Archive for March, 2007

Private Equity going Public

OK, I’m not speaking of a company privately owned that would filled for an IPO; although it is interesting to note that most of the attention lately has been on the reverse moves. I’m speaking of Blackstone intention to float their shares.

The move is interesting first because Blackstone is one of the biggest Private Equity firm in the world. Second because it could usher a new state of the art in Private Equity. A lot of the major Private Equity firms will soon face the same dilema: how to you turn from a small boutique who’s grown huge into a well-run professional company. Buy-Out firms, does this remind you something? The fact is that a lot of the current biggest PE firms have been founded in the last half-century by a bunch of financial entrepreneurs. A lot of these entrepreneurs are now reaching an age where most of the people already retired. So you have to solve a transition problem.

I find interesting that Blackstone decided to turn to the Public Market to solve this cash-out / maturity conundrum. I would find even more inspiring if the Carlyles of this world decided to turn Blackstone back from Public to Private in order to boost performance after a while; and educating if a Carlyle gone public ends-up merging with our frontrunner Blackstone.

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Private Equity backing serial Movie Directors

A recent article in The Economist called Hollywood’s new model (premium access required) is reporting the interesting trend that Hollywood film funding is taking more and more the private equity approach. Apparently some funds found an opportunity to change the investment process in Tinseltown and take their profits out of a risky business by applying some standard methods: bank on the directors with a track record (even slightly tainted), be ready to invest in unproven ones (if they are cheap). This notably differs from the old investment process: do not be seen with a looser, do not bank on the unbankable. But this clearly resembles the methods applied in high-tech: backing an entrepreneur with a mixed record is better than backing a rookie (if he is cheap), banking on a rookie is an alternative (if he is really cheap).

 Maybe Entrepreneurs will never enjoy the glamorous lives of movie directors marrying their gorgeous lead actress but they may take some comfort in thinking they do not have to invite the board to their wedding party.

Using CRM during the day, and VRM at night?

VRM is a new term (no I do not mean Virtual Reality Modeling) coined for Virtual Relationship Management. So while you may be using a CRM system at your company to extract the last penny from your reluctant customer base, you may now decide to use your own information at night to try getting a better deal from this annoying salesman that is hassling and chasing you even into your den.

It seems that a new company Attention Trust has decided that our attention is a precious good and that we should receive a fair return for having to read, listen or just bother with the message the persistent salesman is trying to impose on us. This clearly belongs to this new VRM trend.

 If you are more specifically interested by VRM applied to banking, then you should definitely read Colin Henderson’s post on The Bankwatch. If you are more than interested by BankingVRM, you should then join BarCampBank‘s workgroup on the subject.

 Finally, there is Project VRM a project hosted by Harvard University.

 We’ll see if we has customer will be able to regain the upper-hand in the selling process. But at least it is reassuring for people who may fail to make theirs quotas because of inadequate CRM systems, that they can recoup part of the money by negotiating hard when they buy their next kitchen set.

We all are insider traders

Have you ever based some of your personal decisions on how things were going at work?  When business is booming and the perspective of a fat bonus becomes more pregnant, we might be tempted to buy the new car a little earlier than we would have under regular conditions. Conversely, when things turn sour at the office, we may postpone a series of superfluous buying decisions. Some economists may call it a boom and bust cycle, but some regulators may call it insider trading: True you do not trade directly on the stocks of your company for your own benefit, but you release precious information to the market not in an orderly way as legislation of the public equity market would require.

 Again, some economists may argue that you do no arm and that you do not provide any information that is not integrated into the current public prices. Really? Maybe this is more a situation where collecting and processing this information would be too coostly – and certainly a big problem from the privacy perspective. Anyhow, it would still have to be proven that with the results in hands, you really have an hedge over the market. A potential test for assessing if the wisdom of crowds do apply to insider trading.

Just to finish, I may just give an anecdotic side to the question of the value of inside information. In the course of my career, I’ve had often access to privileged information related in roles I played in different mergers and acquisitions. With my colleagues, we often tried to predict what would be the market reaction when the world will know through a presse release this precious pieces of information that we were the only one to posess for a few hours. Results are not dazzling, predictions were incorrect every other times, not much better than flipping a coin. So we may well all be insider traders in the end, but it may not give us an edge over other things than our personal decisions.

Should you give your valuation on your first date?

I was participating the other day to a project presentation session at a Business Angel club. The different presentations were all finally presenting some slide where you could find the money they need (a good point) and some valuation (a bad point). Let me give a fatherly piece of advice: “do not give your valuation on the first date”.

 This special moment of seduction where entrepreneurs meet potential investors is definitely a first date. You may engage for a long time as partners and you must surely take the female approach of being very selective on the gene pool and the means of survival that you want for the baby that “you” will be carrying. So be very seductive, be plain open on what you need, but do not spoil this first getting-together with valuation. The risks that you take is that you could deter some potential investors that have a lot to offer beside money. Second, in a good negociation, you must try if possible not to be the one giving the first price: if your valuation is silly and you find someone ready to talk with you, chances are they will never go for the long stand or are plain stupid. In the case of professional investors like VCs, this can be even considered as a faux-pas, VCs will use their own valuation mechanisms to come to a price and you’ll have small freedom to maneuver beside playing several potentially suitable partners one against the others.

