Harry Newton's In Search of The Perfect Investment
Technology Investor. Harry Newton
AM EST, Thursday, April 16, 2009. File
this one under Nothing Wall Street invents is working. I own a little
of the Goldman Sachs Vintage Fund IV. It's a private equity fund made up of
discounted slivers of other people's funds. The idea was that buying private
equity at a huge discount -- because someone or some institution needed desperately
to sell -- gave huge returns in the long-term.
December 31, 2008 account shows I'm down only 4% on the year. But Goldman
says when they finally figure it out, I should be down an additional 13% to
18%. So maybe 22%. That's their "best estimate." They explain:
All this is nothing
new. It's just depressing when you see your miserable investments with Goldman
and see their employees getting $10 billion or so in bonuses. For what? For
losing me money?
has clearly been affected by this challenging environment. By the fourth
quarter of 2008, acquisition financing was essentially unavailable, which
led to a dramatic slowdown in new deal activity. Additionally, exit alternatives
were severely limited as the public markets were essentially closed for
initial public offerings an both financial buyers and strategic buyers were
more inwardly focused and generally unwilling to consider acquisitions.
Lastly, it has become increasingly clear that the economic downturn has
directly or indirectly affected the performance of nearly every portfolio
(mergers and acquisitions) volume fell more than 29% in 2008, to $2.9 trillion,
from record high volumes in 2007. In addition to contributing to the reduced
aggregate level of activity, the lack of available financing disproportionately
affected sponsor-backed activity. As a result, private equity's share of
global M&A declined from a 2006 high of 19% to just 4% in 2008. On a
dollar volume basis, leveraged buyout (LBO) activity was the lowest since
2003. As in previous years, public to private transactions accounted for
a significant portion of that LBO activity, 66% by transaction value. From
2004 through 2007 recapitalizations of companies owned by private equity
funds exceeded $20 billion annually, generating significant dividend payments
for funds and their LP's (limited partners, like me). That source of proceeds
evaporated in 2008, with just $1 billion in recapitalizations; there were
no recapitalizations in the second half of 2008.
of the global credit markets which began in the second half of 2007 led
to severe de-leveraging (paying off debt) across the leveraged finance investor
base. This de-leveraging, combined with an "overhang" of transactions
to which private equity firms and banks had made financing commitments (the
leveraged loan forward calendar peaked at $237 billion), created a massive
technical imbalance in which demand for capital far outstripped the overall
supply. These technical issues were exacerbated by relative value pressures
in the investment grade, loan and high yield markets. As a result, from
record-setting volume in 2007, leveraged loan volumes fell by 71%, to $155
billion; high yield issuance fell by roughly the same percentage. This was
a trend that had begun at the end of 2007, with volume in the second half
of 2007 down 57% from the first half of the year. Private equity-related
leveraged loan volume fell by 98%. In 2008, pricing moved up just as dramatically
as volume moved down, with leveraged loan spreads ballooning 812 bps (basis
points) to 1,122 bps.
in 2007, valuations for private equity began to decline as the credit which
facilitated lofty valuations dried up and as falling public equities created
downward pressure on valuations. On average during the year, buyout firms
paid 9.5x trailing EBITDA for companies with EBITDA over $50 million, down
from 9.8x in 2007. By the second half of 2008 valuations has dropped further
to 9.1x, but with few transactions taking place that number likely understates
the extent to which valuations have adjusted downward. There is widespread
agreement in the private equity industry that values will continue to fall
and that those participants with fresh capital are eager to invest at valuations
that reflect the new valuation environment, the uncertain economic times
we are experiencing as well as the limited supply of debt capital. Deal
size also changed dramatically in 2008. The largest LBO (leveraged buyout)
of 2007, TXU, was $44 billion whereas the ten largest buyouts announced
in 2008, combined, were valued at $35 billion.
capital funds were buoyed by a strong IPO market in 2007, that market was
virtually shutdown in 2008 making it a difficult year for venture capitalists
as many planned public exits were postponed. There were 6 venture-backed
IPOs in the U.S. in 2008-the lowest since 1977-raising $0.5 billion, down
from 86 IPOs raising $10.3 billion in 2007. In fact, there has only been
one venture-backed exit in the last three quarters. In 2008 venture-capital
investing declined for the first time since 2003, down 8% from 2007; the
number of deals dropped as well, by 4%. Clean Technology was the one significant
growth area for venture capitalists, representing seven of the ten largest
venture-backed investments, increasing by 52% in dollar volume.
