Saturday, March 31, 2007

I'm Back

Now that my vacation is over, I'll be working on getting back to a regular schedule. At least, until my next trip. If all works out, I'll be able to jump with a band for St. Thomas Carnival in a few weeks. I'll keep you posted.

I also plan to work on some changes to the overall blog format. Not of posts, per se, but layouts and some of the information in the margins. Just stay tuned as I start implementing those changes. We'll see how it goes.

Until next time...

Wednesday, March 28, 2007

Janus' Modern Portfolio Construction

Over at All About Alpha there is a recent piece on Janus' Modern Portfolio Construction (MPC). Its an interesting take on portfolio construction, and the article is worth a read. I don't know, but when I read about a "Tactical" bucket, I think beyond just ETFs and the other vehicles mentioned. Maybe that's just due to personal experience, and Janus does have a typical investment company mandate focused on long-only investing. I'm not sure how ETFs, equity options, commodities futures/options, etc. would play in this MPC world. Anyway, its an interesting piece from the always informative All About Alpha and worth checking out.

Until next time...

Private equity conglomerates and the focus problem

How did this one get so big?

I'm not trying to debate this point. It seems pretty clear that conglomerate is the most accurate description for the top tier PE firms. So where do they go from here?

I've argued for some time that the PE model won't translate well into the technology world, as most of my readers know. The biggest reason for this failure, in my opinion, is precisely the type of generalized corporate management that conglom...I mean private equity firms...are best at.

Small and focused is the order of the day. Now, small may be a relative term. It may 500, 5000 or 50000 employees depending on the business in which the enterprise operates. What is most important is that enterprise is well adapted to its particular purpose, without the distractions of other disparate, or even tangential, business activities. Generalized management techniques are not designed to address these problems. Are Steve Schwarzman, Henry Kravis or Leon Black really going to roll up their sleeves and get into the nuts and bolts of why one of the tech firms in their portfolio isn't performing to plan? Are David Bonderman and Steve S. really going to delve into the operational benefits and pitfalls of upgrading process technology at a Freescale fab, or whether the fab should be shutdown? Do they have the background to provide leadership in this area? I doubt they do.

(Don't misunderstand. No disrespect is intended. But let's be friggin' real here! You know I'm right.)

Let's not even get into the leverage issues and LIPOs and the potentially (ultimately?) crippling effect they will have on many of the acquired firms. (The WSJ appears to think Leon Black is the king of the LIPO. Subscription req'd.)

From a pure management standpoint, enterprises need to be slimming down and focusing their operations squarely on performance in their core businesses. This is not the game of a conglomerate; by definition, conglomerates are about scale and the (perceived?) efficiencies it grants. (An oversimplification, I know, but humor me.) This slimming is exactly the reason that Motorola shed the Freescale business - because it sucked up resources from MOT's chosen core businesses.

Weren't the original conglomerates discredited, GE notwithstanding? How many non-PE conglomerates are there anymore? Not as many as there used to be - GE, Textron, Berkshire Hathaway and Tyco? (The latter being gripped in death throes as it tears itself into its 3 constituent parts.)

So anyway, from my (admittedly limited) vantage point, it seems that the trend is toward smaller, more efficient and less diversified enterprises. I'm all for this. More employers serving more people - consumers, other businesses, government, whomever requires those specialized services. Financial engineering, in and of itself, is not a strategy for growth. Yes, there will always be mergers, divestitures, spin-offs, leveraged recaps, and all manner of other operations. However, they should serve the interests of the enterprise and its stakeholders - the customers, the employees, the shareholders and even the creditors.

Then again, I guess, in a PE transaction, a LIPO does *exactly* that, doesn't it? At least for the shareholders.


Blog Recommendation - Baltimore Housing Blog

This is another one of my must read blogs, given that all of my RE investing efforts are targeted in Baltimore, MD at the moment. I consider this blog to be the 5000 foot level of observation. The writer, Nikki, has some very insightful analysis, although not all of it is directed at Baltimore. (She covers the Baltimore metro area in great detail.) I find this an invaluable resource for an overall feel of the Baltimore market, though my partners and I are still "on the ground". We can't be everywhere at once, however, and that's where this blog comes in. I hope you find it as interesting as I do!

