Feb 25

Don’t Take Truth in News For Granted

 

Don’t take truth in news for granted, especially in this age of instant “journalism,” where any widely followed blogger can become a de facto trustworthy source for his or her readers. It’s on us, as consumers of news, to do our own research. We must self-curate all of the sources and determine for ourselves who is right, and who is wrong; which statistics are accurate, and which are misleading; which sources are biased, and which aren’t.

Otherwise, we will be lead astray by the age-old warning: “it is often better to be confidently wrong than timidly right.”

I believe that three recent examples bring proof to this opinion:

1. Tesla Motors Bricking. Blogger Michael Degusta has thousands of followers, and his vociferous complaint about a catastrophic battery drain issue in Tesla’s popular Roadster quickly took hold in mainstream news outlets. Tesla’s stock took a hit, because Tesla was instantaneously judged guilty in the court of public opinion. The problem? As Michael Nestler posted on Google+, the blogger may have had ulterior motives. And, it turns out that Tesla did nothing wrong, and in fact provides its owners with fair warning in the Owner’s Manual.

2. The Inaugural Robert Scoble Angel Fund. According to Newsweek/Daily Beast writer Dan Lyons, the Scobleizer is now an angel investor and/or venture capitalist. These are two public figures who are very widely followed and respected in the tech community. Many people immediately took Lyons’ account as truth. Here’s the problem: according to Scoble, there’s no fund. And after Lyons’ rather aggressive blog post, Scoble was forced on the defensive, since he works pretty hard to maintain his objectivity. Worse still, Lyons never contacted Scoble for comment. That fact alone, regardless of the story’s truth, is horrid “journalism” and absolutely unfair to Scoble.

 

3. Path Contact-Gate and MG Siegler‘s Boisterous Defense. Dave Morin’s Path took a publicity hit when users discovered that the app silently uploaded iPhone contact information. Morin apologized, which is great, and it is true that Path was not alone in this shady activity. But the fact remains: Path knowingly betrayed trust, which is a bad sign for management decision making. The tech journalism community has absolutely flayed companies in the past who have made mistakes like this (Hello, Facebook and Google?). Lucky for Path, noted tech journalist MG Siegler came to its defense. Siegler’s legions of fans took his cue and the Path fiasco passed quickly, by tech privacy standards. The problem? Siegler is a partner in CrunchFund, which is an investor in Path. This is the ultimate conflict of interests. Fair warning to Mr. Siegler: The SEC frowns upon this sort of thing, big time.

The moral of this story: please, please, please, read news broadly. Do your own research and make your own decisions. Nowadays, news consumption occurs instantly, and savvy networkers can easily become widely read journalists. Just because someone is loud and popular does not mean that their news is accurate.
Note: All opinions contained herein are my own, and not necessarily representative of my employer(s).

Feb 23

What is Private Equity, Part 3

 

Delving into the Private Equity minutia, here’s a little analysis of President Barack Obama’s recent tax proposal. The proposed cut of corporate taxes from 35% to 28% has drawn all the headlines, but more important are the details in the fine print.

A great example is the proposed change to interest deductions. Currently, companies can deduct their interest expense from earnings before calculating owed taxes. It’s similar to how homeowners can deduct mortgage expense before calculating what we owe to Uncle Sam. President Obama would like to do away with the corporate version of the deduction.

The problem is, for any company with a substantial amount of debt, this change might increase the tax bill. This change would strike particularly hard at companies who have been acquired (LBOs) or invested in (financed) by private equity (PE) firms. Using leverage, as I explained in a previous post, helps private equity firms to make a higher return, and thereby allows the PE industry to exist.

Why is that important, you might ask? Well, I discussed some of the reasons here. Briefly stated, PE is a fundamental facet of capitalism that provides financing sources to established, mature companies who do not have, or do not wish to have, access to public markets. The vast majority of the PE industry is absolutely, positively not about “vulture capitalism” — no matter what you might hear or read in the news. “Turnarounds” and “chop shops” are niches within the broader PE industry. They are not the norm. Rather, most successful PE is predicated upon investing in and supporting good, solid companies.

