A Blind Man Driving a Ferrari

By Rob McCreary

American business is like a Ferrari. It purrs at 140 mph, corners well at half that speed and is coveted by everyone. The US dollar, our capital markets, the US banking system, our rule of law, easy capital flows, startup successes, invention, innovation and orderly corporate governance all come together with a throaty purr just like a Ferrari. As President Calvin Coolidge said “The business of America is business”.

Hollywood Provides an Analogy

So, when I had the great luck last weekend to stumble into a classic old movie starring Al Pacino called “Scent of a Woman” about a blind Army veteran who has lost his will to live, I immediately wondered whether there is an analogy?

Recall that Lt. Frank Slade hires a prep school kid, Charlie Simms, (played by Chris O’Donnell) to be his assistant on a final trip to New York City. There is a memorable scene when Frank  talks a Ferrari salesman in Manhattan into letting Frank’s assistant, Charlie, test drive the $107,000 (1992 prices) car. Charlie drives the Ferrari to a deserted part of Manhattan and then Frank takes over. He gets the car up to 70 mph and then says, “Charlie I want to feel how she corners”. Of course, he is suicidal anyway so Frank really does not care how well he executes a blind man turn in a Ferrari at 70 mph.

This is Hollywood so everything ends well with a friendly New York cop pulling Frank over for speeding. The cop never notices that Frank is blind, and the officer lets Frank off with a warning; not for driving blind but simply for excessive speed.

A Bureaucrat Test Driving Your Business

I could not pass up the opportunity to connect the dots between the Ferrari business world and the blind political class many of whom have no business experience. Someone from SEC, DOL, Justice, EEOC, EPA, and IRS is taking the keys from business owners every day. The old concept of checks and balances insured, at least in a Presidential election year, a healthy partnership between politician and business people who controlled the funding. However, in 2016 Trump bypassed the business community by financing his own primary and the Clinton Foundation supplied a “magic carpet” to the White House. Both candidates have done an end run on business. This portends an unchecked reign for the political class. Frank Slade is not giving up the wheel any time soon.

The aggressive overreach by Obama bureaucrats in all the three letter agencies is also changing accountability. “How does she corner at 70 MPH?” is not the first question you want to hear when a blind politician decides it can test drive American business.

Businessman’s Bluff

Until I read Peggy Noonan’s article last week in The WSJ “A Dramatic Lesson about Political Actors” about Borgen, a miniseries cast in Denmark, I believed that business leaders in the United States could hold the politicians in check. Borgen portrays an ambitious woman president against a business scion who threatens to move his company out of Denmark if the president does not revoke a mandate that all corporate boards have 50 % females. The Denmark president calls the business leader’s bluff because the business leader is a patriot and can’t leave the country. Likewise, US corporate leaders cannot leave the system. Where else will they go? There are no other reliable alternatives.  A number of big names have already sold out and those that resist are being targeted and punished. There is no greater proof than Goldman Sachs agreeing to become a commercial bank.

The next act will be a blind man with a comb over or a blind woman in pant suits test driving the Ferrari. It reminds me of Nancy Pelosi’s equally blind faith appeal about regulating 16% of GDP by enacting Obama Care: “We have to pass the bill so you can find out what is in it.”

I also wonder who is going to ticket our political leaders for driving blind? It certainly won’t be the FBI, or Justice. They have already shown that they can’t tell the difference between an “extreme recklessness” and a blind driver. It won’t be Jamie Dimon or Lloyd Blankenship either because their bonus pools are regulated by the Comptroller of the Currency. Maybe some ingénue like Charlie- a young man of character and integrity who has been raised like old school Americans to make tough choices and stand for something- can grab the keys to the Ferrari before some blind politico drives it into a wall?

Nope. This isn’t Hollywood. There is no happy ending and the Ferrari’s keep getting smashed until there are no more Ferrari’s. Only then will someone from the FBI notice that the politicians have been driving blind without a license.

Your Insights Are Welcome

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Please send us emails, articles, YouTube videos, tweets or even old-fashioned means of communication like voicemail’s, mail or a phone call on the topic of Private Equity For Families. All ideas are welcome.

Rob McCreary, Chairman
CapitalWorks, LLC

August 29, 2016

Rob McCrearyA Blind Man Driving a Ferrari

Private Equity Firms Seen As Broker Dealers

By Rob McCreary

A recent article in the June 30, 2016 edition of The Wall Street Journal by Norm Champ titled “An Iniquitous Raid on Private Equity” highlights the latest intrusion by the SEC on the freedom of private equity managers to arrange their relationships with their portfolio companies. In an enforcement action against a private equity firm called Blackstreet, the SEC sought restitution, interest and penalties for charging a transaction fees in connection with the buying and selling of portfolio companies. The SEC characterized part of the problem in its own press release as follows: “Blackstreet operated outside of the funds’ documents by using fund assets to make political and charitable contributions and pay entertainment expenses.” The enforcement action was settled for $3.1 million. It was not enough that Blackstreet was registered with SEC as an investment advisor under new rules spawned by Dodd Frank. The enforcement action claimed that Blackstreet had acted as a broker dealer in connection with the buying and selling of portfolio companies and as such needed to be registered with SEC as a broker dealer.

