March 30, 2007 4:35
The house that Meg Whitman built
I'm on the Princeton campus, where I spoke earlier this afternoon on a panel on careers in the publishing industry (there will still be careers in the publishing industry, right?) and visited a guy named Krugman. The big excitement, though, was seeing what use Meg Whitman's $30 million has been put to.
The money went toward building the massive, pseudogothic "Whitman College" where Princeton's tennis courts used to be. It appears to be almost done. Here's a mere corner of it:
Update: Here's another view (and sorry, these are taken with my crummy camera phone; I'll try to do better in the future):
March 30, 2007 11:15
Get that company stock out of your 401(k). Please
There's a moment in the documentary Enron: The Smartest Guys in the Room (it's also in the book, on page 242) where the company's head of HR is asked at a December 1999 employee meeting, "Should we invest all of our 401(k) in Enron stock?"
"Absolutely! Don't you guys agree?" she says, looking over at Ken Lay and Jeff Skilling, who are on the stage with her. "You're doing good," Skilling says, grinning.
Those people ought to be thrown in jail for the rest of their lives just for that, I remember thinking when I watched the movie. Putting money in Enron stock late in 1999 was a disastrous move, of course. But putting anything but a tiny portion of your 401(k) in company stock, even if your company isn't an Enron-like den of self-dealing and fraud, is always a bad idea.
I was reminded of this while talking Wednesday to Chris Jones from Financial Engines, one of several companies that's making a good little business these days keeping people from doing really dumb things with their 401(k) money. It turns lots of people are still doing really dumb stuff: Jones said that 22% of of 401(k) participants still keep more than half the money in company stock, and half keep more than 20% in company stock.
What's so bad about that? The first thing is spreading your risk: If your company goes under, as Enron did, but your 401k is invested in things other than your company, you may still be able to retire comfortably--unlike a lot of those Enron employees. Jones says the most sensible thing would be to own an index fund that holds everything but your own company's stock, but that's not an idea he thinks he could ever sell to his corporate clients.
Another factor that Jones explained to me is that the mean expected return on any single stock is going to be much lower than that of the market as a whole. Why's that? Because the performance of the overall market over time is driven by a minority of superstar stocks--two thirds of the stocks in the S&P 500 actually underperform the index.
Now the flip side of all this is that, as Corey Rosen at the National Center for Employee Ownership would be quick to point out, companies where most employees own stock tend to outperform the competition. But the 401(k) should not be the vehicle for this ownership. It's a retirement plan, the flawed-but-indispensible replacement for the old-line corporate pension. So keep that company stock out of it.
March 30, 2007 10:25
Hard times ahead (maybe)
My latest column is up online, and in the issue of Time with the penguin on the cover. It begins:
There are those who fret that current troubles in real estate will lead to an economic slowdown, maybe a recession. Then there's Peter Schiff. "Our standard of living is going to decline," the Connecticut stockbroker confidently declares. "There's no way around it, and it has just started."
Schiff owns Euro Pacific Capital, a smallish firm that specializes in moving clients' money into nondollar assets like foreign stocks and bonds. Over the past couple of years, he has become a regular, hectoring presence on cable-TV business shows--on CNBC they call him "Dr. Doom." Now he has a book out, ominously titled Crash Proof: How to Profit from the Coming Economic Collapse.It isn't the only such cheery tome on shelves these days. In Financial Armageddon: Protecting Your Future from Four Impending Catastrophes, trader Michael Panzner warns of an economic meltdown that will lead to Zimbabwe-style hyperinflation and possible martial law. In Empire of Debt: The Rise of an Epic Financial Crisis, which briefly hit business best-seller lists in 2005 and will feature next year in a documentary film by the makers of acclaimed crossword-puzzle geekfest Wordplay, financial-newsletter authors William Bonner and Addison Wiggin draw parallels between the early 21st century U.S. and the decline of Rome and imperial Spain. There are more such jeremiads on sale. I just don't want to use up all my space listing them. Read more.
My general tendency over the years has been not to take such people at all seriously. And I still think their dire predictions should be consumed with many grains of salt (I personally recommend Maldon sea salt, which comes not so much in grains as in flakes). But in talking to Schiff, Panzner and Wiggin I found to my alarm that I entirely share their concern that the last recession didn't do the usual recessionary work of getting people to cut back on spending and especially borrowing. So now American consumers are bearing debt loads of unprecedented proportions that a lot of people--if the subprime mess is any indication--are going to have trouble paying back. And when that happens, things might get pretty ugly.