However, because PE investments are illiquid — in other words, a PE company can’t just sell its ownership in a company in one day — PE investments are considered higher risk. Why? If a manufacturing company runs into supplier trouble, then a PE firm is stuck with its ownership in the company and must weather the storm — if it were a public company, the PE firm could simply sell its shares immediately. In order to offset this higher risk, PE needs to exhibit higher rewards, or in investment parlance, higher investment returns. This is the classic risk-reward theory.

As I explained, using a prudent amount of debt that a company can support, a PE firm can increase its return on its equity investment. But if interest cannot be expensed before tax calculations, then suddenly the company is paying more taxes and is generating less cash to service the debt. Therefore, debt levels by necessity will have to decrease. Private equity returns will decrease. Private equity may no longer provide its investors with a reward (return) commensurate with its level of risk.

The President wants to simplify the tax code and reduce deductions that corporations can take. In exchange, he will lower the global tax rate to offset some of the higher tax bill that the detailed changes will incur. He has admitted as much.

I approve of the concept of simplifying tax code. But the President needs to be careful about making sweeping changes without understanding all of the resulting effects that such changes will procreate. Not that any of this matters, I guess, as there is no way this iteration of the bill goes anywhere, especially not in an election year…
Note: All opinions contained herein are my own, and not necessarily representative of my employer(s).

Feb 07

What is Private Equity, Part 2

What Is Equity, and How Does It Grow?

A post in my ongoing series on “Explaining Private Equity”
(cross-posted from Google+

A week ago, I posted a tidbit of private equity (PE) news. The short story: PE has been in the spotlight thanks to Presidential candidate Mitt Romney, and in the midst of the public brouhaha, popular chain PepBoys was taken private by a PE firm. At the behest of some of my friends and family, I decided to explain private equity in depth.

Some of you might think: “come on, everyone knows what equity is!” Actually, since I’ve returned to the world of private equity, I’ve had a few friends ask me to explain the basic concept of equity. Of course, if you already know what equity means, the rest of this post will be awfully boring to you. But please, do share this with any of your friends who you think might be interested!

I like to explain equity in terms that most people can relate to: owning a house. When you buy a house, you own it. If you sell it, the money is yours. But there’s a caveat: if you borrowed money from a bank in the form of a mortgage, then you must pay back that mortgage (and its interest).

Let’s say you paid $100,000 for your house. $100,000 is the value of the house — not to be confused with equity, we’re getting there! You were able to get a mortgage from the bank in the amount of $80,000 in order to help buy your house. That $20,000 cushion ($100,000 home value minus the mortgage) is called the equity of the house. It’s the cash that you had to fund out of your pocket in order to purchase your home. It’s also called your equity contribution.

If you were to sell the house that same day, the $20,000 of equity would go right back into your pocket because you own the house. There’s the simple concept. You are the equity owner, and you own all the value of the home after you’ve satisfied your mortgage obligation.

Now, let’s pretend you don’t sell your house today. Instead, you sell it in five years. And voila! The economy has recovered, and home values in your neighborhood have gone up because people are feeling good, and are willing to pay more for houses. In addition, you’ve put in a new kitchen and you’ve re-sculpted your front garden. You are able to sell your house for a $150,000 value. In the mean time, because you’ve got a job, you’ve managed to pay down some of the mortgage via your scheduled monthly payments. Now you only owe $50,000 to the bank.

When you sell your house, because you own 100% of the equity in your home, the equity value that you receive is $100,000 ($150,000 minus the remaining mortgage). Your equity value has QUINTUPLED from $20,000 to $100,000. Why? The economy raised the value of the house. Your improvements (kitchen, garden) raised the value of your house. And, you were able to pay down some of the mortgage. Your equity has grown. It has appreciated.

