private equity – Alex Burns

January 6, 2018January 6, 2018

RentierCap

I’ve started a model portfolio that I will watch as 2018 unfolds:

AUMF – IShares Edge MSCI Australia Multifactor ETF (factsheet).
BAF – Blue Sky Alternatives Access Fund (shareholder site).
BLA – Blue Sky Alternative Investments Limited (shareholder site).
IHVV – IShares S&P 500 AUD Hedged ETF (factsheet).
IHWL – IShares Core MSCI World All Cap (AUD Hedged) ETF (factsheet).

The initial impetus for this emerged from reading S.M. Amadae, David Graeber, David Harvey, Michael Hudson, David Michael Kotz, Philip Mirowski, and James Rickards about neoliberal capitalism. These authors converged on the FIRE sector (finance, insurance, and real estate) as a socio-economic elite that would continue to charge debt and economic rents, as rentiers.

Current and former colleagues have looked to innovations like the sharing economy as a way to deal with growing economic inequality. I came to different conclusions: I spent six years learning how hedge funds and proprietary trading works. The topics ranged from macro plays (Kondratieff winter) and fund flows (Richard D. Wyckoff’s influence on technical analysis) to using global markets to hedge against home bias, and the success of momentum-value combined strategies.

I’ve dubbed the model portfolio RentierCap as it benefits from the FIRE sector. The model portfolio aims to accumulate wealth over a longer period of time than a catalyst-based intraday strategy. It uses Smart Beta and Exchange Traded Funds. I’ve selected BlackRock ETFs (in a nod to the Adam Curtis documentary HyperNormalisation), although State Street SPDRs and Vanguard ETFs could be used, and may have lower expense ratios and management fees.

December 26, 2014

Active Management Reading List

Asset Management

Asset Management: A Systematic Approach to Factor Investing by Andrew Ang (New York: Oxford University Press, 2014). Presents an asset management model including factor risk premiums for different asset classes.

Expected Returns: An Investor’s Guide to Harvesting Market Rewards by Antti Ilmanen (Hoboken, NJ: John Wiley & Sons, 2011). The return drivers of the major asset classes.

Funds: Private Equity, Hedge, and All Core Structures by Matthew Hudson (Hoboken, NJ: John Wiley & Sons, 2014). The types and structures of major investment funds.

Manias, Panics and Crashes: A History of Financial Crises (6^th edition) by Charles P. Kindleberger and Robert Z. Aliber (New York: Palgrave Macmillan, 2011). The historical lessons and structure of speculative bubbles.

Hedge Funds

The Alpha Masters: Unlocking the Genius of the World’s Top Hedge Funds by Maneet Ahuja (Hoboken, NJ: John Wiley & Sons, 2012). Profiles of activist and global macro hedge fund managers.

The Big Short: Inside the Doomsday Machine by Michael Lewis (New York: W.W. Norton & Company, 2010). How hedge fund managers extracted alpha from the 2007-09 global financial crisis.

The Billionaire’s Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund by Anita Raghavan (New York: Business Plus, 2013). Hedge fund manager Raj Rajaratnam and the demise of the Galleon hedge fund.

Confidence Game: How A Hedge Fund Manager Called Wall Street’s Bluff by Christine S. Richard (Hoboken, NJ: John Wiley & Sons, 2010). Hedge fund manager Bill Ackman and the MBIA fraud investigation.

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Perdersen (Princeton, NJ: Princeton University Press, 2015). Presents a framework for how hedge funds extract alpha (excess returns above a benchmark) using active management.

Fooling Some of the People All of the Time (rev. edition) by David Einhorn (Hoboken, NJ: John Wiley & Sons, 2010). The fallout from hedge fund manager Einhorn’s decision to ‘short’ Allied Capital.

The Fundamentals of Hedge Fund Management: How to Successfully Launch and Operate a Hedge Fund (2^nd edition) by Daniel A. Strachman (Hoboken, NJ: John Wiley & Sons, 2012). The operational structure of hedge funds.

Hedge Fund Market Wizards: How Winning Traders Win by Jack D. Schwager (Hoboken, NJ: John Wiley & Sons, 2012). Interviews with successful hedge fund managers and traders.

Hedge Fund Masters: How Top Hedge Fund Traders Set Goals, Overcome Barriers, and Achieve Peak Performance by Ari Kiev (Hoboken, NJ: John Wiley & Sons, 2005). The performance psychology of hedge fund traders.

Hedge Funds: An Analytic Perspective by Andrew W. Lo (New Haven, CT: Princeton University Press, 2010). A quantitative finance model of how hedge funds work.