This logic is so flawed that you have to ask what is the political motivation? Did Blackstreet principals say something bad about our President? Did they contribute to conservative causes? Did they finance the Benghazi movie? One thing is for sure in Chevy Chase, these guys did not contribute to the right political party? Had they made charitable contributions to the Clinton Foundation from Fund assets we may have had a different view of entertainment expenses?

Business Model for Private Equity                                                                      

The business of private equity is buying, improving and selling its portfolio companies. The private equity firm serves as the general partner and exclusive manager of a limited partnership that owns the portfolio company.  GPs act for the passive owners who risk general liability if they engage in management activities. So the GP is really the owner’s representative and the exclusive party to exercise all of the functions of ownership including buying and selling. Under this logic a private condo developer who pays himself a commission for selling a condo unit instead of hiring a real estate broker should be a broker dealer.

Transaction Fees Are Common

Transaction fees are often assessed by a General Partner when the resources of the private equity firm are devoted to the buy or sell effort. For example, the creation, supervision and updating of a data room is often a collaboration between the managers of the portfolio company and employees of the General Partner. Depending on who does what, it may be appropriate to outsource many one-time services incident to a sale to the private equity firm rather than having a management team do it for the first time. It is not unusual for the GP to charge a fee for the avoided costs to the portfolio company. It is rare, however, for the GP to act as a financial advisor in the purchase or sale. It is a principal and a surrogate for the owner not an agent. If it is charging a transaction fee in connection with a buy or sell it would most often be in the context of providing outsourced services that are not within the expertise of the management team or the case where a preemptive, unsolicited offer is too good to pass by and an intermediary is not required.

The best example is tuck in acquisitions where the transaction was sourced by the GP and the transaction size is too small to engage an investment banker to sift through the selling memorandum, due diligence materials, legal documents, escrows and post-closing responsibilities. Most of our portfolio company managers have little or no experience with acquisitions and they completely outsource the heavy lifting to us. If we charge a transaction fee, it would usually be significantly less than an investment banker would charge for many times more work than they are trained to do. This is not a broker dealer activity but rather additional work by the GP that is an avoided cost to the portfolio company and its owners in the limited partnership.

Bad Actor Creates Bad Precedent

The fund formation documents typically permit the GP in its capacity as a fiduciary (investor interest first) to charge reasonable transactional and portfolio monitoring fees whenever it is providing outsourced services to the portfolio company that they cannot provide themselves. Those outsourced functions are numerous: treasury, corporate development (inbound and outbound), financial reorganization, financial modeling and feasibility analysis, quarterly governance preparation, litigation management, administration of escrows and post-closing working capital, exit preparedness, stock option plan administration, organizing and oversight of committees of the advisory boards, CEO performance reviews, and  hiring and supervision of recruiters for key personnel. None of these functions are broker dealer functions. I know because I worked for a broker dealer and owned a broker dealer. Broker dealers do not act as management surrogates nor do they serve as the fiduciary representatives of the limited partner owners who are prohibited from acting for themselves.

The SEC is run by a woman who understands these things. Mary Jo White is well respected for the work she did in the private sector. For 10 years, she was chair of the litigation department at Debevoise & Plimpton, whose “core practices” and expertise are focused on the success of Wall Street financial firms. The fact that Senator Elizabeth Warren thinks she is doing a lousy job is an endorsement of her leadership effectiveness. Giving her the benefit of the doubt, you must ask if something else is motivating a bad legal intrusion. The answer is found by investigating the reputation of Murry Gunty who is the general partner of Blackstreet. He was alleged to have rigged the balloting for the prestigious Harvard Business School Finance Club in his favor and might be on the SEC’s ten “most wanted” list because of subsequent ethical slips. This decision may be more about a bad man than the bad activity, but it certainly does not warrant bad legal precedent.

And there is always the most logical explanation in Washington DC- politics as usual.

Your Insights Are Welcome

Periodically we will circulate this blog to a target market that includes successful families, wealth advisors and middle market business owners.

Please send us emails, articles, YouTube videos, tweets or even old-fashioned means of communication like voicemail’s, mail or a phone call on the topic of Private Equity For Families. All ideas are welcome.

Rob McCreary, Chairman
CapitalWorks, LLC

August 11, 2016


Rob McCrearyPrivate Equity Firms Seen As Broker Dealers

Pollsters and Politics Are Great Bedfellows

By Rob McCreary

Early in my career I read great advice for surviving the world of financial prediction: “Give them a date and give them a number, but never give them both at the same time”. The profession of making business predictions is a graveyard for professionals who almost got it right.  The business world demands reliability and creates high accountability for paid prophets. Most do not survive their sophomore year.

Political Prophets Have another Standard

I simply cannot understand how the whole industry of political prediction can thrive when its recent batting average on major events like the surprise conservative victory for David Cameron in 2015, Trump 2016, Brexit 2016, Romney’s Presidential campaign in 2012, and almost all global warming predictions is hovering around the Mendoza line or what Miguel Cabrera is batting against Indians’ pitching this year, around .155. How can these highly credentialed university academics and pollsters with every resource on the planet including social media, the internet, robocalls, exit polls, snail mail and endless algorithms get it wrong so often when so much is riding on their predictions?

I can only answer that question with another three questions:

  1. Who is interpreting the prediction?
  2. Who is benefiting from the prediction?
  3. Who is paying for the prediction?