This exact analogy works for businesses. Let’s say you absolutely love your neighborhood bakery, and you want to buy it. You think it’s worth $100,000, and the old owner agrees: He says he’ll sell the bakery to you. You ask the local bank to help you pay for the purchase, and they give you $50,000 to do so. You pay $50,000 out of your own pocket — that’s your equity contribution. The deal is done, and now you are the 100% equity owner of the neighborhood bakery. You also happen to be an amazing, charismatic pastry chef, and in five years, you’ve doubled your customers. You’ve improved the storefront with new paint and frosted glass. You’ve added in seating. And because you’ve been making money hand-over-fist, you’ve used the profits of your bakery to pay the bank back all its money already. Now, because you want to retire, you sell the bakery for a $200,000 value. That means you get to go home with all $200,000, since you own 100% of the equity of the bakery, and there is no debt. You’ve quadrupled your equity contribution.

That is the simplest definition of equity. There are countless twists and turns within the concept of equity, but so long as you start by understanding this, the rest is very simple to unravel.

I hope this was helpful to at least one person out there!

 

Note: All opinions contained herein are my own, and not necessarily representative of my employer(s).

Jan 31

What is Private Equity? Part 1

Private equity (PE) deals, specifically leveraged buyouts (LBOs), have been in the news quite a bit recently. We can thank Mitt Romney’s presidential campaign: rivals like Newt Gingrich, as well as newshounds, have been scrutinizing his experience at Bain Capital, a PE firm. This has cast the PE industry in the (harsh) spotlight.

For an industry very accustomed to flying under the public radar, this level of attention has presented a challenge. Why? For those unfamiliar with finance, the fundamentals of PE can be difficult concepts to grasp. Information is easily misunderstood. Successes and failures are often misallocated.

In simplest terms: PE firms supply equity capital to companies who can not, or would rather not, issue public stock in order to raise equity capital on their own (a la on the NYSE or NASDAQ). There is a lot more to PE than just that, but that’s the easiest way to think about it. I will get into more depth in a later post.

By the way, for a brief tutorial on “What is equity capital”, stay tuned to my blog!

A good example of PE just popped up yesterday. PepBoys, a popular, national chain of auto parts and service centers, agreed to be “taken private” by a veteran PE firm named The Gores Group. What does this mean? PepBoys will no longer be a public company. They will be privately owned. In other words, their equity will be owned by a small group of people, rather than by anyone with a brokerage account.

Why would they want to do this? We the public don’t know for sure, but there are many possible reasons.

  1. Being private can give companies flexibility, as they only have to answer to a handful of shareholders, and not hundreds of public shareholders, when performing acquisitions, divestitures, business expansions, product extensions, etc. Having to answer to the public for your every move can make a company feel hamstrung.
  2. SEC scrutiny for public companies is intense, and being private means you are subjected to (somewhat) less stringent reporting rules. This applies to scrutiny in (1), as well!
  3. Believe it or not, private companies and PE firms often have easier access to the debt markets, in large part because of the tight relationships between PE firms and lenders.
  4. A CEO might believe that her or his company is undervalued by the public, and therefore may seek to go private in order to achieve a more fair value for the company.

Whatever their reason, it’s clear that PepBoys would rather not continue to use the public markets to raise capital.

So you see, there is a lot to think about when considering Private Equity. By no stretch of the imagination is it solely vulture capitalism, nor is it all success and roses. The answer lies in between, and hopefully by paying attention to my stream, I might be able to teach you a little bit about it.
Note: All opinions contained herein are my own, and not necessarily representative of my employer(s).

Jan 18

SOPA stands for Stupidly Organized, Pitiful Attempt

 
I know, I know, everyone’s talking about it. I just have to say one thing:

In my opinion, the worst thing about SOPA is that it proves that people completely out of touch with the current online economy are the ones responsible for crafting legislation governing the online economy.

And that opinion reflects me giving lawmakers credit! Because after reading the bill, I can honestly say that it’s a piece of shit legislation. If you’re for it or against it, this much is true: the bill is alarmingly poorly thought-out. What does that say about Congress?

 

Jan 16

Celebrating Martin Luther King, Jr.