March 29, 2007 11:21
Breaking news: No "irony" in Blackstone IPO
The author of the world's absolutely, positively greatest private equity blog, Going Private, has discovered that a lot of people in the "McMedia" (that is, not just me) thought there was something ironic about Stephen Schwarzman, longtime critic of public equity markets, deciding to take Blackstone Group public. Here's her contrary take:
If we view, as I believe we should, the boom in private equity markets as a mandate on the suitability of public markets for fostering long-term growth, and, in particular, their myopic, short-term focus on quarterly earnings, the regulatory burdens of the beloved section 404 and the inability of the investing public to sufficiently reward rational risk taking by management teams of publicly held firms, then using Blackstone as a conduit, a proxy if you will, for public capital markets inflows without imposing the value destroying constructs of the public markets on Blackstone's daughter firms, then there doesn't seem much ironic at all about Blackstone's decision. Quite the reverse, dear reader.
It's an interesting argument, and there's surely truth in the notion that private equity's rise has a lot to do with public markets' flaws. But Blackstone isn't going public primarily in order to "serve as a conduit ... for public capital markets inflows." Yes some of the money raised by the IPO will be invested in private equity deals, and some will, according to the preliminary prospectus, "facilitate our expansion into new businesses." But while the actual breakdown hasn't been made public yet, I'm guessing the bulk of the IPO proceeds will go straight into the pockets of Blackstone's current owners, its partners. Even if you don't subscribe to the cynical view that Blackstone's partners are simply selling at a market top, it seems apparent (in fact, it more or less says so in the prospectus) that the main reason the firm is going public is to make its partners investment in the firm more liquid--so they can diversify their holdings, and so they can get out without too much hassle when the time comes to quit. Public equity markets are great that way: You can buy and sell your shares most anytime you want. And when a private equity firm run by a man who has gone out of his way to bash public markets decides to take advantage of that wonderful property, well, that's kinda ironic.
March 29, 2007 7:57
I'd like to buy the world a döner kebab ...
I was mostly kidding when I said that a döner kebab van in Leesburg, Va., represented deep truths about globalization. But then I got this comment, from one Michael Pöppelmann:
I am an exchange student from Germany and currently in the United States. Doener is my most favorite food. Sometimes I even dream about eating it, just because it is really filling and healthy!
There you have it, a German exchange student, desperately homesick not for bratwurst but for ... döner. And come to think of it, when I was an exchange student in the Netherlands 25 years ago, tacos were the food I missed most.
Now I realize that döner and tacos are trivializations of long-established culinary traditions, and I'm not going so far as to proclaim that nations with döner kebab vans have never fought a war against each other. But I guess I am enough of a stateless cosmopolitan that I am cheered by the sight of Turkish food by way of Germany being served in a parking lot in Loudoun County, Va.
Also, I'd like to share with Michael and the rest of the world an important piece of information: The html coding for umlauts. To write an ö, you start with an ampersand (&) and then (with no spaces) type ouml, followed (again with no spaces) by a semicolon. For a ü it's uuml, for ä it's auml. One need never write "doener," or worse, "doner," again. What's more, no two nations that use umlauts have ever fought a war against each other! (Well, actually, that's probably not true.)
March 28, 2007 11:45
Is Ben Bernanke saying not to expect a bailout this time around? Maybe
Now I'm never going to be known as a Fed watcher (and I'm very glad of that), but I happen to have Ben Bernanke's testimony before the Joint Economic Committee on the TV at the moment, and I here's my on-the-spot interpretation of what he's saying:
Unless things get really, seriously horrific on the housing front, the Fed isn't going to do much about it. It's still too worried about inflation. As Bernanke put it:
Although core inflation seems likely to moderate gradually over time, the risks to this forecast are to the upside.
Meanwhile, the risks to his forecast of continuing "moderate" economic growth go both ways:
To the downside, the correction in the housing market could turn out to be more severe than we currently expect, perhaps exacerbated by problems in the subprime sector. Moreover, we could yet see greater spillover from the weakness in housing to employment and consumer spending than has occurred thus far. The possibility that the recent weakness in business investment will persist is an additional downside risk. To the upside, consumer spending--which has proved quite resilient despite the housing downturn and increases in energy prices--might continue to grow at a brisk pace, stimulating a more-rapid economic expansion than we currently anticipate.
Now this doesn't mean the Fed won't cut short-term interest rates from the current 5.25% sometime this year. But I don't see anything like 2001 (when the Fed funds rate went from 6.5% at the beginning of the year to 1.75% at the end) happening again. I don't think anybody else does, either. But I haven't heard a lot of Wall Street economists point out that, if the housing bust does throw the economy into recession, Bernanke's Fed is unlikely--because of inflation fears--to engineer a quick bailout.
March 27, 2007 11:03
The global rise of the döner-industrial complex
Mrs. Curious Capitalist and I were driving through Leesburg, Va., Saturday in search of cookies when we came across this curious sight: A Turkish döner kebab van, apparently by way of Germany, doing business in exurban Virginia.
