Amit Chokshi
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Latest Comments87 Comments
Short Lived Economic Pessimism: Pollyanna is Back - With a Vengeance
Alt investments go through cycles nobody will deny that. The 1998 vintage LBO funds performed horribly and Forstmann Little was done in by some bankruptcies and other firms barely eked out a 5% IRR over the life of their 98 funds but LBO shops are in my view the least likely to crash and burn. KKR was brought to testify in Congress in the 1980s because of all of the leverage, the job cutting, etc. they did to generate returns but more importantly they were brought in because of the money these guys made off their investments. It's the same thing going on as private equity is the hot thing now but all of the easy money was made from 2003-2005. In those years firms could buy a company and recap it within weeks taking their entire equity out and still maintaining full ownership (look at PanAmSat satellite deal for instance).
Don't get me wrong, I'm very neutral/bearish on the overall market but any fall out will be more harshly felt by hack financial advisers and their retail clients than guys running alternative investments. I've been to a few conferences over the past few months and people love to reference Amaranth but it's a talking point that generates little value, the market absorbed the deal and people made money off it, I would think it is zero-sum, the $6bn didn't evaporate did it? JPM, GS, etc all made money off of that implosion.
I'm not complacent by any means but I don't see any LTCM on the horizon because the field is filled with bigger and more diversified players. Even in the hedge fund world, it's like 80+% of the capital is controlled by about 15-25 firms? Cerberus and Citadel and other competitors are not one trick ponies and do all sorts of stuff so a blow up in one area, yes, correlations go to 1 during crisis, but these guys have better portfolios than most retail investors with their 60/40 stock/bond portfolios. They are principal investors, lenders, etc. they are doing it all these days so are practically institutions in their own right similar to a GS or MS.
Will Sub-Prime Loan Defaults Create Another Amaranth?
Fundamental Indexing: New Ain't Necessarily Bad
The Short Case On Jo-Ann Stores
2) Debt has been reduced from $290 to $200, but it's still levered at close to 4.0x EBITDA. Also, that doesn't include the gross up for the sale-leaseback which now as a lease where they pay rent would essentially represent off balance sheet debt, so the actual leverage is higher than what's represented on the balance sheet. That's fine, it's a common practice but for a business with the industry dynamics and low cash flow JAS produces, that's a lot of leverage.
3) I expect SS to pick up for the same reason but I would not be surprised if the comps come in at 0-2%.
4) Fair enough, I think arts and crafts require more "trendiness" or some sort of "fashion" angle to pick up sales. Groceries has been a tough industry, WINN went bankrupt, etc and there are trends as demonstrated by WFMI and OATS but the bigger guys in my opinion, the traditional stores like Safeway, Kroger, Publix, Albertsons, have been fairly steady players, WMT has been difficult especially when considering the grocery union, but I feel the arts and crafts industry faces different dynamics overall. I am sure Webb will get the operation streamlined but I don't have a lot of faith in doing much on the sales end.
At any rate, good luck with your view on JAS and investment (if you are long).
Nordic American Tanker Shipping: A Dividend Stock With Strong Technicals
Gap: The Short Case
Whole Foods, Whole Portfolio?
The Convergence of Hedge Funds Into Private Equity
So in one of the megabuyout deals, an M&A fee could be $25-$50mm dollars that rivals the sellside ibank fee that goes into the pockets of the buyout firm before any value has been created. Secondly, the privately held funds are then charged a "management fee" to the buyout fund which can range from a few hundred thousand to millions depending on the company size. What makes these even more ridiculous is that in certain instances both the M&A fee and the management fee are 100% pocketed by the GP and the LPs (the insitutional and HNW investors) don't get a penny from that. So again, no value created yet but plenty of cash going into the buyout firm.
On top of that, with the current credit markets, buyout firms can run leveraged recaps to redeem their initial equity investment and still retain control of the firm such that between ultimately deleveraging the holding + dividends will allow the fund to sell the business in 3-5 years at an even lower valuation multiple and still make 20+% IRRs. That's why I'd say LBO firms are not "very interested in the strategic direction of the companies and industries in which they invest." It's a basic financial engineering process that can be applied to steady cash flow businesses. It's the same process for a newspaper company, a donut shop (Dunkin Donuts), a financial software company (SunGard), it's just certain, steady cash flows with limited capex. That's why a mattress maker has had about 6 different PE owners over the past 10 years or so.
If anything, I'd say hedge funds that take a long-term approach to investing (ValueAct, Bill Ackman, Second Curve Capital, Lisa Rapauno, Greenlight Capital) take an intensive approach to their investments since the holdings are marked to market every day and since they don't have control of the managment team/board, they will have to be that much more detailed in their analysis.
Also, hedge funds are not an asset class in the same regard as buyout funds. Buyout funds have some pretty strict rules in place in their fund documentation. It's really just buyouts and the occasional PIPE that are allowed and some other rules regarding public equity positions. Whether it's a $50mm or a $15bn LBO fund, the process is the generally the same, it's just the deal sizes are smaller and you'll use more bank than bond debt. But when people talk about hedge funds, they lump a variety of strategies into one asset class that can have no relevance to one another. A hedge fund that focuses on energy trading or FX may have nothing to do with a vanilla long/short fund or a distressed debt fund or short-only or a value/long-biased fund yet they will all be lumped together in many press articles (institutional investors generally have allocations for strategies, however).