After a second
record setting year in 2007, private equity fundraising declined to $465
billion in commitments, down 6% from 2007. The fundraising environments
has, however, changed more dramatically that those figures suggest. Quarterly
data tells a more complete story of the magnitude of the change; fourth
quarter 2008 commitments were down 66% from the first quarter. In addition
to the slowing pace of commitments, in an unprecedented move, a number of
major funds have allowed their LP's to scale back their existing commitments.
economic and financing environments have had profound impacts on private
equity managers and their portfolios. General partners recognize their portfolio
companies need to be prepared for an extended downturn and are working closely
with their management teams to aggressively manage costs while closely monitoring
liquidity needs. As weaker participants in each industry falter, general
partners are trying to position their companies as the survivors and future
winners although it is unclear when the market environment will again be
conducive to growth. While there are instances where underlying portfolio
companies are able to take "offensive" (rather than "defensive")
actions such as making acquisitions, such activity is more the aberration
than the norm. Generally speaking, private equity investors recognize this
is a time for their companies to survive rather than take meaningful operating
risk and are instructing their managers to act accordingly.
magazine business also sucks. Circulations are plummeting. Ad are
going for quarter price. Misery and desperation abound. I buy a DVD from Amazon
and receive this email:
your recent DVD purchase you can now get up to 5 magazine subscriptions
at 50% off each. No promo codes needed and no strings attached, the discount
will apply automatically at checkout.
the prices are cheap. My benchmark has always been $1 an issue for a monthly
-- like Esquire. But now Esquire is $8 for the year. Harper's Bazaar is $8.
Good Housekeeping is $8, etc.
are going digital, too. You'd think they'd be real cheap -- since the cost
of delivery is almost zilch. But... go on Zinio's
site (they're the leading provider of digital magazines) and you'll
find the same magazines at the exact same price as the paper edition. I'm
not a big fan of digital magazines since turning pages and zooming in to read
them is sooooo slow. Also you can't mark articles that interest you, though
you can print them. Now, if the publishers got their wits together and dropped
their digital prices dramatically, I might get more interested. Is anyone
I used to publish a dozen magazines. That's how I made my money. So, I know
what I talk of. For a change.
cell phone danger. Your cell phone is a tiny
PC. It can be infected with bugs and viruses. People can listen in on your
conversations and hear what you're saying -- even if you're on the phone.
I wouldn't get overly freaked But you should be aware. For more, this YouTube
video is semi-interesting.
sent me this. She comments she never found this "humor"
funny -- until recently.
wife. Actual conversation, yesterday April 15, 2009.
Would you like to go to the movies this evening?
I'll be with you in a moment.
Excellent. I'll pick a movie and buy tickets.
We never did
go to the movies last night. We fell asleep.
big Talmudic question
After many years, a young Talmud student who had left the old country for
America returns to visit the family.
where is your beard?" asks his mother.
he replies, "in America nobody wears a beard."
least you keep the Sabbath," Mama asks.
in America, business is business. Everybody works on the Sabbath."
food you still eat?" asks Mama.
in America, it is very difficult to keep kosher."
The old lady
ponders this information and then leans over and whispers in his ear, "Isaac,
tell me, are you still circumcised?"
A man goes to the doctor to get a prescription for Viagra.
The doctor says,
"Viagra can be very dangerous. We do not dispense it indiscriminately.
Please bring your wife to my office next week."
The next week
the man shows up with his wife.
The doctor asks
to see the wife by herself for a few moments. She follows him back to the
The doctor asks
her to disrobe and she does. He then asks her to turn around a few times,
jump up and down, get on the examining table and to turn in various positions.
He then tells her she can get dressed and goes out to her husband.
the doctor says, "there is nothing wrong with you --- I couldn't get
an erection either!"
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
with regulatory authorities, which I am not. I am a reporter and an investor.
I make my daily column -- Monday through Friday -- freely available for three
reasons: Writing is good for sorting things out in my brain. Second, the column
is research for a book I'm writing called "In Search of the Perfect
Investment." Third, I encourage my readers to send me their ideas,
concerns and experiences. That way we can all learn together. My email address
is . You can't
click on my email address. You have to re-type it . This protects me from
software scanning the Internet for email addresses to spam. I have no role
in choosing the Google ads on this site. Thus I cannot endorse, though some
look interesting. If you click on a link, Google may send me money. Please
note I'm not suggesting you do. That money, if there is any, may help pay
Michael's business school tuition. Read more about Google AdSense,
here and here.