Anyway, Mrs. CC took this lovely photo of said van, and I was sure I could come up with something Tom Friedmany to say about it and globalization: The world is flat, like a slice of döner. Or maybe it's sorta conelike, like döner still on the spit. Or maybe it's made up of lots of pressed-together meat ... Awww, I give up.
March 27, 2007 9:51
See, told you the Internet was just a fad
From the nice people at ClickZ Stats:
The number of active Internet home users dipped by 0.13 percent in February in the 10 countries tracked by Nielsen/NetRatings.
Spain (-3.31 percent); the U.S. (-1.50 percent); and Germany (-0.96 percent) accounted for the dip in the number of active home users. The number of users was down 426,498 compared to January data.
I attribute this to growing frustration at the inability to find videos of lower-division sporting events.
Update: It's not just Internet usage. The cell-phone ringtone market has plateaued as well. From my e-mail inbox:
NEW YORK, March 27, 2007 – Broadcast Music, Inc. (BMI), the leading U.S. performing right organization representing more than 6.5 million musical works from more than 300,000 songwriters, composers and music publishers, today released its annual projection for U.S. ringtone sales and for the first time released a U.S. ringback tone market projection for 2007.
BMI estimates that the 2007 music ringtone market will dip to $550 million (U.S.) in retail sales, down $50 million (U.S.) from calendar year 2006. BMI pegged the market at $600 million (U.S.) in calendar year 2006; $500 million (U.S.) in 2005; $245 million (U.S.) in 2004 and $68 million (U.S.) in 2003, respectively.
March 26, 2007 11:20
Yeah, CBS really showed that YouTube who's boss
I'm writing my next weekly column today, which given the way I work means I'm spending a lot of time procrastinating. So I'm reading the sports blog Deadspin, and come across a reference to the amazing finish of the Division II men's basketball championship game between Winona State and Barton (Barton came from seven points behind with 45 seconds left to win). The embedded video doesn't seem to work, so I go to the site Deadspin got it from, and it doesn't work there, either. Then I head to YouTube, search on "Winona Barton," and am immediately pointed to several videos of the amazing finish. None of them will load, and when I see that a commenter on one of them says to "enjoy the video before CBS takes it down," I head over to the CBS Sports Website.
There I quickly find a page of college basketball videos, but they all appear to be from the Division I tourney, and I can't find any way to search them. So I use the main search bar on the site to search for "Winona State video," and am steered toward an AP story on the game. I can't see any video link at first, but finally notice, among the tiny headlines along the right side of the page, a link to "Video: Wild finish."
I click on that, and it appears to bring me back to the main college hoops video page. I start scrolling through the videos, find nothing but Division I stuff, and am about to give up when I finally notice that below the video screen--and invisible before I started scrolling down the page--was a "playlist" that listed the NCAA Division II Championship. I clicked play, and finally, after sitting through an ad for slingbox, got the video, which after a bunch of seemingly random brief clips from earlier in the game, showed me the finish. It was pretty amazing.
Anyway, I don't want people to steal stuff that CBS paid to produce. And I really didn't mind watching the ad that preceded the game video. But what possible purpose did it serve for CBS to make it so hard for me to find the thing? And why in the world doesn't CBS let people embed its clip--which has advertising already built into it--on their blogs? In short, why won't CBS let people help other people find its content? There's no good reason that I can think of, other than the force of pre-Internet habit, which is why I tend to be so down on Big Media's attempts to fight the likes of YouTube.
Update: My Fortune friend Adam Lashinsky says I was full of baloney when I wrote that content isn't king, and tells of a happier experience tracking down a Daily Show clip here.
March 26, 2007 10:09
Mortgages for the people
My latest column, about subprime lending, is up online and in the issue of Time with the Cliffs Notes versions of the Bible on the cover. Here's how it begins:
In early March, Boston College management professor Alicia Munnell gave a lecture at Yale on pension policy. "I was there, talking about retirement things," Munnell recalls, "and somebody looked at me and said, 'Are you responsible for the collapse of the subprime market?'" The question wasn't entirely out of left field. As director of research at the Federal Reserve Bank of Boston, Munnell co-authored a bombshell 1992 study that concluded that mortgage lenders systematically discriminated against blacks and Hispanics--even when one adjusted for income and creditworthiness.
Munnell's work propelled her into a big job in the Clinton Administration and led to new legislation and regulations aimed at pressuring banks to increase their presence in poor and minority neighborhoods. These new laws had the desired effect: home ownership among minorities, and Americans in general, began to rise steadily--the first such sustained increase since the 1950s. In 1998, 57% of black mortgage applicants were turned down; by 2004 the figure had dropped to 26.8%. For low-income applicants, mortgage denials went from 44.3% in 1998 to a low of 19.8% in 2003.That was one remarkable result of the surge in subprime mortgage loans to borrowers with iffy credit records. The other remarkable result is that it is ending really badly--in a wave of foreclosures that could, at worst, cost billions, throw millions of people out of their homes and cause a recession. Read more.