Tuesday, March 27, 2007

New Real Estate Worldview

This is just something that jumped into my head while I was working on valuations for a set of properties that one of my partners came across. I'll probably expound on this idea at some point in the future, once I have more to go on. For this brief note, suffice it to say that valuing real estate on comparables is the dumbest friggin' thing in the world. If whoever thought of it is still living, they should be put down like a diseased animal. If I get a chance this week, I plan to work on a new valuation model that I've been considering for some time. We'll see how that works out. But this comparables shite is for the birds. Damn!

Until next time...

House #4 Closed

Finally! What a cluster fuck that turned out to be. Maybe it was because the wholesaler we were dealing with was new, or shady, or whatever his problem was, but that closing was more complex than it had any right to be. At last it is done, and we can start integrating it into our portfolio. And I sure hope this means the last of financing properties in someone's personal name. The LLC should be able to finance something, a bloody pack of chewing gum - SOMETHING - now.

Note to the wholesalers in the state of Maryland who happen to be reading this - make sure your seller knows the full story in advance. Let him know that you are assigning the deal. The guy we dealt with decided to keep this little nugget of truth a secret until we hit the title company's office. So we're in the office trying to find out the best way to break the news to the seller about what size check he needed to write to the wholesaler without scuttling the deal. Fugg me! Considering that I'm still dealing with the nuclear fallout of lies in my personal life, this one didn't sit right with me at all. Thankfully my partners and I were able to connect with the seller on a few different levels and get him to be comfortable with us. (The guy attends the same church as one of my partners. Additionally, he and I share the same birthday, 20 years apart.) Somehow the wholesaler figured out some good words to seal the deal, and all was well.

Now we have another rental in beautiful Baltimore. Slowly the portfolio is coming together. Now its just a matter of building back my credit score, because all the daggone inquiries are eating me alive. I'm glad I sat in on this tele-class about credit repair that was held by my RE investment club. Some really useful information came out of that about the credit industry in the US, so I plan to put that to use ASAP!

Alright, until next time, by which time I hope to be caught up on the goings on in the business world. Maybe I'll also have run into a hedge fund manager or 2 by then.


Monday, March 26, 2007

Its been a long time

I'll have more to say later in the day after I return from dinner. I just wanted to let you all know that I haven't disappeared for good. I arrived in St. Thomas, US Virgin Islands on Saturday and have been trying to take in the experience as much as I can (given the shoddy state of my life right now). House 4 closed on Thursday, finally, after much stupidity and lateness. I'll go into that more as well. So far, things are alright here. The will be more to come.


Tuesday, March 20, 2007

My Problem with Private Equity

This is exactly it! (WSJ - subscription req'd)

Financial engineering is a tool, and useful one at that. But if it is the entire modus operandi of the big buyout firms, it is a dead end proposition.

Maybe I'm just on my compassionate capitalism kick again, but where is the corporate responsibility here? Why is there such blatant excess being exercised against the acquired firms? Don't that have anything better to do with their funds than to pay dividends to their sponsors? What about actually growing the business? Hell, RUNNING the business profitably might be worthwhile.

My problem isn't with the fact that the cash flows support this kind of transaction (for now). My problem is that the funds should be supporting the business, and once all the operational objectives have been funded, then the sponsors should be able to take a little more off the table. Its the same kind of analysis as Roger Ehrenberg at Information Arbitrage made for Apple developing a VC strategy two weeks ago.

Leon Black has the right to make his money, no doubt. But throw off the dividends once the sustainability and profitability are in place. Not before. That's all I ask.

House 4 Update

Closing is set for Thursday. It would be nice to have a regular time for it, but as hectic (mismanaged?) as this process has been, I'll be happy just to have it done. The deal was a wholesale deal. At least the appraisal came back in at a reasonable number, about 4K above our purchase price including the assignment fee of 4K to the wholesaler. This one already has a tenant in it so it should be a nice straightforward holding for the portfolio. Not great cash flow, but reasonable considering the tenant hasn't paid her portion of the rent in 4 bloody years. (Its a Section 8 property.) Its definitely a winning deal in a market that hasn't offered many of those. Even without raising the rent, it will throw off some cash, and with a few minor repairs, we can probably get a little bit more out of a future tenant should this one not be cooperative with the rent payments.