Academics and the British Tote Board

Take Brexit; The pollsters and the bookies diverged in the weeks leading up to the vote. The media was fixated on the bookies expecting that the tote board, how people are betting their money, was a better indication of the result than what people told the pollsters they were going to do. In turn, financial markets sided with the bookies and signaled ironclad confidence in a “STAY” outcome. So the capital flows measured by bookies and brokers prophesied a certainty of NO Exit. That was good enough for academic experts like Stephen Fisher and Rosalind Shorrocks from Oxford University who predicted only a 39% chance of EXIT one week before the polls and 11% as the polls closed one week later. The Washington Post in an article by Chris Hanretty on June 24 reports them being blindsided.

According to Chris Hanretty’s article “Here’s Why Pollsters and Pundits Got Brexit Wrong”, various factions saw the vote unfolding differently: “None of these methods saw a Leave outcome as the most likely outcome. Ordinary citizens came closest, putting the probability of ‘Brexit’ at 55.2 percent, closely followed by an average of polls at 55.6 percent. The least accurate forecasting method was to infer probabilities from betting markets. Fisher and Horrocks, on their morning of poll update, reported an implied probability of just 23 percent. Ninety minutes after the close of poll, this market-derived probability had fallen to just 11.3 percent.”

So the people and the pollsters said that there was a greater than 55% chance that Britain would EXIT the EU.  That needed to be re-interpreted by Oxford academics, Stephen Fisher and Rosalind Shorrocks, by divining the British tote board and the financial markets. Mr. Hanretty suggests that academic pros were relying on tracking referendum forecasts that were a special brew of people, pollsters and betting markets. Two of those three said go and only one, the bookies, said stay. The academics went with the tote board which turned out to be as accurate as my childhood Ouija Board that predicted I would be a priest.

The rest of The Washington Post article talks about the academics learning something new about campaign dynamics in referendums called “status quo reversion” which is the well supported tendency that undecided voters are more likely to choose the status quo (REMAIN) than the uncertain future (EXIT) and that was proved by the betting book and the financial markets.

Hedge Funds Probably Made a Killing

I have another suggestion for The Washington Post. The real smart guys (think George Soros) might have encouraged wholesale media endorsement of the REMAIN outcome because they had a big bet on the more likely EXIT result. Soros would believe the people and pollsters and he could easily manipulate the academics’ Ouija Board.

Think about a multi-billion hedge fund with currency trading skills that is making small, but timely and influential, bets for REMAIN on all the tote boards in London but large last minute (market timing) Exit bets in the currency markets when the odds start to become really good. The pollsters are saying EXIT, the people are saying EXIT but the betting line is 10:1 for REMAIN based on The Washington Post’s and media’s ringing endorsements (backed by Oxford Academics) of the betting markets belief in status quo reversion? Seems to me some hedge fund (think George Soros again) made a small fortune. The reason I suggest George Soros is because his voice was loudest at polling time (after he may have shorted the Sterling) about what would happen if Britain exited the EU. My explanation, while pure conjecture, is just as plausible as the “status quo reversion theory” not working in close referendums?

Support for my hedge fund theory comes from an article published by The Economist on June 24th as well. Among other things, that article investigated the composition of the Ladbrokes betting book on Brexit: How did the wisdom of crowds fail so spectacularly? One theory holds that the Brexit market was swayed by a small number of big bets by optimistic “remain” voters, who tended to be richer than those who supported “leave” (indeed, Ladbrokes, a bookmaker, has said that the majority of individual wagers were placed for “leave”). But while political-betting markets could conceivably be small enough to demonstrate such inefficiencies, currency markets most certainly are not, and they displayed the same pattern as the bookies.” Maybe “richer”, in this case means institutional money that was trying to manipulate the tote book to influence the currency markets?

Going back to pollsters and predictions and remembering my three questions, you have to be pretty skeptical about political predictions:

  1. Who is giving the prediction or interpretations of the prediction? It is usually some branch of media or independent research sponsored by some venerable institution of higher learning.
  2. Who is benefitting from the prediction? Some branch of media is usually incented to predict close elections because it leads to massive ad campaigns.
  3. Who is paying for the prediction? Usually one or more affiliates of a political organization who have commissioned a study or the media itself who simply views it as an investment in creating future ad inventory?

Based on my three questions I think the 2016 Presidential election poll right now is either 60/40 for Hillary or 60/40 for Trump, but you will not hear that from the pollsters because a dead heat (within the margin for error) encourages fundraising that buys advertising. I only wish the pollsters would call it straight and avert the pain of the endless media onslaught that will start soon.

Your Insights Are Welcome

Periodically we will circulate this blog to a target market that includes successful families, wealth advisors and middle market business owners.

Please send us emails, articles, YouTube videos, tweets or even old-fashioned means of communication like voicemail’s, mail or a phone call on the topic of Private Equity For Families. All ideas are welcome.

Rob McCreary, Chairman
CapitalWorks, LLC

July 26, 2016

Rob McCrearyPollsters and Politics Are Great Bedfellows

No Hands on the Wheel

By Rob McCreary

Coming back from Ft. Wayne Indiana last week I drove for 1 ½ hours in my Subaru Outback without touching the accelerator or brake! I actually went for almost ½ mile with no hands on the steering wheel. That experiment ended when a red warning light started to flash a message on my navigation screen, “Please Put Your Hands Back on the Steering Wheel”. This is a Subaru, not a Mercedes or Lexus. It has a vision system with two cameras located at the top of your windshield on either side of the rear-view mirror. The salesman for Subaru claims that the vision system will stop the car if a collision is imminent. So far, I have not had the guts to check that promise.