Since committing the piece to print, I've been worrying a bit about its somewhat waffly conclusion--that sure, things got out of hand, but subprime lending has done a lot of good as well. But I have yet to come up with a better one.
March 23, 2007 3:14
Yeah, that about sums it up
From Dealbreaker, apropos of Kinsley's great Blackstone column:
Writing about Wall Street for Time Magazine is a bit like writing about Williamsburg nightlife for the New York Times. Most of your readers have no idea what you’re talking about, so you can get away with almost anything. It probably gets a bit frustrating to know that none of the people you write [about] ever notice you but as a trade-off they never write angry letters to your editors either.
Well, actually, I have gotten a couple of half-angry comments. And that award. So that's it: From now on this blog will be devoted solely to Williamsburg nightlife.
March 23, 2007 2:14
Home prices: Not going up for five years
Sales of existing homes were up sharply in February. But don't expect that to keep up. "All those involved in the real estate market would like to say this is proof the real estate market has turned around," says Bill Hampel. "I think it’s an aberration."
I was on the phone with Hampel, the chief economist of the Credit Union National Association, this morning. Credit unions make lots of home loans. But Hampel doesn't talk the perennially optimistic real estate industry talk. That's partly because he's been through real estate cycles before and partly because he thinks loose lending standards drove a lot of housing demand over the past couple of years--and those lending standards are about to get a lot tighter.
"A lot of the gimmicks that lenders have used to lower payments--deeply discounted rates, option ARMS, interest only loans--those applied to prime mortgages as well as subprime ones," Hampel says. Now most of those gimmicks are disappearing under pressure from regulators and investors, and without them fewer people will qualify for mortgages, thus reducing housing demand. (And not just, as I speculated the other day, in poor neighborhoods.) "Lenders tend to overreact to these things," Hampel says. "We go out in one direction, and then come shooting back."
That's one reason Hampel thinks home prices aren't going up anytime soon. The other is that he's been working at CUNA since 1978, and has seen how real estate downturns usually play out. The key word is slowly.
"If this were the stock market home prices would have dropped 30% and then started rising again," he says. But the housing market doesn't work like that. When demand drops, many people hold on to their homes rather than sell at a loss. So while Hampel doesn't see a "meltdown" in the offing, he doesn't see a turnaround either.
"I think that basically home prices are flat for five years," he says. "It’ll take that long for them to catch up with the economy."
March 23, 2007 10:39
The connection between Blackstone's IPO and your retirement
Michael Kinsley weighs in on the Blackstone IPO in the new issue of Time, and he does it very entertainingly. It's basically a much-improved redo of a Slate column he wrote in November that I took to task in this here blog.
This time I don't really see anything to take Kinsley to task over. I'll leave that to the perpetually aggrieved commenters over on Swampland; oh, and I'm sure if Ms. Private reads it, the steam will start coming out of her ears. But the column does provide an excellent opportunity to move this Blackstone IPO discussion toward something that actually matters to most of us. Writes Kinsley:
When a private-equity firm goes in and buys, say, a washing-machine company, it rarely does anything to improve the washing machines. Instead it concentrates on restructuring the company--selling off the dryer division, perhaps. Or it doesn't even get its hands dirty to this extent but just fiddles with the finances. I'm not knocking it. It seems to work. Shares in the company are suddenly worth double. But most of that increase in value has gone to the private-equity firm and its investors, not to the folks who have bought stocks in the ordinary way. They are the ones who sold the company at $5 billion and bought it back at $10 billion.
Why can't the stock market deliver that $10 billion in value? Why does it take Schwarzman and crew to squeeze it out (for themselves)? Some say it's the short-term perspective of the investing public. Some say it's excessive regulation, most of which doesn't apply to private-equity investments. Whatever the explanation, the billions earned by private-equity operations aren't "created," as the whimsical conceit of Wall Street troubadours would have it. These billions are a toll charge collected from ordinary investors.
The investors in Blackstone's private equity funds, who do benefit from all this "abracadabra," as Kinsley calls it, are for the most part institutions: college endowments, foundations, and pension funds. Pension funds at least are investing on behalf of ordinary people. Yet for the past 30 years this country has been moving its private sector workforce out of pension funds and into self-directed plans like 401(k)s.
I don't know of a whole lot of 401(k)s with a Blackstone private equity or real estate fund as one of the options. Do you? This is one reason why, as pension consultant Keith Ambachtsheer's CEM Benchmarking has documented, defined-contribution plans (like 401ks) underperformed defined-benefit plans (pension funds) by 1.8% annually over the eight-year period ending in December 2005.