Right about now, I'm inclined to just sit back and wait for the market to slow down more. Every investor and their grandmother was working this beat. I'd prefer to just sit back, stack some cash and wait for the real opportunities to start emerging. I am waiting for a call from another investor about unloading some of his properties in the DC area. It makes me salivate just thinking about it! I'll have to talk to some people about putting together funds to acquire those in various ways. I guess its also time to start my personal LLC, since I doubt I will put all of these in the partnership.

And dammit, more eyelashes are falling out of my left eyelid. Fugg me! Maybe I need more sleep. I can't wait until I get to St. Thomas! Some sun will do me good, I think. And more time to workout than I can gather here. This being "middle class" (if that's what I am) is for the birds. I need time for me, dammit!

3 years and 4 months left. Can't come soon enough.

Until next time...

Monday, March 19, 2007


In the last week, about half of the eyelashes on my right eyelid have fallen out. The rate is increasing for the eyelashes on my left eyelid too.

All due to stress. Personal life stress mostly. Mind you, the situation is of my own creation and thus my own undoing, but its amazing how despondent one can become when they lose people they love. G. says I shouldn't just dive into working as a refuge from the pain, but my other friends don't want me to take on other self-destructive behavior such as heavy drinking either. What's a depressed person to do?

Until recently, the net worth was making some decent strides. Now, given the increase in market action to the downside, its not at all surprising that I haven't crossed 100K yet. Thankfully I'm able to save about 20 - 25% of my monthly net income into a high yield savings account. I also killed most of my credit card debt this past week, so that drag is gone. But damn if it isn't annoying to watch the balances stay stagnant. And I still owe G. $1000 for the laptop I bought from him. We'll see how things look after payday this week.

On the positive side, I've been able to pocket some consulting revenue recently. Not a lot, not even close, but I'm not one to argue with income. I'm not seeking to grow the consulting business; it only really generates spending money.

Nice to see we finally have some positive movement in the May wheat futures. Talk about getting shellacked! I'll keep watching this because there's only a few weeks until expiration on those contracts. I don't think I can get out of the trade anywhere close to whole as things stand.

Anyway, more updates to come. There have been some interesting developments on the RE front and hopefully I'll be able to put in some time working on the back end server infrastructure for the start up venture this week.

Until next time...

Thursday, March 15, 2007

The Hedge Fund Blog discusses the role of 2 and 20

I strolled on over to Hedge Fund Blog this morning to find this latest piece of writing from Mr. Allen. A nice explanation of how and why the hedge fund compensation structure works. Well done.

Wednesday, March 14, 2007

Code is Go!

Finally! We have managed to get our code signed, downloaded and running on 2 platforms. This is what I call progress. I'll be working on the server side configuration stuff for the next few days so I can stay ahead of my partner. All I have is my money making ventures now that my personal life has imploded, so this is good news. Unfortunately, I have been caught up with these personal issues and didn't get around to filing the Subchapter S election form. Fugg it. Taking venture money would convert us into a C corp anyway so it doesn't matter too much. Along with that, my MacBook Pro is up and running. Guess I'm now 2 for 8 so far this week. Woo woo!

Through the Storm

I'm going to apologize to my readers in advance. I may be AWOL in the coming days and weeks as I sort out some HUGE personal problems. My entire life appears to be crashing down around me. I'll be back. Not the same. Hopefully better. But I'll be back.

Monday, March 12, 2007

Blog Recommendation - The Bonddad Blog

This is one I've had in my RSS reader for a little while. I don't know how I stumbled across it, but I'm happy I did. A nice mix of market and economic commentary and a bit of analysis of the financial/economic news of the day. Its a quick read which gets me up to speed when I've been out of the loop for while. Enjoy!

Marc Faber Interview at Bloomberg

Finally! Since it is a slow night, I decided to take some time to check out this interview (via Mish) with Marc Faber which appeared on Bloomberg TV about 2 weeks ago. I'm glad I did. I'm gonna watch it again right now. Some really good stuff in here. Check it out if you haven't already. Dr. Faber may be known for gloom, boom and doom, but he should also be known for reason, logic and good sense.

Friday, March 09, 2007

Why PE should leave technology alone

Again, I can't make any claim to being an expert on the subject, but I've made the argument before that PE and technology companies do not mix. As I was showering the other night in preparation for my J.O.B., the primary reason for this state of affairs came to me. I would also like to thank Equity Private for the insight shared with me by e-mail a few nights ago, for this helped crystallize the logic in my mind.