Hedge Hogs: The Cowboy Traders Behind Wall Street’s Largest Hedge Fund Disaster by Barbara T. Dreyfuss (New York: Random House, 2013). The demise of the Amaranth hedge fund.

Inside The House of Money: Top Hedge Fund Traders on Profiting in the Global Markets (rev. edition) by Steven Drobny (Hoboken, NJ: John Wiley & Sons, 2009). How hedge fund traders profited during the 2003-08 speculative bubble.

Investment Strategies of Hedge Funds by Filippo Stefanini (Hoboken, NJ: John Wiley & Sons, 2006). Common investment strategies of major hedge funds.

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money by Steven Drobny (Hoboken, NJ: John Wiley & Sons, 2011). How hedge fund traders risk hedged the 2007-09 global financial crisis.

The Little Book of Hedge Funds: What You Need to Know About Hedge Funds but the Managers Won’t Tell You by Anthony Scaramucci (Hoboken, NJ: John Wiley & Sons, 2012). An introduction by a hedge fund manager to hedge funds as an active management vehicle to extract alpha from financial markets.

More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby (New York: The Penguin Press, 2010). The history of hedge funds as an active management structure and biographies of hedge fund managers.

Risk Management in Trading: Techniques to Drive Profitability of Hedge Funds and Trading Desks by Davis W. Edwards (Hoboken, NJ: John Wiley & Sons, 2014). Risk management strategies used by major banks and hedge funds.

Trade Like a Hedge Fund: 20 Successful Uncorrelated Strategies & Techniques to Winning Profits by James Altucher (Hoboken, NJ: John Wiley & Sons, 2004). The strategies and techniques that Altucher developed whilst trading for Victor Niederhoffer.

Visual Guide to Hedge Funds by Richard C. Wilson (Hoboken, NJ: John Wiley & Sons, 2014). An introduction to hedge funds as an active management vehicle.

When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein (New York: Random House, 2001). The demise of the hedge fund Long-Term Capital Management.

Private Equity

Barbarians At The Gate: The Fall of RJR Nabisco by Bryan Burrough and John Helyar (New York: HarperBusiness, 2008). The market for corporate control of RJR Nabisco and the takeover’s ‘winners curse’.

The Fissured Workplace: Why Work Became So Bad For So Many and What Can Be Done to Improve It (Boston, MA: Harvard University Press, 2014). A labour / union critique of the asset management / private equity model and its impact on workers.

The Masters of Private Equity and Venture Capital: Management Lessons from the Pioneers of Private Investing by Robert A. Finkel with David Greising (New York: McGraw-Hill, 2010). Anecdotes about private equity and venture capital deals.

Private Equity: Fund Types, Risks and Returns, and Regulation edited by Douglas Cumming (Hoboken, NJ: John Wiley & Sons, 2010). Private equity’s investment fund and legal structure as a form of active management.

Private Equity At Work: When Wall Street Manages Main Street by Eileen Appellbaum and Rosemary Batt (New York: Russell Sage Foundation, 2014). Presents a justification for and evaluation of private equity as a form of active management.

The Private Equity Edge by Arthur B. Laffer, William J. Hass and Shepherd G. Pryor IV (New York: McGraw-Hill, 2009). A justification for private equity as a form of experimental innovation.

Private Equity Operational Due Diligence: Tools to Evaluate Liquidity, Valuation, and Documentation by Jason Scharfman (Hoboken, NJ: John Wiley & Sons, 2012). Presents a framework for operational due diligence of private equity as active management.

Private Equity Unchained: Strategy Insights for the Institutional Investor by Thomas Meyer (New York: Palgrave Macmillan, 2014). Presents a strategic model for private equity as arbitrage.

Sovereign Wealth Funds

Sovereign Wealth Funds: Legitimacy, Governance and Global Power by Gordon L. Clark, Adam D. Dixon, and Ashby H.B. Monk (Princeton, NJ: Princeton University Press, 2013). The fund structure and investment strategies of sovereign wealth funds.

Value Creation

The Alchemy of Finance: Reading the Mind of the Market by George Soros (New York: Simon & Schuster, 1987). Presents Soros’ theory of reflexivity about financial markets, influenced by philosopher Karl Popper.

Antifragile: Things That Gain From Disorder by Nassim Nicholas Taleb (New York: Random House, 2012). An optionality-based philosophy of how to actively deal with luck, risk, and uncertainty.