Now I happen to be of the opinion that the corporate pension system that arose in the U.S. after World War II is unsustainable and unfair to lots of workers. But switching to an "ownership society" where everybody is responsible for his own retirement planning would seem to mean, among many other things, that the abracadabra of Blackstone and other private equity funds, venture capital firms and hedge funds will never again be available to regular folks.
Unless, that is, Blackstone's stock turns out to be a good investment. Kinsley is dismissive of this possibility:
The consensus in the business world seems to be that Schwarzman and his colleagues may be selling full-price tickets to a ball game in the ninth inning, as the stock market fizzles out. These private-equity types are not in the habit of selling at the bottom.
Short-term, I'd say he's right. The Goldman Sachs IPO, which bears a lot of similarities to Blackstone's, happened in 1999, not long before the market tanked. But since then Goldman's stock price has tripled. And mutual fund company Eaton Vance was the best performing stock of the quarter century starting in 1980. Investors in Eaton Vance stock did dramatically better than investors in its mutual funds.
So maybe Blackstone's stock will be okay. But I'm nonetheless coming around to the idea that entirely removing the potential abracadabra of private equity from the retirement portfolios of ordinary Americans is a really bad idea. So how do we get it back in there?
March 23, 2007 9:30
What do you think Steve Schwarzman will buy with his $350,000 in pocket change?
In its preliminary IPO prospectus, private equity firm Blackstone Group said it will henceforth pay billionaire bossman Stephen Schwarzman a salary of just $350,000 a year (don't worry, he'll have a few other sources of income).
Anyway, in my post yesterday I described this as "just the money he uses to tip coat-check ladies."
Meanwhile, Dana Cimilluca wrote in WSJ.com's Deal Journal that "it probably would cover a mere slice of his birthday cake."
Come on, people of Internetland, I think you can do better than that.
Update: A nice one from Dealbreaker:
Last night a friend of ours wondered if Steve Schwarman might drop his $350,000 salary in the backseat of a cab after celebrating the IPO one night. Like a spare umbrella or a girl you met at The Anchor.
Update 2: By the way, I'm not saying I didn't like Dana C's quote. I was just urging a little reader participation. With so far disappointing results (not that I don't like YMM's comment).
March 22, 2007 4:34
Blackstone (and its securities lawyers) explain why Blackstone is going public
Here we go, straight from the SEC filing:
Why We Are Going PublicWe have decided to become a public company:
• to access new sources of permanent capital that we can use to invest in our existing businesses, to expand into complementary new businesses and to further strengthen our development as an enduring institution;
• to enhance our firm's valuable brand;
• to provide us with a publicly-traded equity currency and to enhance our flexibility in pursuing future strategic acquisitions;
• to expand the range of financial and retention incentives that we can provide to our existing and future employees through the issuance of equity-related securities representing an interest in the value and performance of our firm as a whole; and
• to permit the realization over time of the value of our equity held by our existing owners.
This strikes me as a pretty honest account. The last bullet point of course means: So the already very rich partners can get dramatically richer.
The document goes on to describe how "we intend to be a different kind of public company"--that is, one that thinks long-term and doesn't worry if its earnings are up one quarter and down the next. This is where the whole going-public thing gets a little ironic: By taking public companies private, firms like Blackstone say they are able to focus the management on long-term goals rather than quarterly earnings. Yet here is Blackstone saying it can do that even while being traded on the stock exchange. Ah well, foolish consistency is the hobgoblin of little minds.
Update: I finally got down to the potentially juiciest part of the document, the executive compensation table. It's blank. I guess they won't give those numbers out until they're absolutely, positively, indubitably sure they're going public. It is disclosed that Stephen Schwarzman's salary will be $350,000. But that's just the money he uses to tip coat-check ladies.
Update 2: The breakingviews gang predicted in this morning's Wall Street Journal that Schwarzman might take no salary in exchange for a bigger equity stake (I can find links neither at breakingviews.com nor wsj.com). I'd say they were correct within a rounding error. Update 2.5: Here's the link, plus an FT Alphaville post that expands on the topic. Much thanks to Alphaville's Paul Murphy for pointing me to it.
March 22, 2007 4:09
Breaking news: Blackstone makes its investors lots of money!
Blackstone has turned its S-1 (its IPO filing) into the SEC, and thanks to the magic of the Internets it's already up and available for perusal by all.
Here's the first interesting thing I've learned: Its corporate private equity funds have earned investors 22.8% a year, after fees, since 1987. For "real estate opportunity," around since 1991, the after-fee annual return is 29.2%. Not too shabby. Blackstone's funds of hedge funds haven't done nearly as well: 11.9% after fees since 1990.