Private equity should be about operations. Squeezing operational efficiencies out of mature businesses (or business models). Expanding into new markets. New leadership. Adjusting the capital structure. Acquiring customers (and competitors). Reducing costs. Involving stakeholders. That's what it *should* be about. Taking a poorly performing enterprise and making it...well...perform.

At least, that's my (somewhat high minded) theory.

It would appear that in the last few years, the performance piece of the puzzle has been lost (intentionally?). Yes, there is plenty of levering and capital structure machinations, but not much else.

I don't think selling off assets (EOP) or the traditional "corporate raider" model can be applied in technology. The technology space never rests. There is always some innovation occurring; tis the nature of the beast. Even the lowly hard drive, courtesy of tech PE darling Seagate Technologies, is evolving constantly. Higher densities are the primary way, but interface technology is also changing. Witness the growth in Serial ATA (SATA) and SAS interconnects. In networking, we have the same thing. Never mind all the dark fiber that was buried and has subsequently been written off by network providers. We've got 10 Gb Ethernet here, and even faster modes on the way. You can peel off tons of lambdas over a given strand of fiber. The race is unending.

This is why technology companies do not (now) make good PE targets. When the basis of your business is innovation, research and development, and your window to get to market and make back the investment grows increasingly shorter, there is no way for even large tech companies to rest on their laurels and collect rivers of cash. Levering is largely, if not exclusively, about being able to service debt. (Commercial real estate shares this property, and it is an equally simple business at the most basic levels.) However, the interest payments on the leverage employed in taking out a technology company cannot be guaranteed to be serviceable based on the standard market fluctuations in technology. Things change too fast to count on that constant cash flow.

Recently, Investment Dealer's Digest had a bit about the new-ish emphasis on bringing operators into PE shops - rockstar CEOs, as the saying goes - with lots of connections, hands-on experience and wisdom. THIS, to my mind, is the essence of the proposition. Financial engineering can only take a business so far. That isn't to fault the VPs and rainmakers, but seriously at some point, the enterprise has to be able to consistently MAKE money.

Last week I was sitting in on a conversation between my business partner and my second cousin's wife who works for IBM. My cousin's wife was making the point that the bean counters have taken over the company and their solution to every problem is to cut - something, anything, just make costs go away. This is not a long term solution to the problem. If you've got a business pipeline that will fund operations profitably, but your staff is already overworked, you can't just leave the staffing where it is. You have to be able to add people and resources to do the work faster and better. Under such circumstances, refusing to add headcount, or even worse, to try to remove it, is absurd. Quality of service delivery will suffer, which will impact the brand and eventually the commitment of those customers to continue to pay for the services. At least, they will probably seek to spend that money elsewhere. The same point applies to IBM as it does to PE shops looking to take out a technology company. Innovation is the name of the tech game.

Now, I can see some exceptions, and as I may have previously mentioned, there are some operators that seem to know where the intersection of technology and private equity lies. Or at least they are closer to finding it than others. Seagate and Flextronics would seem to be too good examples, and both were Silver Lake deals. Silver Lake is much more of the exception however, because technology is all they do. Both of these were manufacturing heavy companies which probably had outdated processes and facilities, and are operating in fields with razor thin margins. There was probably a lot of upside to these deals because they are operating at the intersection of the "real", tangible world and the technology world. That will be less the norm in the future, as fewer companies will be engaged in creating hardware products and even more development is channeled into software. I don't know that the same kind of benefits can be engineered in a software company that have been engineered with Seagate. You can always reduce headcount and spin off divisions, bring in new managers, recapitalize and reorganize, but at some point, you'll need new product which means new ideas, new research, new development, new engineering, plus all the other stuff (QA, documentation, support, distribution, security, sales, etc.).

At the end of the day, the company has to be able to perform. Private equity should be a vehicle, and I have no problems with it being a well compensated vehicle, for increasing corporate performance. Create. Innovate. Execute. Wash, rinse, repeat. All of that takes of precious cash that most of the current generation of PE firms would rather have flow to them, as management/consulting fees or dividends. Technology companies have to be able to move fast, and debt is a burden preventing that kind of dynamism. If you're not moving, you're dead, and a tech company weighed down by debt is well...figure it out.

House #4

For all of those who may be interested (or had even forgotten), the real estate business is starting to make moves again. While I don't think there is enough turmoil to take advantage of right now, this deal was too good to pass up.