Den of Thieves by James B. Stewart (New York: Touchstone, 1992). How financier Michael Milken helped to create the high yield bond / junk bond trade and caused the downfall of Drexel Burnham Lambert.

Learn Or Die: Using Science to Build a Leading-Edge Learning Organization by Edward D. Hess (New York: Columbia University Press, 2014). How the hedge fund Bridgewater creates a Radical Transparency culture for value creation.

Moneyball: The Art of Winning an Unfair Game by Michael Lewis (New York: W.W. Norton & Company, 2003). How baseball coach Billy Beane used Bill James’ sabermetrics – the statistical study of baseball performance – to transform the Oakland A’s team.

More Than You Know: Finding Financial Wisdom In Unconventional Places (rev. edition) by Michael J. Mauboussin (New York: Columbia University Press, 2008). How to find and extract alpha from financial markets using lessons from psychology and science.

The Nature of Value: How to Invest in an Adaptive Economy by Nick Gogerty (New York: Columbia University Press, 2014). Presents a value creation model used by the hedge fund Bridgewater.

Plutocrats: The Rise of the Global Rich and the Fall of Everyone Else by Chrystia Freeland (New York: The Free Press, 2012). The geopolitical worldview of contemporary business and financial elites.

The Predators’ Ball: The Inside Story of Drexel Burnham and the Rise of the Junk Bond Traders by Connie Bruck (New York: Penguin Books, 1989). How financier Michael Milken’s deal flow enabled him to take control of Drexel Burnham Lambert.

Putin’s Kleptocracy: Who Owns Russia? by Karen Dawisha (New York: Simon & Schuster, 2014). How Putin’s regime in Russia dealt with the oligarchs, and engaged in institutional capture and value appropriation of Russian state assets for private gain.

The Snowball: Warren Buffet and the Business of Life by Alice Schroeder (New York: Bantam Books, 2008). The authorised biography of value investor Warren Buffett.

Security Analysis (6^th edition) by Benjamin Graham and David Dodd (New York: McGraw-Hill, 2008). The influential primer on value investing.

Steve Jobs by Walter Isaacson (New York: Simon & Schuster, 2011). The authorised biography of Apple’s co-founder Steve Jobs.

Why Moats Matter: The Morningstar Approach to Stock Investing by Heather Brilliant and Elizabeth Collins (Hoboken, NJ: John Wiley & Sons, 2014). Morningstar’s ‘economic moats’ framework for value creation.

Venture Capital

The Business of Venture Capital: Insights from Leading Practitioners on the Art of Raising a Fund, Deal Structuring, Value Creation, and Exit Strategies (2^nd edition) by Mahendra Ramsinghani (Hoboken, NJ: John Wiley & Sons, 2014). Interviews with venture capital practitioners on deals and term sheets.

Deal Terms: The Finer Points of Venture Capital Deal Structures, Valuations, Term Sheets, Stock Options, and Getting Deals Done by Alex Wilmerding (Eagan, MN: Thomson Reuters / Aspatore, 2005). Term sheets, deal structures, raising capital, and legal structures for private equity and venture capital deals.

Term Sheets & Valuations: A Line by Line Look at the Intricacies of Term Sheets & Valuations by Alex Wilmerding (Eagan, MN: Thomson Reuters / Aspatore, 2006).

Venture Capital: Investment Strategies, Structures, and Policies edited by Douglas Cumming (Hoboken, NJ: John Wiley & Sons, 2010). Venture capital’s investment fund and legal structure as a form of active management.

Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist (2^nd edition) by Brad Feld and Jason Mendelson (Hoboken, NJ: John Wiley & Sons, 2012). The legal structure and term sheets for venture capital deals.

Zero to One: Notes on Startups, or How to Build the Future by Peter Thiel with Blake Masters (London: Virgin Books, 2014). The PayPal co-founder and Facebook / SpaceX investor presents a venture capital model of value creation.

January 12, 2013January 12, 2013

12th January 2013: Killed By Death

Vanity Fair‘s Rich Cohen gives some family estate planning advice about United States billionaire and private equity maven Teddy Forstmann:

In the months following his death, his art collection was sold at Sotheby’s, bringing in $83 million. His Manhattan penthouse was sold in June 2012 for $40 million. The house on Meadow Lane in Southampton is on the market for $31 million. It seems as if little he collected has been preserved, but has instead been broken up and sold. Teddy, at least in part, measured his success in dollars: he was forever in search of a higher percentage, a bigger return. That was the game, how he kept score. If you judge by how big and how much, then, in the end, no matter your charity or causes, that’s what you’ll become in the minds of other people. Teddy was one of the richest men in the country, with his paintings, his mansion, his helicopter and plane. And when he died, that’s what remained: the fortune and the estate. If you are money, then, when you die, you will be spent.