The vision system called Eyesight calibrates an assured clear distance for the speed at which you are traveling. If I set the cruise control for 65 mph and someone pulls into my lane, the car will break down to an assured clear distance until the car in front of me moves out of my way. It will then speed up to 65 mph. The vision system also keeps my car from moving out of its lane without the blinker having first been engaged. This feature is a little clunky.  If there is a curve in the road the car will lurch back toward the middle, sort of the way my daughters over steered when they had their temporary license.

The only apparent flaw in the Eyesight system is rain and snow. Moisture can block the cameras and the system will not operate. The other flaw is human override. There are times you forget you tapped the brakes which disconnects the cruise control. Those lanes get pretty hard to navigate with no hands on the wheel and no Eyesight when the system is not engaged.

The business implications of the driverless car are potentially devastating for the auto industry. Your car sits in a garage or parking lot for most of its life. If you take the cost of a car and divide it by the time you drive it versus the time you own it, the math for variable cost Uber or a car on demand is pretty compelling.

Take the case of an empty nester couple who both lease a car for 36 month that has a MSRP of $39,000, have a one hour round trip commute and drive to work and park in a garage. Assume they drive them an average of 15,000 miles each year. Assume the garage costs $100 per month. Also assume they can surrender their leased vehicle at the end of 36 months without any additional payments or credits. Assume insurance is $800 per car, the car gets 25 MPG and gas costs $2.50 per gallon. The couple gets an oil change for $40 every 3000 miles.

The leased car costs $8,248 per year and the Uber or driverless car at $0.15 per mile is $2,225 per year, entirely variable.

Here is how the leased versus driverless car might compare:

Leased Driverless
Miles 15,000 15,000
Oil Change $200 0
Insurance $800 0
Parking $1,200 0
Gas $1,500 0
Lease Cost $4,548 0
Variable Cost 0 $2,225
Total $8,248 $2,225

According to my research, the consumer price of Uber per mile is $0.12-$0.15 cents per mile depending on your city and time of day. When you consider how close we are to a driverless car, the cost per mile may only go down as you eliminate the driver.

I had never understood the disruptive effect of driverless cars until I had the Indiana driving experience. If these driverless cars can circulate without a driver and are available on demand, I may not own two cars.

Of course, when you have an athletic closet in your trunk and 75 pound chocolate lab, the driverless car is not an option. Soccer moms and multi-sport hackers like me will always default to the minivan and the SUV. However, we are likely to give up the car for commuting and that could be a big game changer for the auto industry.

Also, if you go to any car wash you realize that people love their cars and want to own great makes and models. The driverless car won’t stop auto enthusiasts or collectors. In fact, the capital freed up by the variable cost, driverless car may go for that Maserati, Ferrari or Tesla. I am looking forward to the “no hands” experience in my Maserati at full throttle in first and second gear!

Your Insights Are Welcome

Periodically we will circulate this blog to a target market that includes successful families, wealth advisors and middle market business owners.

Please send us emails, articles, YouTube videos, tweets or even old-fashioned means of communication like voicemail’s, mail or a phone call on the topic of Private Equity For Families. All ideas are welcome.

Rob McCreary, Chairman
CapitalWorks, LLC

July 15, 2016

Rob McCrearyNo Hands on the Wheel

When You Have $100 Billion in Cash You Buy LinkedIn

By Rob McCreary

I don’t get why this $26 billion deal makes sense. I guess it is like buying Facebook or You Tube but without any retail consumers. I use Twitter solely to receive business and sports information and “follow” people and organizations whose opinion I admire. I do not use Facebook because I want to be private and don’t need new friends. I love You Tube because it makes me look smart on home improvement projects like how to charge a car battery without shocking yourself or how to replace a faucet washer without stripping the reverse threading. To the contrary, I don’t use LinkedIn for anything.

Luckily, before I posted this blog I met with a young man who is looking to change his career from investment banking to private equity and he explained to me that LinkedIn is an important resource and community for younger people who are trying to create new, and utilize existing, professional networks. Other younger people in our office roll their eyes and give me that “you are a caveman” look. Our office manager suggests that this is a valuable network because it is mostly professionals who already know how to use the Microsoft suite of products and find LinkedIn a safe environment for networking without fear of commercial solicitation. Obviously, this is a generational thing and I should stick to what I know which is the analog form of networking that involved shaking hands and looking people in the eye.

According to the WSJ Microsoft’s CEO explains that the deal is “the coming together of the professional cloud and the professional network.” I am not sure what that means but the WSJ thinks it involves toggling between our productivity software and our social networks. In my case I am a pretty shabby user of productivity tools and an even dumber user of social networks but I get why using Outlook is immensely helpful. It allows me to enter addresses on the Outlook calendar that I can then click from my car during a thunderstorm to launch Google maps for my destination without much risk of running into those orange barrels that are more prevalent than locusts. It allows me to invite a group of people to a meeting and to manage changes to that meeting. Of course it allows me to send and receive email and thousands of junk mail solicitations. My new favorite feature is “clutter” where all my golf invitations go and where I can search for music, vintage wines and Russian Brides. If you want to send someone an important email that you really don’t want them to read just include some vague reference to the  things no network administrator will allow-sex, drugs and rock n roll.

