volume'. Two variables determining what happens next to the price. It was really amazing how each of those algorithm would generate a trading signal and let us know what the best trading idea is for the next 2-3 days.
It became more and more convincing that what I saw was the future of all trading to happen in probably 10 years time. However, I had my own set of apprehensions. To my surprise, when I asked one of the PhD's that met me about how an algorithm can capture human behaviour, he told me it couldnt and then I wondered as to how one could trade without knowing the market instinct. And at that moment all my conviction in quant systems was gone...
what I took away from this meeting was systems help you decide a lot of things, however, can't be decision makers themselves. Firstly, because (however ironic it may be) systems dont understand emotions, they dont understand that fact that humans behaviour is as random as randomness can get..Secondly, no system in the world can tell you what the corporate earnings are going to be 2 years down the line ... Principally how do u adjust for irrational behaviour? I understood that price captures present human behaviour, however, no one knows what happen's tomorrow...
This is what exactly happened to these quant funds in August, systems failed to take into account the irrationalism in the market. They failed to understand that there is more to markets than price and volume; something we know as fear and greed ... and no matter how good the present is ..future cant be perfect !b
Sunday, May 4, 2008
Upside down..
Its that period of the market cycle again where hypocrisy is masking market well being..
What I mean by the above statement is the change in the attitude of the so called 'Capitalist' world which has learnt a new lesson of 'Socialism' in the last 6 months of this major financial distress. No points for guessing that this blog is about US policy makers!
When the markets began to tumble at the begining of the August 2007, our friend Ben approached the crisis as a self regulation mechanism and did react as if it was just another day where he sits over shit and reads newspaper. It was only after a few farts that he realised what actually had happened to him was loose motion. Incidentally, that loose motion of his isnt being cured yet. One thing which incredibely came out of this episode was a change in thinking. Suddenly Ben decided to become a socialist; he forgot what capitalism was; he forgot that the rule of the market is 'survival of the fittest'. Instead Ben choose to help the orphans, ya ya ... poor little investment bankers who forgot Basel II. Papa Ben will buy all junk paper in the market and go to house's to collect rents. Papa Ben will give orphans more money to spend more money to waste ... Papa Ben will make sure they get food to eat .. given that Indian's eat more food now, Papa Ben along with grandpa Bush has to make sure american orphans get food and become smart when they grow up... Papa Ben has an 800 Billion dollar Balance sheet and he is gonna rescue us all !
No, the objective of this blog is not to disgrace american's ... its about how hypocratic US policy makers are ... they would come to all WTO rounds asking developing countries to reduce food subsidies; asking for a capitalist approach out of these countries. Where the fuck has capitalism gone now? .. why the fuck Mr. Ben fears american investment banks being taken over by Chinese banks now? It was a rule US propogated, so why isnt it being implemented now?... Why go beg money from Arab's now .. you always had an anti-muslim propoganda? .. this is as hypocratic as it can get ... You dont have food to eat; dont blame it on others...if you got the balls to do it; try and strengthen US dollar...
Fact of the matter is short term Socialism is not bad ... we all know developing world needs socialism to compete with the big boys and there is no shame in thinking about the well being of one's country however socialistic that is. The truth as it stands today is that the developing world is more capitalistic than the developed world, banks are more solvent in the developing world, the middle class can afford a better living standard, kids have better education and the biggest irony of all is that developing world has food to eat which the riches dont have.
Its time that countries like US realize; their time to dictate terms has gone; better not propogate something they can't follow themselves. Its time to respect the developing world, its time where 'war' is not your solution to get out of recession ! The world is turning Upside down and no power can stop this from happening because its time has come..
What I mean by the above statement is the change in the attitude of the so called 'Capitalist' world which has learnt a new lesson of 'Socialism' in the last 6 months of this major financial distress. No points for guessing that this blog is about US policy makers!
When the markets began to tumble at the begining of the August 2007, our friend Ben approached the crisis as a self regulation mechanism and did react as if it was just another day where he sits over shit and reads newspaper. It was only after a few farts that he realised what actually had happened to him was loose motion. Incidentally, that loose motion of his isnt being cured yet. One thing which incredibely came out of this episode was a change in thinking. Suddenly Ben decided to become a socialist; he forgot what capitalism was; he forgot that the rule of the market is 'survival of the fittest'. Instead Ben choose to help the orphans, ya ya ... poor little investment bankers who forgot Basel II. Papa Ben will buy all junk paper in the market and go to house's to collect rents. Papa Ben will give orphans more money to spend more money to waste ... Papa Ben will make sure they get food to eat .. given that Indian's eat more food now, Papa Ben along with grandpa Bush has to make sure american orphans get food and become smart when they grow up... Papa Ben has an 800 Billion dollar Balance sheet and he is gonna rescue us all !