 So do not rush things. Dress your idea up for the event, give your number at the end of the first rendezvous and wait to see if you convinced a smart investor or two to try to know more about you,… and be ready to get rid of the indecisive ones.

P2P Money: would you also need a pooled payment system?

At BarCampBank, we have been thinking lately of what we call P2P Money. In fact this is more like a pooled payment system that would allow us to decide and manage common expenses for the group. Beyond our immediate need as a community, we also see that as an enabler for the different project we are incubating in peer-to-peer mode.

 In short, here is a list of requirements that could characterize such a system:

  • Have a place where pledges for money can be stored and easily committed
  • Have a way for the group to define different future expenses, voting for prioritization and approval.
  • Have a way to make direct payment to the vendor in case of a large payment
  • Alternatively, have a way to transfer cash to one of the participant to make the payment
  • Have a way to enter, track, approve past expenses incurred by different participants (above feature would then provide a reimbursement mechanism)
  • There are already things existing along these lines. This is certainly one of the driving ideas behind Fundable . Fundable already makes possible so called “group actions”. Iit misses some of the decision making and tracking (accounting) that I described above. But it is a v 1.0 of a Business 2.0 application. So stay tuned for what comes next there.

     It is interesting to devise for a while what a new system like P2P Money would make possible or what systems it could replace eventually.

    First, it would make possible monetary coordination in loosely organized groups. Association could collect funds from their members (or non members) for routine small projects. Budding project groups could start acquiring resources without having to trust one of the member to serve as a treasurer. Transnational social network could jointly invest to promote their goals (something standard banking system make next to impossible).

    Second, it could eventually entirely replace the banking system for certain of these groups. I can easily imagine any club using such a system for its entire accounting and expense system. True, usually you do not pledge money, but treasurers would cerainly feel happy not to bank all the checks and reimburse members that bought material with through similar paper hassle. 

     Finally, things have to be put in perspective to give the boundaries to a pooled payment sytem. Bill Gates can easily decide to allocate $1B to a project within a matter of days. That represents 1M people ready to collectively pool an average of $1000. That’s a lot… So, no need to say that a pooling payment system won’t be a significant player before a while. But it makes possible entirely new patterns. If we indeed find a large collection of problems that can only efficiently be solved through the wisdom of crowds, we definitely need P2P Money. So be prepared for a long journey, but the prospects seem quite exciting. What do you think?

    Is Private Equity a better Chief?

    The latest deal in Private Equity with the acquisition of TXU by KKR and Texas Pacific Group is giving an interesting new twist in the battle between private and public control. More specifically it raises the interesting question to know if private can be better than public for governance.

     True, this is not entirely new. The raiders of the 80s were clearly showing up where management was a disaster, would sack the guilty, put some order in the accounts and take their profit and leave. This some kind of ruthless governance, but this can be extremely powerful to take advantage of the erring companies. Then, eh, this is the public governance that clearly failed to do its job.

     Arguably, such opportunities are scarcer nowadays as public has stepped up its standards. So came second wave of private equity: take advantage of the difference in regulation. With post-Enron’s ajustments, it seems it is now less costly to run a company under a private umbrella rather in public full ligth. Thus a series of public to private transformation. PE would then monitor the business for a couple of years, then return the acquired company to the public with a profit, or more likely sell it to a bigger group. There is certainly more governance in this, than in the previous round. But PE was still supposed to be fairly hands-off after some initial restructuring beyond the public’s eyes. The job was again monitoring that everything was going according to plan, if not: sack the management team.

     The new deal with TXU is interesting, because here PE clearly is clearly boasting its capacity to provide better governance on the long term. The argument is even, public market are short-sighted (not a new complaint), we will be able to drive with our eyes on the silver lining and profit will come, eventually. We will have to wait a couple of test for the acid test, but there’s enough default in public governance that give weight to the argument.

     Now, what could be the next step. More private? The answer could in fact be more of both. With peer-to-peer (P2P) governance we could indeed see a fourth wave where control returns to the larger number but possibly not through the standard public markets mechanism. It is certainly a shame that the collective brain power of all these small investors is not currently used for governing companies. It is obvious now that the bloggers have a collective power way beyond the Gartners and Forresters. We have technologies so that governance can now be expressed through web technologies instead through proxy fights and dubious shareholder meetings. The same for the accumulated industry knowledge distributed through potential small investors instead of in the heads of a handful of PE specialists. So there is obviously an opportunity to tap into this wealth of capacities.

     I don’t know if this will happen, but I would find quite funny that P2P governance comes to be a credible alternative and that everybody would wonder if the Ps stand for Private or Public.

    Maybe you could join us on the BarCampBank if you’re interested in discussing this.