Back to LinkedIn, I get friended on LinkedIn all the time even though it is not called that. I usually accept the invitation to join because it does not require me do anything. I also am rated by the people who friended me but it is amazing how little they know about what I really do because I am always getting endorsements for venture capital? In short I am not sure what to do with LinkedIn.

I also don’t understand why this database on 400 million users is really valuable. Google can take me anywhere in the world both through Google Earth and also on my calendar and it can also track me like the CIA and NSA. Twitter can give me alerts when Indians relievers give up walk off home runs and then Terry Pluto can interpret the perils of grooving a fastball at 0-2. Amazon knows that I like Asics sports shoes and will buy whenever there is free shipping. You Tube saves my marriage by empowering me to execute plumbing and electrical miracles. For me, LinkedIn lets people I already know “friend me” so I can accept and then see a list of people I don’t know who want to be linked in to me. I had not realized that this is really not about me. All this activity is really about my networks and a quick and easy way for business people who don’t know each other to connect with my validation.

Obviously I missed the $26 Billion opportunity which by all accounts is a big miss! I am also sure that toggling between productivity tools and professional networks will drive MSFT’s revenues and profits. One of my partners told me that the merger really creates a 3 dimensional customer relationship software product by cross connecting each of your Outlook contacts to their Linked In networks. Another 1+1=3 deal.

I am beginning to get it, but now better identify with my parents confusion after we all watched the Beatles on the Ed Sullivan show and two weeks later my brothers and I had wigs, guitars and knew all the lyrics to “Meet the Beatles”. Microsoft and LinkedIn are probably as compelling as the Beatles but I just don’t know it yet.

Your Insights Are Welcome

Periodically we will circulate this blog to a target market that includes successful families, wealth advisors and middle market business owners.

Please send us emails, articles, YouTube videos, tweets or even old-fashioned means of communication like voicemail’s, mail or a phone call on the topic of Private Equity For Families. All ideas are welcome.

Rob McCreary, Chairman
CapitalWorks, LLC

June 29, 2016

Rob McCrearyWhen You Have $100 Billion in Cash You Buy LinkedIn

Breaking the Sound Barrier

By Rob McCreary

The sound barrier has been broken by all the TV networks and my ears are hurting badly. It is only June 15, 2016 and the big onslaught of paid for political garbage hasn’t even started and I still feel like I fell asleep next to an amplifier at a Grateful Dead concert. The incessant screeching and screaming from the presumptive nominees and all of the cackling from self-anointed media pundits are making me crazy. I might even forgive Katy Couric’s selective interview editing because she doesn’t screech, scream or whine. I am so tone deaf I am settling for selective serenades from dopey media people with pretty vacuous smiles, soft voices and untrustworthy fact finding.

This morning I followed Joni Mitchell’s advice from her hit song “You Turn Me on like a Radio”:

If you have too many doubts
If there is no good reception for me then turn me out
Cause honey who needs the static it hurts the head
And you wind up cracking and the day goes dismal
From breakfast Barney to sign-off prayer
What a sorry face you get to wear

Instead of listening to TV to get the morning news, I just turned it off and listened to the birds. Though as the caffeine kicked in, I got edgy and I had to read “The Wall Street Journal” because Peggy Noonan’s editorials run on Fridays. No joy there because Peggy’s article was pretty shabby and every other article was a paid advertisement disguised as objective journalism, sponsored truth in 12 point bodoni type.

Because the WSJ had both bad news and an altered version of the real news I returned to the birds realizing that their morning chitter was soothing, harmonic and downright pleasing. A light bulb went on for me! I may not be the only person in America that just can’t stand the noise. TV news is finished. It does not matter whether it is free or paid, Fox or Foe. It has lost its legitimacy for the same reason that the WSJ, Google and Yahoo will eventually lose their legitimacy- it is all sponsored advertising masquerading as highbrow, elite truth.

There Is Daily truth in The Daily Mail

But there is an alternative for any of you who want to know what is happening but need a new harmonic. My daughter sent me a link for an entertaining and photogenic purveyor of daily truth from the UK called The Daily Mail. You won’t find any of the elite media vocabulary either – no daily vocab tests from “The New York Times” or “The Washington Post” asking you to “conflate opposing ideas” or “The Economist” talking about the Syrian “diaspora”. This is just junk, funk, nearly naked celebs, dethroned athletes and quite soothing daily blather from the Kardashians usually accompanied by multiple wardrobe malfunctions. This stuff is so bad there are no advertisers.

Where else can you learn that Bristol Palin played hooky to go Halibut fishing with her “baby daddy BFF”, Dakota Meyer, and the pictures are mostly 100 lb. halibut. Or that a Yellowstone tourist put a baby bison in the trunk of his car because he and his wife were trying to save it? Better yet did you know that Selma Hayek was nervous about meeting the Pope so soon after she was posted on Instagram admiring Susan Sarandon’s cleavage? This is just the kind of news I need with my Raisin Bran in the morning. It goes well with the bird songs and will make me better understand most of Trump’s admirers who click here for their social and political insight. Its international readership probably includes members of the Hillary Nation who are blackmailing her with Benghazi emails they stole from her server as well as loyal donors to the “Foundation” trying to buy a night at The White House. I had to dig deep in The Daily Mail, however, to find anything about Bernie Sanders’ followers. Luckily, it came late in the publication where Elon Musk is quoted as saying we are probably living a simulated computer game designed by aliens and run the risk of becoming like pets or house cats.