March 22, 2007 11:01
Does NewsNBCUniversalTube stand a chance?
Well, this is pretty interesting. From the Los Angeles Times, which broke the story:
News Corp. and NBC Universal plan to announce as soon as today that they are creating an online video site stocked with TV shows and movies, plus clips that users can modify and share with friends, according to people close to the negotiations.
The two companies enlisted help from some of Google's biggest Internet rivals. The News Corp.-NBC Universal partnership has deals with Yahoo Inc., Microsoft Corp., Time Warner Inc.'s AOL and News Corp.'s MySpace to place videos in front of their collective audience of hundreds of millions.Despite Hollywood's dismal track record in creating successful joint ventures, these players see little choice but to band together to compete against Google and Apple Inc., which are becoming powerful distributors of entertainment.
My tendency has been to focus on the "dismal track record" when it comes to Big Media and the Internet. I think people (or at least Internet users) prefer using neutral, third-party gateways to media content. But that's not always true: It always makes our day here at Time when a link to one of our online stories goes up on the CNN.com homepage. It's not a neutral gateway, but it sure gets a lot of traffic.
I do know, though, that since Viacom pulled all its Daily Show and Colbert Report clips from YouTube, I don't watch those clips anymore. It's too much of a pain to find anything on the Comedy Central site (although, I noticed upon visiting just now, it does seem to be improving). Which is something NewsNBCUniversalTube better work on.
Update: Thanks to commenter Jim for his words and for pointing me to Lev's post on the same topic, which is similar to but, I'm afraid to say, smarter than this one.
March 22, 2007 10:17
Private equity, public markets and Maxwell Smart
The other day I was honored to receive the first-ever Maxwell Smart Prize for Mediocrity in Financial Journalism, from the private-equity blog Going Private. The citation declared that my offense was the sentence (regarding the Blackstone Group's rumored IPO):
It does nicely underscore the basic truth of the private equity business, which is that without public markets on which to buy and sell companies, it couldn't exist.
There was no explanation of just what was so bad about the statement, and I defended it as true. But in an e-mail that she has kindly agreed to let me share with my readers, my new favorite smug young private equity blogger explains the true nature of my egregiousness:
No, it is not true, actually. I didn't explain because I doubt my
readers need it spelled out for them.
What IS true is that big public -> private -> public transactions
make the headlines because they make for good copy. They are,
however, a very small part of "private equity." Most private
equity is boring. Too boring to make the likes of Time. (Though
it still interests me that no one bothers to recognize the risk
taken even by the sponsors of these deals and insists instead that
public shareholders who willingly provided their proxy have somehow
been cheated). I've pointed this out any number of times on the
blog. Do take some time to peruse the items in "The Business"
category.My firm, for instance, will likely never IPO a firm and fewer than
10% of our deals have been "take private" transactions. We have
very little to do with the public markets (excepting that we have
many more excellent managers happy to work for our daughter firms
and flee from the insanity that is SarOx and the public capital
markets). Yet we employ thousands, have grown each of our
companies in employees and revenue every year.To insist that without public markets the private equity business
"couldn't exist" is insulting to the people in the business who
actually work on improving companies (rather than just balance
sheets) for a living. This constant myopic view perpetuated in the
press (irresponsibly in my view) leads to daft regulatory moves
likely to badly twist the economy into a knot. (Of course, we'll
blame that on the hedge funds).In case you haven't heard, Milton Friedman is dead. There are
precious few champions for free markets anymore. The irony is that
if you just leave the mega deals alone the "problem" (are
responsible, sophisticated actors acting in a nearly frictionless
market a PROBLEM?) will solve itself anyhow (Carlyle recognized
this months ago, as did I- publicly). The credit markets are
smarter than the both of us. Believe me. Muck about and you're
likely to tar the real engines of buyouts and growth with the same
brush. Add to that the coming tax hike and I'm damn glad I'm in
London and not New York.Your reporting is irresponsible because you don't care enough to
understand the subject matter. The result is that you perpetuate a
fiction, namely that big mega-buyouts and their LIPOs constitute
the universe of private equity. I'm amused (sardonically amused)
that you use the moniker "Capitalist," frankly. But, perhaps going
deeper is harder to do with the little copy you are afforded.
So there you have it. Want to know more? Read her blog. It's pretty danged good.
I still think my statement was true, though. First, all the really big private equity deals undeniably need public markets to work. And my sense is that even the great mass of smaller private equity transactions wouldn't go nearly as smoothly if there weren't open, transparent, public equity markets out there providing a backdrop. As I've written before, private equity offers a really useful complement (one that really didn't exist before the late 1970s) to the public company and the traditional private firm. But it's never going to entirely replace them.