The property is a rowhouse, similar to two of the other properties we already own. The stunning part of the deal (or at least the first stunning part) was the fact that the seller wanted such a pittance for the house. Off the bat, we should cash flow a nice small amount. There's a Section 8 tenant already in place at an agreeable rent. (Otherwise, we wouldn't have agreed.) With a bit of repairs, the house could be worth 15 - 20K more than our purchase price. My valuation spreadsheet absolutely loved this property when I ran the numbers. It shares a lot of similar traits to our best performing property.

The second great thing about this deal is the financing package. Since the sales price is so low, and we have a line of credit with another lender, we were able to go to our preferred guy and get a nice 10 year fixed pay option ARM. 10 year fixed! At a low rate. Un-fuggin-believable! Yeah, yeah, I can hear all the voices now. However, if we own this property for 10 years, it will be a minor miracle. As far as the option ARM piece goes, it is a very investor specific loan. Do I generally like or feel comfortable with this concept in general? No. However, it helps us achieve a certain goal that as a group of investors, we have sought to achieve. I take that discomfort as a sign of growth, in this case. We have all chosen to be investors and put our own resources on the line in pursuit of our goals.

Anyway, I spent a fair amount of today providing documentation for things I'd already provided documentation of a few months back. I'm going to make sure 120 days haven't passed since the last time, because digging up new versions of all of this shite is really not the best use of my time. There's even more stuff to try to dig up and send off tomorrow. What a friggin' pain. Just moving paper from point A to point B.

Anyway, there is more to come soon. Keep watching...

Thursday, March 08, 2007


I have to apologize for the delays in posting. I've actually been working on some longer posts that require a bit more thought and proofreading. However, the primary reason I've been so absent is that I'm up to my eyeballs in to do items. Whether its real estate, or the new business, or tax stuff, there's always something new. I'd really like to get my taxes over and done with, but last year was some damn complicated that it is taking up far more time than I imagined or hope. And WTH is this with the accountant not being able to open a QuickBooks file? Isn't that what you get paid to do - open QuickBooks files all day? Good lord!


Anyway, look for some good stuff soon, once I have a chance to sit down and re-read through the stuff.

Until next time...I am still alive...

Monday, March 05, 2007

Apple VC

Simply put, this is generally a good idea. Funding start ups which are creating applications, particularly those exclusive to the Mac, would be a powerful move from Cupertino. Backing innovative developers who work exclusive on MacOS X with the tools, systems, cash, contact with Apple internal developers, debugging assistance and distribution would be HUGE. New applications, especially those which can't be found on other platforms, would help drive the Mac into new niches. (And the Mac is the ultimate niche platform, but add enough niches together and you have a real market.)

Even bigger though, and with a bit less headache, would be just to seed application developers.

As the BusinessWeek piece mentions, plenty of small developers (and large ones too) do not release Windoze and MacOS X versions of their apps simultaneously. The biggest reason is that the development costs involved in development, QA, documentation, distribution and all the other functions of software creation comprise a much larger portion of the potential revenue to be generated, at least on the Mac. There just aren't as many systems in the field to amortize the development costs over.

Apple could be using strategic investments in the $5M - $50M range to seed development of a wide range of apps from developers large (Adobe and Microsoft) and small (Delicious Monster).To me, the most critical issue would be to fund developers to port applications that only run on other platforms to the Mac. In the case of apps that run on Solaris, HP-UX or other commercial *nix variants, this could be enormous. The Mac is THE Unix platform to develop on. Apple has the momentum, the cash, the installed base and the platform to allow finance, visualization, and scientific/engineering/mathematical developers even broader outlets for their applications. That's some real value add, IMO.

The point is to increase the size of ecosystem and to build better developer relations with the members of that ecosystem. Apple has historically been very bad about this, and that tone continues even to this day for some God-awful, unknown reason.

People buy computers because of what they can do with the machine. Simple. So the more things that can be done on the Mac, the larger the potential customer base. I for one would love to have a real, complete Visio running natively on MacOS X. Hopefully Apple will learn this lesson and start seeding developers who are creating apps that people want to run on MacOS X. This is a mistake SUNW made back when they had a war chest, and the results are pretty obvious.

Whether creating a VC arm is the best use of Apple's cash is debatable. However, putting some of that cash to work in developers who can expand the user base of the Mac platform is a no brainer. I just wonder why it hasn't happened yet.