No, the objective of this blog is not to disgrace american's ... its about how hypocratic US policy makers are ... they would come to all WTO rounds asking developing countries to reduce food subsidies; asking for a capitalist approach out of these countries. Where the fuck has capitalism gone now? .. why the fuck Mr. Ben fears american investment banks being taken over by Chinese banks now? It was a rule US propogated, so why isnt it being implemented now?... Why go beg money from Arab's now .. you always had an anti-muslim propoganda? .. this is as hypocratic as it can get ... You dont have food to eat; dont blame it on others...if you got the balls to do it; try and strengthen US dollar...
Fact of the matter is short term Socialism is not bad ... we all know developing world needs socialism to compete with the big boys and there is no shame in thinking about the well being of one's country however socialistic that is. The truth as it stands today is that the developing world is more capitalistic than the developed world, banks are more solvent in the developing world, the middle class can afford a better living standard, kids have better education and the biggest irony of all is that developing world has food to eat which the riches dont have.
Its time that countries like US realize; their time to dictate terms has gone; better not propogate something they can't follow themselves. Its time to respect the developing world, its time where 'war' is not your solution to get out of recession ! The world is turning Upside down and no power can stop this from happening because its time has come..
Friday, May 2, 2008
the 1st one ...
The title is so bcuz this is my first post of a new blog dedicated to 'Finance'...
As most of us who decide to study finance go through the books of many legendary investors and traders who made it big in the world of finance, I did go through some of them myself. One of the quotes that I remember distinctly from an investment guru 'Warren Buffet' read .."It doesnt matter if you lose my money, though, never lose my trust". I decided to mentioned this word 'turst' in first blog bcuz today being a fund manager I realize that most important for me to do as a person who manages money for investors is not to lose their trust ... and let me now explain what did Buffet mean when he said that sentence.
Trust; when comes to managing money is a term pharsed to distinguish 'Mistake' from 'Irrationality'. We are all humans and we all tend to make mistakes, no one can be perfect isnt it. There is no shame in making mistakes, what matters though is to understand if you behaved irrationally when you made that mistake or whether that mistake was an outcome of irrationality. There is a thin line of distinction between Mistake and Irrationality and its very difficult to prove the absence of other if the first one is proved. Essentially irrationality is an outcome of continued mistakedness and failure to accept the condition when one is wrong.
One quality about all good investors and traders I found in the books I read was their ability to realise their mistakes quickly. And most important the courage to accept their mistake and go ahead with the next trade. Some how they all are mechanical, they accept that the world is smarter, have a low ego when it comes to trading / investing, stop loss and profit taking is a religion to be followed, greed is matched with the level of caution, have tremendous wit to decide the risk reward ... they all made mistakes, however, they could distinguish it from irrationality.
So here's the first lesson of finance: No matter how good you are, you cant avoid mistakes.. just dont be cynical to make that mistake turn into irrationality.
As most of us who decide to study finance go through the books of many legendary investors and traders who made it big in the world of finance, I did go through some of them myself. One of the quotes that I remember distinctly from an investment guru 'Warren Buffet' read .."It doesnt matter if you lose my money, though, never lose my trust". I decided to mentioned this word 'turst' in first blog bcuz today being a fund manager I realize that most important for me to do as a person who manages money for investors is not to lose their trust ... and let me now explain what did Buffet mean when he said that sentence.
Trust; when comes to managing money is a term pharsed to distinguish 'Mistake' from 'Irrationality'. We are all humans and we all tend to make mistakes, no one can be perfect isnt it. There is no shame in making mistakes, what matters though is to understand if you behaved irrationally when you made that mistake or whether that mistake was an outcome of irrationality. There is a thin line of distinction between Mistake and Irrationality and its very difficult to prove the absence of other if the first one is proved. Essentially irrationality is an outcome of continued mistakedness and failure to accept the condition when one is wrong.
One quality about all good investors and traders I found in the books I read was their ability to realise their mistakes quickly. And most important the courage to accept their mistake and go ahead with the next trade. Some how they all are mechanical, they accept that the world is smarter, have a low ego when it comes to trading / investing, stop loss and profit taking is a religion to be followed, greed is matched with the level of caution, have tremendous wit to decide the risk reward ... they all made mistakes, however, they could distinguish it from irrationality.
So here's the first lesson of finance: No matter how good you are, you cant avoid mistakes.. just dont be cynical to make that mistake turn into irrationality.
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