March 21, 2007 5:13
On the virtues of ignoring market noise
Rob Sellar, head of North American equities for Aberdeen Asset Management, a big British investment house with a value bent, stopped by today and offered this bit of observation/investment advice:
At the end of the day, the brokerage community is all about generating noise, because that generates turnover.
A little later he said:
I hate selling stocks. If a business is a good business, it's still going to be in 20 years.
That last bit is of course not strictly true. (Wanna buy some Digital Equipment stock?) But still, it's kind of a cool way of looking at the world.
March 21, 2007 9:20
Some content wants to be free. Some doesn't, but we'll still use Google (or something like it) to find it
ZDNet blogger Donna Bogatin, who pays much closer attention to Google than I ever will, raked my Google vs. Big Media column over the coals last week. At least, I think that what she was doing--her post spends a lot of its time countering arguments that I never really made, but perhaps are espoused by the more Web-2.0-besotted among us.
No matter: Bogatin grouped me into the camp of people who think Google will rule the world, and from the evidence of that one column this wasn't unreasonable of her. But I am large, I contain multitudes. Which is to say that, on this issue at least, I change my mind every couple of hours.
Bogatin is convinced that content should not be free, and that "Google's free content kingdom is at risk." Fine. My question, though, is which content? Some (highly specialized business journalism and porn spring to mind) shouldn't be free online. Some should. For the latter, and even some of the former, Google provides an enormously valuable function: It steers people to what they want. I don't see how that's freeloading. And while it's entirely possible that another company will come up with a better way of doing that than Google's, the function will continue to exist. It will also continue to transform the business models of companies that produce media content. They're going to have trouble forcing customers to come in through the front door of their TV network, home page, whatever--because that's just not how people use the Internet.
Google's YouTube site is more problematic. It hosts content that it didn't create. Most of it is uploaded free of any copyright restrictions (like Curious Capitalist Jr.'s first soccer goal), but a lot is illicitly swiped from copyright holders. Google knows the latter can't go on forever, and is working hard to set up ad-revenue-sharing deals with the TV networks and others whose videos end up on YouTube. But it's entirely within the realm of possibility that this effort will fail, and that YouTube will turn out to be Google's bridge too far.
What's not within the realm of possibility is that TV networks and magazines and newspapers will be able to go back to the old ways of controlling their interactions with customers. Unless, that is, they can get by without very many customers.
March 20, 2007 12:30
More on those private equity conglomerateurs
Turns out I wasn't the first to make the private equity/conglomerate connection. Back in April, the anonymous author of the blog Going Private (subtitled "The Sardonic Memoirs of a Private Equity Professional") complained that private equity firms and hedge funds were getting too big and unfocused:
Didn't we learn in the 1980s that unfocused conglomerates don't work particularly well? Why are we running down that road again, with hedge funds, with Google? Management fees, perhaps? We are long past the point where the management fee just barely pays the bills at a fund and you have to find upside to get wealthy. The incentives to bloat assets under management are simply too significant now, I think.
Anyway, thanks to Abnormal Returns for making me aware of my lack of originality. I did think of it all by myself, though. (Not that it was all that hard.)
Update: Now I am told I was being not just unoriginal but trite.
Update 2: And now I have won Going Private's first-ever Maxwell Smart Prize for Mediocrity in Financial Journalism, for "the financial journalist issuing the most sweeping generalizations, possessed of the weakest grasp of finance and most the deficient command of economics." So put that in your pipe and smoke it.
My prize-winning sentence, from this post Monday, was:
It does nicely underscore the basic truth of the private equity business, which is that without public markets on which to buy and sell companies, it couldn't exist.
Ms. Mr. Going Private failed to explain exactly what was so egregious about this statement. (Yes it's a "sweeping generalization." Kinda obvious, too. But it's also true.) Nevertheless, I will update my resume immediately to include this prestigious new honor.
Update 3: The private equity = conglomerate meme makes its way to wsj.com's Deal Journal, with full credit to me but not to Ms. Private. I'll not stand for this!
March 20, 2007 10:27
Why those private equity guys may want to go public sooner rather than later
I missed the breakingviews.com scoop last week on Carlyle Group co-founder Bill Conway warning his colleagues that private equity's salad days are coming to an end. It's very interesting:
In a recent memo to Carlyle's investment professionals obtained by breakingviews.com, Conway acknowledges the firm's "fabulous profits are not solely a function of our investment genius, but have resulted in large part from a great market and the availability of enormous amounts of cheap debt."
That "great market," in which private equity firms can borrow all they want at low rates to buy companies, yet still get a good price when it comes time to sell one of their holdings onto public markets, will end in the next year or so, Conway predicts. After that, returns will be lower, and firms that didn't keep a close eye on risk will be punished.