Now that is something we can all conflate. There is daily truth in The Daily Mail!

Your Insights Are Welcome

Periodically we will circulate this blog to a target market that includes successful families, wealth advisors and middle market business owners.

Please send us emails, articles, YouTube videos, tweets or even old-fashioned means of communication like voicemail’s, mail or a phone call on the topic of Private Equity For Families. All ideas are welcome.

Rob McCreary, Chairman
CapitalWorks, LLC

June 15, 2016

Rob McCrearyBreaking the Sound Barrier

Saudi Wins the Game of Oil Chicken

By Rob McCreary

Daniel Yergin is to oil what Seth Klarman is to stock Picking. I hold each of them in high esteem for being experts in their respective worlds. Mr. Yergin is a Pulitzer Prize winning author for his history of the petroleum industry from 1850 through 1990. Reviews call his book “The Prize” a “bible” and the definitive history of the oil industry. Mr. Yergin did a follow up in 2011 call “The Quest”. Having learned most of my oil facts from Jed Clampett on the Beverly Hillbillies and JR Ewing on Dallas, I found “The Quest” to be almost as entertaining as watching Elly May Clampett “rassle” with brother Jethro.

When Mr. Jergin’s name recently appeared in the Heard on the Street section of the Wall Street Journal, I immediately clicked on the story. Mr. Yergin says it is still all about Saudi Arabia. Given that one out of eight barrels of oil are pumped from the Kingdom, the battle for market share (with a currency war as the side show) was definitely won by Deputy Crown prince Mohammed bin Salman, grandson of the country’s founder. The precipitous drop in oil to a market clearing price of $26 a barrel in February spooked investors and lenders, put a halt to new investment and shut down marginal producers. Mr. Yergin cites his own company statistics that show 2015 to be the lowest investment year for oil since 1952. Mr. Yergin sees the current mid $40 price as a signal that the market is turning. However, he is quick to caution that production still exceeds demand and there are still big surpluses in oil inventories. He believes that by 2020 demand for crude will exceed current supply by more than 5 million barrels a day. The winners from this predicted change will be the nimble and low cost producers whom he identifies as Saudi, the Middle East and new shale production.

Unlike prior episodes of Oil Chicken, Saudi is determined to diversify away from oil as its only resource. It is intending to develop a massive sovereign wealth fund to reenergize an economy with 11% unemployment, principally among young people who may be swayed by jihadist sentiment. Saudi recently announced a $3.5 Billion investment in Uber. It also plans to continue investing in the world’s third largest military. As a financier and a geopolitical force, the new Saudi will be reinvented. The IPO of Saudi Aramco will be a signature statement.

The only exogenous variable in the playbook is the U.S. Dollar. Right now a strong dollar challenges a $50 target. Recently the U.S. Dollar weakened with a great benefit to the price of oil. With the rest of the world’s monetary policy faltering around the negative interest rate stimulus and the spotlight on a China recovery that may be sputtering, the U.S. Dollar may reverse its trend and strengthen.

While I cannot understand why $30/BBL oil isn’t better for the citizens of the world than $50/BBL I do understand that business interests and oil producing countries need petrodollars to pay off leverage. I also understand that since oil is priced in US Dollars the prosperity equation is often in disequilibrium. We need a strong US economy for jobs at home but a relatively weaker currency for exports. We need a high oil price for those leveraged producers teetering on bankruptcy but we need a low pump price for consumers. I guess Saudi will end the debate with its decision on production. As the low cost producer it can pretty much set its own funding plan for the planned sovereign wealth fund and the IPO of Aramco. It is so interesting to see other nations play Chicken with the U.S. and win. Saudi joins a long list of emboldened competitors including ISIS, Putin, Kim Jong UN, the Taliban and Al Qaeda all of whom have flourished as America becomes less exceptional in the eyes of its ruling class.

Your Insights Are Welcome

Periodically we will circulate this blog to a target market that includes successful families, wealth advisors and middle market business owners.

Please send us emails, articles, YouTube videos, tweets or even old-fashioned means of communication like voicemail’s, mail or a phone call on the topic of Private Equity For Families. All ideas are welcome.

Rob McCreary, Chairman
CapitalWorks, LLC

June 7, 2016

Rob McCrearySaudi Wins the Game of Oil Chicken

Private Equity Still on Top

By Rob McCreary

We recently received a Private Equity factsheet from Preqin. Founded in 2003 Preqin has become a trusted source of information about alternative asset strategies like private equity, venture capital, real estate, hedge funds and mezzanine funds. Many alternative asset managers share their performance statistics with Preqin and we are always interested in the trends they are observing. Preqin’s Private Equity Online features extensive information on the buyout industry, including over 3,800 funds, 3,100 fund managers, 49,000 deals, 21,100 exits and much more.

Their latest factsheet shows an interesting scorecard for alternative assets compared to the S&P500. For the period January 1, 2001 to December 31, 2014 only Preqin’s Venture Capital Index underperformed the S&P500 and Fund of Funds appear to be highly correlated to that public index. Buy outs, Distressed Private Equity and Real Estate dramatically outperformed the S&P over that 14 year period.