On this day commemorating Dr. Martin Luther King, Jr., I’d like to recognize the efforts of the 54th Regiment Massachusetts Volunteer Infantry.

Authorized in March 1863 by Massachusetts Governor John A. Andrew, the 54th was among the first official black units in the United States during the Civil War. Governor Andrew hand-picked Colonel Robert Gould Shaw to lead the 54th, and the unit received ample supp…ort from northern abolitionists in the form of clothing, flags, and equipment.

Though the 54th began its tenure engaged in physical labor, it quickly gained recognition for its stalwart efforts. Its most significant engagement occurred at the Second Battle of Fort Wagner near Charleston, SC. Colonel Shaw died in this battle, alongside 53 of his men. 15 were captured, 52 missing, and 149 wounded. Though the South eventually repelled the North, the 54th was lauded for its valor.

Their efforts are credited for encouraging further enlistment of African-American troops. One soldier, William Harvey, was awarded the Medal of Valor some 37 years later, for grabbing the U.S. flag as its bearer fell and shouting, “Boys, the old flag never touched the ground!”

The legacy of the 54th is immortalized in the 1989 film “GLORY,” directed by Edward Zwick and starring Matthew Broderick, Denzel Washington, Cary Elwes and Morgan Freeman.

 

Jan 10

The Grindstone Spins, Yea, Inexorably to my Nose

So, I’m back to it.

56 months, three homes, three continents, two novels, one startup, one independent film, and one beautiful baby boy later, and I’m back where I (basically) began my career: Nautic Partners, a private equity firm with $2.5 billion of equity capital under management. I suppose the time had come to rediscover what the phrase “steady career” means. I’m going to be responsible for limited partner (a.k.a. investor) relations and, when the time comes, fundraising. The guys and gals here at Nautic are awesome, not to mention gracious for letting me re-join after a lengthy hiatus, and I’m happy about my new job. It’s like I never left – which I admit is a bit scary, kind of like those infinite time loops caused by Q in Star Trek: The Next Generation.

Anyway, do not fret!

  • Dead Man’s Burden is in the editing process, and you can all expect to have your socks blown off by Jared Moshe‘s kick ass western in 2012. I’m still helping him out on it, and that means I’m still going to talk about it. Sorry folks.
  • Superman Jed Lau’s startup Memoir Tree (www.memoirtree.com) continues to hurtle towards a successful launch in early 2012. I will stay involved on a more limited basis, but I will keep helping during beta.
  • I promise I won’t become a corporate tool (again).

HAVE AT YE, GRINDSTONE!

 

Dec 25

Happy Holidays from Dead Man’s Burden!

We’ll see you in 2012! Visit us at www.facebook.com/deadmansburden for updates.

Dec 25

Happy Holidays from Memoir Tree!

Thanks to all of you for a fantastic 2011. We hope you are all as ready as we are to launch Memoir Tree in 2012!

Dec 13

Memories Tuesday: The Ford F-Series

At Memoir Tree, we want to make sure that we not only provide you with a fun and easy way to record your family stories, but also help spur more memories so that you can find some of those neat anecdotes that are hidden away. That’s why we’d like to introduce Memories Tuesday. On Memories Tuesday, we will post about various topics that may (or may not) remind you of an old memory.

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For me, cars are one of those things that always spur memories. Whether it’s my first car (a 1992 Ford Thunderbird), my dream car (Aston Martin DB9), my muscle car (Ford Fairlane), or any other beautiful vehicle … the memories always seem to flow.

The Ford F series is among the most popular model lines of all time. It began in 1948 as the Ford Bonus-Built, and as you can see, incorporated a lot of design elements that were both stark and modern for the time. The shape and size changed tremendously over the next sixty-plus years, but its popularity never waned.

My wife’s grandfather has a tenth gen F-350, and I’ve used that bad boy for many a job. Moving a piano, moving an entire dining room set, hauling rocks and dirt, you name it. It’s served the family well for over ten years.

Does anyone else have some old car memories?

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