So the belief that some hedge funds use complex trading strategies is just a broad generalization that may only refer to a few strategies and not even the majority of hedge funds. Kynikos and Sea Breeze are not lilkely using complex trading strategies outside of sizing/balancing their shorts and Cerberus, which is widely known for distressed debt, is probably not trading off minute spreads. You have the SACs, Renaissances, and DE Shaws of the world that command a lot of capital and have a lot of trading velocity but that still will not apply to every hedge fund. Also, guys like Cerberus have been buying whole business for a few years at this point, they bought one of Georgia Pacifics business back in 2004, and have teamed up with/bid against PE firms. Same with guys like Five Mile Capital.
Executive Compensation Will Continue To Be a Hot Button Topic in 2007
Your article omits perhaps the biggest gaffe by the SEC this past week with their rule change in regards to reporting compensation through option packages. They didn't even bother to seek public comment before implementing this new rule which takes place immediately. So as investors we can expect more problems with transparency as executives that are granted the same value of option compensation will be able to manipulate the reporting of it based on the vesting schedule.
So in 2007 we'll see reduced compensation figures since the expense will be deferred over time with no need for real disclosure. The useless board of directors will have their backs covered to continue pouring money into the pockets of their brethren and of course in about 2-3 years some scandal will occur when someone realizes that several hundred million in option expense was put in some cookie jar through and wasn't properly recognized and when shareholders thought some CEO was just getting $10-$50mm in option comp it was really 5-10x that figure.
Pfizer's $199m Payout To McKinnell is Unacceptable
Add the idea that a study by HBS suggested only 14% of a company's value is driven by a CEO (nearly 20% by the industry) and CEO comp really can become an issue.
The only way to deal with it is to radically restructure boards. Even having boards suggest compensation packages shareholders vote on would not do much in my opinion because of the current DNA of these board members. Boards are just saddled with other CEOs and top management of other companies which leads to massive group think across the board. Some senior mgmt guy on the board for company x isn't going to ding the CEO since he/she knows he'll be in the same "club" once his turn comes up. Midlevel company members should get board representation in some capacity as should common shareholders. I think most importantly, boards should have risk capital representation. Either board members should be forced to buy a minimum level of shares if they agree to be selected or allow significant shareholders to outright bring on their own board members. Why do you think the Icahns, Kerkorians, Daniel Loeb's, etc are so much more forceful when they want to effect change. Having real risk capital represented in the board is huge and the fact that most of these bozos get grants along with a stipend is flat out ridiculous.
Pfizer's $199m Payout To McKinnell is Unacceptable
The problem is that the majority of institutional shareholders (mutual funds) like Fidelity are rollover investors. They are frankly, pathetic. Rather than stick around with their tremendous risk capital at stake to effect change in stocks that underperform, they bail out and move on to the next company. And more importantly, when it comes to proxy voting, I doubt the Fidelities of the world even consider what is being held on panel to vote on and just vote yes across the board.
First Marblehead: Little Risk Priced In
Does the Recent Spate of Buyouts Signal that Stocks are Underpriced?
Even with stocks fairly valued, with high yield and leveraged loan markets pricing risk so low in recent years, PE firms can still pay a fair price and make killer returns. The point is really seeing if the returns are that great on a risk adjusted basis. Leon Cooperman of Omega did his own study back in the 80s which showed if you levered the S&P500 to the same capital structure of typical LBOs, it would beat average PE fund returns. I also believe Prof Kaplan at U Chicago has done some research questioning how strong PE returns really are.
PE funds just take the "market" aspect out of the companies they buy, add some leverage and wait for the returns to be generated. I think the biggest reason it's so easy for PE funds to take these cos private is because investors are so myopic and will take a 20% premium rather than allow management/company to continue doing what they are doing and ultimately wait for the market to assess a higher valuation.
Follow Up to 'Private Equity Buyouts: The Five Cs'
As long as rates remain low PE funds will have all they need to do deals. They aren't buying bad businesses, they are buying stable businesses and juicing their returns. When Bain bought Burlington Coat Factory and now Outback, they're not changing much around. Those companies aren't going anywhere and a little leverage will juice their returns.
As for the PE/movie deal, that's been going on for a while. Tom Cruise getting into a PE deal is not a big deal, other entities like Relativity Media have been PE backed/financed.
Blockbuster's Year of the Dog
BBI wouldn't be an attractive buyout candidate, it's currently valued at 6.0x EBITDA which is not cheap for a company that is struggling like BBI is. Icahn is still in BBI as well as other investment managers and they would not give in to a low ball premium like typical dumb money institutions (Fidelity, T Rowe, etc). Leonard Green "won" the war for Hollywood Video at a greatly reduced price and that performance hasn't seemed to be very pretty even with a seemingly cheap price.
With the leverage on BBI and it's cash flow, there's not a lot of juice left to pay a big premium and that prob won't win over Icahn and other investors. On top of that, there have been other decent businesses like JAG and CSC that couldn't find buyers and there are plenty of good businesses that are cheap relative to the financing PE firms can obtain where as BBI is probably too big of a challenge. Maybe 5 years ago, a deal could have been done to milk the company for cash but at this point with improvements and changes in technology and delivery of content changing so rapdily, BBI's cash production is dwindling at a much faster rate than people probably expect.