Escalating Exit Values Drive Investment Returns

Starting in 2010 there is remarkable consistency in the average number of global buy out deals (1000) but the value of those deals has risen from $50 billion to almost $140 billion in 2014. Preqin does not report the median exit values so the 2014 results may be skewed by large PE backed acquisitions. For example in 2015 PE backed Dell’s purchase of EMC alone was $67Billion.

Fundraising was quite active and dry powder reported by the top 10 US and UK buyout firms exceeded $120 Billion. That equates to almost $750 Billion of buying power overhanging the M&A marketplace just from the 10 biggest players. With all of this capital chasing a pretty static number of available properties it is not surprising that the deal values are going up and reported returns are sliding. The 1 year returns (horizon IRR) for the period June 2014-June 2015 for Buyout Strategies has fallen to a little more than 16% versus ten year horizon returns that are slightly greater than 18%. During the ten year period venture capital has a superior one year horizon IRR of more than 20% whereas over the longer ten year horizon the VC returns have barely exceeded 5%. The message for anyone who is paying attention—now is the time to be a seller even in an embattled asset class like venture capital.

The exit statistics confirm the sellers’ market. In 2009 there were about 700 exits with an average exit value of approximately $175 billion of which slightly more than 200 were either restructurings or IPOs. In 2014 (a peak) there were almost 1800 exits with an average exit value of $450 billion. Only 380 of those exits were IPOs or restructurings. The trend line for exits through the public markets is falling just like the statistics for initial public offerings of all varieties. The M&A market is the preferred liquidity path for private equity sponsors.

Smart Money Is Clamoring For Private Equity

The Preqin report also confirms most of the trends we are seeing. The unwritten story may be that investment returns from later vintage funds (2014 and 2015) may dramatically undershoot the most recent horizon returns of slightly more than 16% simply because entrance prices keep going up and the exit prices appear to have peaked. Meanwhile unit growth is challenged in almost all corners of GDP. Even interest rates are threatening to break out of the basement and an indebted America portends increasing taxes. The PE business model has benefitted from all of these variables playing in almost perfect harmony over the last 10 years.

Despite the headwinds and cautions, private equity is the place all the smart money is going. Maybe it is because it is the only asset class where there is any chance of long terms returns above 10%. That actuarial result is imperative for underfunded pension funds who have constructed benefit assumptions around historical returns of 6-8%. One of the risks for the PE asset class, especially larger pools, is inability to put money to work at attractive returns. Success in fundraising may be perverse. However, niche strategies and focus on inefficient pockets like the lower middle market may still provide IRRs in excess of 20%. A larger challenge is the taxation of carried interests. Both of the presumptive candidates would end the favorable capital gains treatment in which case you may see early retirements and other leadership defections in this great asset class.

In the meantime if you have been prescient and have invested in the private equity class, take a moment to savor a job well done.

Your Insights Are Welcome

Periodically we will circulate this blog to a target market that includes successful families, wealth advisors and middle market business owners.

Please send us emails, articles, YouTube videos, tweets or even old-fashioned means of communication like voicemail’s, mail or a phone call on the topic of Private Equity For Families. All ideas are welcome.

Rob McCreary, Chairman
CapitalWorks, LLC

May 26, 2016

Rob McCrearyPrivate Equity Still on Top

New Broker Rules May Affect Capital Markets

By Rob McCreary

I am sure the Department of Labor did not intend to benefit private equity sponsors when it announced it’s new “stockbrokers are fiduciaries” program. The fall out may already be starting, I was surprised to learn that JP Morgan will not allow its brokers to solicit trades in “non-investment grade” issuers. I really was shocked by this policy and its ramifications for the whole swath of the capital markets that deal with non-investment grade issuers. Does this mean brokerage firms have decided that they cannot meet the fiduciary standard if they are soliciting trades in smaller, more risky companies? Does this policy apply to debt and equity securities? Does it apply to initial public offerings which by the nature of the offering are mostly smaller, riskier issuers? Will brokers set trading limits based on float to meet a fiduciary standard? Does hasty rule making challenge the U.S. Stock and Bond markets by equating the fiduciary standard with the investment rating of the securities? Maybe I have been asleep and these policies have always been in effect and have nothing to do with new fiduciary standards? Maybe Thomas Perez has leaked the playbook to big brokerage so they can get ahead of his rulemaking which is just now going into effect?

All I know is that the capital markets have not been receptive to initial public offerings for a long time. The Chairman of one of our portfolio companies sent me this recent snapshot of the IPO scene:

Krispy Kreme and Keurig follow a growing number of companies going private to shield themselves from public company regulations and shareholder groups’ competing goals, in an effort to focus on the health of the enterprise. Data from Weild & Co. show that the number of public companies trading on the exchanges has decreased by 35 percent over the past 20 years, the New York Times reported last year. Due to global economic volatility and poor initial public offering (IPO) performance, more companies are also forgoing an IPO in favor of being bought by competitors or interested investment firms. The dollar volume of IPOs decreased 63 percent from 2014 to 2015 as the volume of mergers and acquisitions has increased by 46 percent.