So yeah, I guess I can understand why Schwarzman & Co. might be in a rush to sell some of their shares to the public.
March 19, 2007 5:03
Do publicly traded private equity firms = conglomerates?
I'm still trying to get my head around the news that, after years of badmouthing public equity markets, Steve Schwarzman is thinking of taking Blackstone Group public. It does nicely underscore the basic truth of the private equity business, which is that without public markets on which to buy and sell companies, it couldn't exist.
When I think about what a publicly traded Blackstone would look like, though, my mind keeps drifting back to the 1960s, when conglomerates like ITT and LTV were the hottest thing in business. The conglomerateurs bought companies in lots of unrelated businesses on the assumption that they could somehow run them better than they had been run before.
It turned out, though, that the conglomerates' chief assets had been their high stock prices, which allowed them to swallow up companies on the cheap. Once the stock market stopped cooperating, their reason for existence disappeared. In their place arose a new market phenomenon, the leveraged buyout (LBO) fund, which used borrowed money to take underperforming companies off the market and then performed radical surgery--often involving shedding unrelated businesses--before taking them public again.
You probably see where I'm headed here: The most successful LBO artists grew into today's private equity firms, the biggest of which--like Blackstone--manage investments in dozens of companies at once. Sort of like, you know, a conglomerate. And with Blackstone mulling an IPO, the speculation is that several of its competitors may follow suit.
Now there are surely some important differences that I'm ignoring here. And there are conglomerates that work pretty well: Berkshire Hathaway thanks to the consistency and financial acumen of its CEO, Warren Buffett; and General Electric thanks to its relentless focus on developing top managers. Blackstone may turn out to have a differentiating skill set like that, too. But it's just not possible that all the big private equity firms do. And if they go public, that will eventually become apparent to one and all, just as it did with the conglomerateurs of the 1960s.
March 19, 2007 11:01
East Coast Google vs. West Coast Google
In the summer of 1999, I paid a visit to a little startup in downtown Palo Alto. I was working on a Fortune article about Inktomi, then the new power in Internet search, and the startup was a nascent competitor. I sat down with its president--a kid named Sergey--and he questioned Inktomi's strategy of building its business around big deals with portals AOL, Yahoo!, and MSN. Sergey said he hadn't figured out yet how his company was going to make money, but he knew he never wanted to be dependent on just a few big customers.
After that, I went ahead and wrote my article about Inktomi. I checked out Sergey's company's search engine, and it did seem to find stuff on the Internet better than anything Inktomi had on offer. But I had made a pledge to myself not to write about revenue-free startups. Oh well.
This is not, however, to be a disquisition on the lameness of my editorial judgment. No, it's that now, almost eight years later, I have finally gotten around to writing a magazine piece about that startup from 1999, Google. And what Sergey told me way back then still has relevance to the quandaries and conflicts faced by Google today.
When Sergey, Larry and friends finally did find a way to make money, it was very much in keeping with Sergey's early disdain of big deals. Google catered to small advertisers and small publishers and became the one company to strike it truly rich mining Chris Anderson's long tail--that territory of tiny transactions that were mostly uneconomical before the rise of the Internet.
The tail refers to one end of a statistical distribution, at the other end of which (the head) are the blockbuster hits that defined late-20th century media. But while the long tail has been very, very good to Google, the company is now too big and too ambitious to settle for the nickels to be mined among the Web searchers and bloggers and small businesses of the world. It has been moving its attentions up the curve, along what Google insiders call the "torso"--a territory of professionally-made content geared to niche audiences--toward the hit-filled head long dominated by Big Media.
Google now has a major outpost in New York geared almost entirely toward working with Big Media and Madison Avenue. Their job is to close the very sorts of big deals that the company long avoided, albeit on much different terms than what Google would have had to put up with in 1999. It's not just YouTube's deals (and battles) with broadcasters, which have been getting most of the headlines lately. There are also big efforts to extend Google's automated ad sales model to newspapers and radio, and to get more Big Media web properties enmeshed in Google's AdSense network.
The result is a corporate split personality. Google's New Yorkers spend their days trying to make nice with the established powers of the media business. Many of them used to work at said established powers. Most are excruciatingly diplomatic. Here, for example, is what I got (via e-mail) while reporting my column last week out of former Time Warnerite David Eun, Google's vice president of content partnerships:
We work with thousands of content owners large and small around the world who produce entertainment, news, education and information content. We will continue to respect the rights of content owners and seek mutually beneficial partnerships offering the broadest distribution and the most attractive economics in the market.We also look forward to developing new learnings with our partners across a growing portfolio of products and initiatives while providing opportunities to promote their content, engage their audiences and build new businesses.
Meanwhile, back in Silicon Valley, Google CEO Eric Schmidt was saying undiplomatic things like:
The growth of YouTube, the g