You might start with Gregory Curtis’s book The Stewardship of Wealth (New York: John Wiley & Sons, 2012) for estate planning and inter-generational wealth transfer.

August 24, 2012December 26, 2012

24th August 2012: Gawker’s Bain Files

Nick Denton’s Gawker site has released 950 pages of documentation on Mitt Romney’s Cayman Islands private equity and hedge fund investments. Henry Blodget’s BusinessInsider is skeptical, but this cache could keep me busy for months. Dangerous Minds‘ Richard Metzger sums up how I feel: “The idea that these documents are, currently, as I type this, being analyzed by crowd-sourcing is either a fortunate or very unfortunate fact of political life in 2012!” Vanity Fair‘s Nicholas Shaxson has a useful backgrounder on why hedge funds use the Cayman Islands domicile for offshore tax minimisation.

July 17, 2012December 26, 2012

17th July 2012: Mitt Romney’s Tax Returns

Mitt Romney refuses to release his past tax returns.

The issue coverage from John Cassidy, Willian D. Cohan, James Fallows, and Dan Shaviro on Romney’s tenure at Bain Capital and what the returns might reveal is a lesson in capital gains tax arbitrage.

March 24, 2012December 26, 2012

24th March 2012: European Commission Antitrust Investigation on EMI

I’m working on an academic journal article about Terra Firma‘s unsuccessful private equity acquisition of EMI. Terra Firma defaulted to Citigroup, which agreed to sell EMI’s record labels in November 2011 to Universal Music Group (Vivendi SA) and EMI’s publishing to a Sony-led consortium. Now, the European Commission will investigate Universal’s acquisition for antitrust implications, given the planned market size of the combined group. Vivendi SA’s shares traded sideways in a choppy market on Friday, 23rd March 2012, possibly in relation to the antitrust announcement and the possibility of regulatory arbitrage on the Universal-EMI deal.

February 25, 2012June 28, 2012

25th February 2012: Mailroom Jobs & Superstar Economics

The Operator: David Geffen Builds, Buys and Sells the New Hollywood (2000)

For the past week I’ve been writing about academic entrepreneurs and superstar economics. Now, NPR’s Adam Davidson has a great New York Times article on why many careers are becoming lotteries in which a small group has a ‘winner-takes-all’ or ‘success to the successful‘ dynamic and others can miss out. Davidson’s key insight:

Hollywood is, in some ways, the model lottery industry. For most companies in the business, it doesn’t make economic sense to, as Google does, put promising young applicants through a series of tests and then hire only the small number who pass. Instead, it’s cheaper for talent agencies and studios to hire a lot of young workers and run them through a few years of low-paying drudgery. (Actors are another story altogether. Many never get steady jobs in the first place.) This occupational centrifuge allows workers to effectively sort themselves out based on skill and drive. Over time, some will lose their commitment; others will realize that they don’t have the right talent set; others will find that they’re better at something else. [emphasis added]

Davidson’s thesis is that this “economic lottery system” pushes talent to the top. He cites Hollywood actors and directors, and Big Four accountants who survive the ‘up or out’ system to make partner (William D. Cohan has interviewed the Wall Street losers). Davidson connects tournament theory — the study of individuals who have relative advantages in salary and wage negotiations — to disruptive innovation (PDF), globalisation, technology and other mega-trends that are creating a ‘race to the bottom’ dynamic. How can individuals cope with these changes? “In a lottery-based economy, you need some luck, too; now, perhaps, more than ever,” Davidson advises. “People should be prepared to enter a few different lotteries, because the new Plan B is just going to be another long shot in a different field.”

For Davidson the “economic lottery system” model is the New Hollywood. The reality is a little more complex. Classical Hollywood’s studio production system flourished from the 1930s until the ‘go go’ Sixties when the modern conglomerates collapsed. For a brief period from 1968-73, independent producers flourished before the studios fought back with the blockbuster film, new marketing, distribution, and control of ancillary revenue streams. A similar pattern occurred in the 1995-2000 dotcom period (PDF) in Los Angeles, New York, Austin, and London. Ben Eltham and I found in a 2010 academic paper that Australia’s film industry fluctuated depending on a mixture of Australian Government intervention, available labour, and international tax arbitrage. Eltham and I both read Nikki Finke’s influential blog Deadline Hollywood.