Source: NACD Weekend Reader

American Business and Capitalism Are powered By Self Interest

In my experience in the brokerage business the old adage, “stocks are sold, not bought”, is almost universally true. Self-interest propels the brokerage industry to generate investment ideas for its retail customers because commissions are usually a reward. However, the retail customer benefits from institutional quality research from firms like Goldman Sachs and JP Morgan even if the stock broker is serving them up with a commission. If you dictate a fiduciary standard that only allows brokerage idea generation to focus on the largest companies, we may all find that the NASDAQ and AMEX have shrinking liquidity and relevance. It is not inconceivable that many discount brokers who thrive from retail customers will go out of business. If most below investment grade issuers are too risky for retail, what will it mean for employment and sustainability in the small end of the brokerage industry? I also wonder what it will mean for the NASDAQ and the AMEX.

You Can Crowdfund But You Can’t Solicit?

It is ironic that crowdfunding rules for early stage, pre-revenue business ideas have virtually no boundaries anymore while established companies trading on vibrant exchanges are experiencing the wrath of wanton rule makers. I guess it is ok for a retail investor to lose all his money on crowdfundings for a startup but a stock broker cannot solicit a trade in below investment grade issuers. So Tesla ( NADAQ:TSLA) with a S&P rating of B- might be off limits for broker solicitation, but Elio Motors (3 wheeler with promised 84mpg but no products and no production) can solicit non-accredited investors and raise $25.0+ million in a series of crowdfunding’s. Tesla has a $27 billion market cap! This seems a little absurd but the laws of unintended consequences produce goofy results, especially when they are concocted by rule makers who do not believe in American exceptionalism and likely do not know the US capital markets are the envy of the world.

Big Brokerage Is Now Big Banks

One reason you may not have heard a hue and cry from the big brokers is self-interest. The “too big to fail group” are all banks now and they will get all the business they want, directly or indirectly, when the little guys fail. Instead of having to compete with low commissions, you will now get a 1% wrap fee with Goldman, JP Morgan or Wells Fargo.

This is a great boom for private equity because small issuers may not have an alternative liquidity path through the capital markets. Right now the M&A market works much like a mini NASDAQ with thousands of investment bankers acting as market makers soliciting capital from institutionally funded private equity and mezzanine capital firms to provide complete liquidity in change of control transactions for private companies. If it does not want to give up control,   a private company can always consider going public as an alternative. Given the proctologic experience imposed by Dodd Frank and Sarbanes Oxley that choice right now is skewed toward the M&A markets. The fiduciary standard might be the last nail. The Department of Labor may have succeeded in permanently stifling capital formation at the small end of the capital markets for big employers while the SEC is encouraging it for companies that don’t even have employees.

This is the kind of nonsense you find when the people in charge are more concerned about votes than voters.

Your Insights Are Welcome

Periodically we will circulate this blog to a target market that includes successful families, wealth advisors and middle market business owners.

Please send us emails, articles, YouTube videos, tweets or even old-fashioned means of communication like voicemail’s, mail or a phone call on the topic of Private Equity For Families. All ideas are welcome.

Rob McCreary, Chairman
CapitalWorks, LLC

May 16, 2016


Rob McCrearyNew Broker Rules May Affect Capital Markets

Bring Common Sense Back To Business Regulation

By Rob McCreary

We had lunch with the Chairman of one of our portfolio companies last week. He is a successful entrepreneur who owns and operates several businesses. By his own admission he loves business. However all the capitalists at the table agreed that the slow death by a thousand cuts of governmental regulation and red tape is making the experience less joyful every day.

He had two great ideas. The first was to tie minimum wage increases to age of employee. Entry level workers get a smaller paycheck because they are younger and less experienced. You get young people in the game and they then begin to understand payroll taxes and the cost of being governed. You also take them off the street and put them in the path of business opportunity. We agreed that some of the smartest and most successful people we know never went to college, or if they did, went to a college we never heard of.

His second idea was even better. Why not suspend all regulation of a new business for the first 12 months of a startup. The statistics shows that a large percentage of these businesses fail so why tie them up them with the regulatory straight jacket? Give them the chance to make it without the cost and aggravation of filings, formation fees and expenses, insurance, regulatory compliance and all taxes other than payroll. If they fail, at least they did not have to spend time and money on infrastructure they then no longer need? If they succeed for 12 months, they graduate to the real business world. Let business people devise the program so cheaters, opportunists and lobbyists cannot game the system.

Both of these ideas came from the trenches. You have to have business experience to understand how to balance regulation with prosperity and few of our elected officials have any business experience. As a consequence you get well-intentioned, but poorly devised, programs like the proposed minimum wage changes, classification of employees, making stockbrokers fiduciaries and universal healthcare.

We all agreed that getting young people to test drive capitalism is important. You can’t expect them to enjoy the ride if first you bury them with a 200 page driver’s manual and a series of driver tests. Take the regulations off. Stop protecting votes rather than voters. Have common sense business leaders teach capitalism before we capitulate to the dark forces of collectivism.

Fear the Bern!

Your Insights Are Welcome

Periodically we will circulate this blog to a target market that includes successful families, wealth advisors and middle market business owners.

Please send us emails, articles, YouTube videos, tweets or even old-fashioned means of communication like voicemail’s, mail or a phone call on the topic of Private Equity For Families. All ideas are welcome.

Rob McCreary, Chairman
CapitalWorks, LLC

May 9, 2016

Rob McCrearyBring Common Sense Back To Business Regulation