History also differs on the New Hollywood exemplars that Davidson selects. “Barry Diller and David Geffen each started his career in the William Morris mailroom,” Davidson observes. Tom King’s biography The Operator: David Geffen Builds, Buys, and Sells the New Hollywood (New York: Random House, 2000) details what actually happened over this six month period in late 1964-early 1965 before Geffen became secretary to television agent Ben Griefer (pp. 46-52). Geffen lied to WM’s Howard Portnoy that he was Phil Spector’s cousin. Geffen lied about having a college education and persuaded his brother Mitchell to write a letter and cover this up. When they met, Diller “thought Geffen was a rather odd duck for using his vacation time to work in the company’s other office” (p. 50). Geffen networked with agent Herb Gart, “stalked” New York office head Nat Lefkowitz, and got his break from Scott Shukat. Geffen relied on chutzpah, hard work, networking, and having a career goal: “signing actors.” No wonder that Geffen hated King’s biography.

These qualities are essential to Davidson’s “occupational centrifuge.” When academics ask me about their Dean’s budget and resource allocative controls, and why universities are now like Davidson’s “economic lottery system”, I suggest they invest time in watching the film Moneyball (a film in part about tournament theory), and understanding the performance and value creation goals of private equity firms (the mental model of consultants who possibly advise the Dean).

I haven’t finished the academic journal articles on those ideas yet . . .

December 23, 2011

23rd December 2011: Holiday Reading

My holiday reading for late December 2011 and the first week of January 2012:

1. George F. Kennan: An American Life by John Lewis Gaddis (New York: The Penguin Press, 2011). I’ll need a few weeks to get through this masterful biography of the foreign affairs maven who conceived of Cold War containment. It took Gaddis almost 30 years to research and write this authorised book, based on archives and extensive interviews.

2. A bunch of private equity books for a planned journal article on the EMI-Terra Firma Capital Partners deal.

3. Aum Shinrikyo chapter notes for the PhD — hope to have a draft for the PhD committee by mid January.

4. Nancy Duarte’s Slide:ology (Sebastopol, CA: O’Reilly Publishers, 2008) for a new project.

May 20, 2010August 13, 2010

20th May 2010: On Michael Milken

In November 2009, the Australian cultural policy author Ben Eltham and I published a conference paper and presentation on Twitter’s role in Iran’s 2009 election crisis. One of our conclusions was that as a social network platform Twitter can be prone to rumours and two dynamics: information cascades (people making the same choices) and rational herds (a form of social learning in which individuals self-organise into groups, usually on the basis of shared affinities, identity or preferences). We cited Christopher Chamley and Mark Schindler‘s work, whilst Cass Sunstein has written important work on how information cascades and rumours spread.

Collectively, these authors observe the tendency for people to forward and filter information without checking the pertinent facts, evaluating the motives of their source, personalising the ‘other’, and also not considering the original, appropriate context.

One of the best examples of this phenomenon is the pre-Twitter career of financier and philanthropist Michael Milken (personal site). In the early 1970s, as a young analyst at the leveraged buyout firm Drexel Burnham Lambert, Milken foresaw a new market in high-risk securities that blue-chip investment firms would not touch: high-yield or ‘junk’ bonds of debt-laden companies. As depicted in Connie Bruck’s excellent book The Predator’s Ball (New York: Penguin Books, 1989), a source for Adam Curtis‘ must-see documentary The Mayfair Set (BBC, 1999), Milken became a major driver of the 1980s private equity boom. Despite being implicated in the Ivan Boesky arbitrage case, and being barred for life from the securities industry, Milken has subsequently reinvented himself through the Milken Institute think-tank and other activities.

The power-users of social networks like Facebook and Twitter may joke about gaining ‘world domination’. As a self-styled ‘Master of the Universe’, Milken actually achieved this goal, if only for a brief time. Consider the strategic dimension of how Milken did so. As a true innovator, he foresaw new markets and macroeconomic trends a decade before others did. He developed powerful, financial innovations in debt securitisation, mergers and acquisitions, and risk arbitrage. He built a loyal and private network, together with the organisational capabilities to leverage deal-flow. He also controlled the public dissemination of market information through conferences and media interviews. He understood the subtle power of crafting and framing a media image around themes which appealed emotionally to people — entrepreneurship, freedom, and being the revolutionary vanguard — which Curtis argues was really a personal agenda to cement Milken’s influence, power and social status. Many of Milken’s strategies tapped the dynamics of rumours, information cascades and rational herds, apparent in the 1980s private equity boom.

Perhaps this is why Milken tried (unsuccessfully) to convince Bruck not to publish her book.