So I was reading some of the commentary about the new Geithner plan, and the one thing that struck me (particularly as I read this) is that we still haven't see anything cogent about the valuation of these "troubled assets".
At the end of the day, I think the banks ARE currently insolvent BUT I think they can survive this. The key will be getting those assets off their books. YES, they will be insolvent. Get over it. As Steve Randy Waldman said over at Interfluidity the other day, they were insolvent before, during the S&L crisis. Insolvency isn't the issue. A few years of reasonable earnings w/o dividend payouts and public markets recapitalization -- as James Surowiecki has advocated (see the Interfluidity post for the links to Surowiecki) -- and I think many (not all) of the current banks survive in some form. Obviously, the industry will see huge structural changes in other ways, but overall, I don't think we risk losing too many of the existing banks. Yes, the banking system needs to be fundamentally overhauled, and personally, I think Glass-Steagall needs to make a return, but that's a conversation for another day.
Aside: The ones I think we DO lose would appear to be interesting shorts. :) Figuring out those names is left as an exercise to the reader. That's what the comments are for! I'll start with WFC.
What worries me most is whether Geithner's new plan will attempt to do what Hank Paulson's original plan(s) attempted to do - bailout the banks with unrealistic valuations of these assets. I don't think too many private investors will be interested in overpaying to take these assets off the balance sheets of the banks. I know I wouldn't be interested in overpaying for distressed assets. The marks they carry are because they are distressed! So I am particularly curious to see when and how this question is answered. If anyone out there reading has anything to share, speculation or otherwise, please do share!
I already think this bounce is setting up a huge shorting opportunity. However, until this question is answered, we're still in what Upside would call a Wile E. Coyote moment, not realizing there's no ground underfoot but still running. If this question isn't answered well AND soon, gravity kicks in with a vengeance! Of course, that's not to say that gravity won't kick in just because. It is "The Market" after all.
Finally, realize that I am only speaking about this plan right now. So many people seem to have forgotten about the BIG elephant in the room, the REAL missing man. There will be a next leg down, I'm fairly certain. And the banks will continue to be insolvent. Whether that turns into a liquidity problem is To Be Determined. All bets are off on any of the existing private banking institutions surviving once the leg down kicks in.
Until next time...
UPDATE: Looks like I spoke a bit too soon, but still, I personally want more detail.
Showing posts with label Higher Education. Show all posts
Showing posts with label Higher Education. Show all posts
Tuesday, March 24, 2009
Saturday, December 06, 2008
PE Liquidations among Endowments
I'm wondering if any non-Ivy schools are taking advantage of this opportunity to acquire stakes in private equity funds on the secondary market. This isn't the first that we've heard of this story, and it likely won't be the last. However, if any endowments were sitting on some liquidity, this is sounds like a decent entry point with some well respected PE names.
*cough* Howard U.? *cough*
Of course, what is more likely is that these non-Ivy or non-first tier endowments are probably trying to liquidate their portfolios too. So sad.
These first tier endowments are getting hit by MTM accounting rules too? If smaller endowments can't get at least 50% off, then something is terribly wrong! At 50% or greater discounts, some of the LBOs of the last few years sound fairly reasonable. But its going to take even greater discounting to squeeze $120B in assets into $40B of investable capital.
When I originally started writing this post, Harvard had not yet reported their latest results. Down 22% (WSJ.com sub req'd) since the start of the fiscal year. Wow!
I contend that there is plenty of alpha out there to be gained, but it will take creativity, negotiation skills, and iron will to earn it. The days of easy alpha (more accurately, alternative beta) are over for the near future. Is this one way some of the second tier endowments can catapult their results into the stratosphere? Hell if I know! But I can fell the abundance of opportunity, and it gets more pronounced with every leg down. The question is who will take advantage of it?
*cough* Howard U.? *cough*
Of course, what is more likely is that these non-Ivy or non-first tier endowments are probably trying to liquidate their portfolios too. So sad.
These first tier endowments are getting hit by MTM accounting rules too? If smaller endowments can't get at least 50% off, then something is terribly wrong! At 50% or greater discounts, some of the LBOs of the last few years sound fairly reasonable. But its going to take even greater discounting to squeeze $120B in assets into $40B of investable capital.
When I originally started writing this post, Harvard had not yet reported their latest results. Down 22% (WSJ.com sub req'd) since the start of the fiscal year. Wow!
I contend that there is plenty of alpha out there to be gained, but it will take creativity, negotiation skills, and iron will to earn it. The days of easy alpha (more accurately, alternative beta) are over for the near future. Is this one way some of the second tier endowments can catapult their results into the stratosphere? Hell if I know! But I can fell the abundance of opportunity, and it gets more pronounced with every leg down. The question is who will take advantage of it?
Friday, October 17, 2008
Deleveraging Academia
The WSJ has an article about the impact of the credit crunch on colleges. It appears that the effects are being felt all through the academic complex.
Good!
Higher education has been one of the most mis-priced and overvalued products in this country. The rate of increase in college costs has been flatly absurd. Why? Too much money.
For the longest time, colleges and universities have been overpriced. The price inflation we've seen for college education was completely ridiculous, fueled by easy government grants, loans and other spending. Isn't that the kind of government spending that leads to inflation - spending that creates no marginal increase in value? Sure seems like it. We're not talking Weimar Germany yet, but still, the entire college financing market has been able to increase in cost at insane rates of growth on the back of cheap money, mostly in the form of debt.
It had to come to an end. Good riddance.
I think there is a lot more to come - a lot more layoffs, more construction to be postponed, and other crazy spending by universities to reign in costs. No longer will they be able to finance this madness with 6% annual tuition increases, because shortly there will be few (if any) with the capacity to pay. Definitely not from the "middle class".
And socioeconomic stratification will get worse.
I feel sorry for anyone who was counting on getting loans to pay for any kind of higher education. Its going to be ugly, but it is long overdue.
Good!
Higher education has been one of the most mis-priced and overvalued products in this country. The rate of increase in college costs has been flatly absurd. Why? Too much money.
For the longest time, colleges and universities have been overpriced. The price inflation we've seen for college education was completely ridiculous, fueled by easy government grants, loans and other spending. Isn't that the kind of government spending that leads to inflation - spending that creates no marginal increase in value? Sure seems like it. We're not talking Weimar Germany yet, but still, the entire college financing market has been able to increase in cost at insane rates of growth on the back of cheap money, mostly in the form of debt.
It had to come to an end. Good riddance.
I think there is a lot more to come - a lot more layoffs, more construction to be postponed, and other crazy spending by universities to reign in costs. No longer will they be able to finance this madness with 6% annual tuition increases, because shortly there will be few (if any) with the capacity to pay. Definitely not from the "middle class".
And socioeconomic stratification will get worse.
I feel sorry for anyone who was counting on getting loans to pay for any kind of higher education. Its going to be ugly, but it is long overdue.
Wednesday, September 03, 2008
Investing in Endowments - The Dream that Will Never Be
I LOVE this idea from Felix Salmon about alumni being able to invest in their alma mater's endowments. Its innovative, its different, and it will never happen in our lifetimes. However, I love it.
As John Mauldin is one to point out, regular people should be allowed to invest in alternatives as a way of enhancing returns in their retirement portfolios (or whatever other funds they allocate to the alternatives space). You can find his 2003 congressional testimony on the subject here.
I imagine the biggest problems would be the administration of small(er) investor accounts and the accredited investor rules. You could attack the first problem by allowing minimum investments of greater than 6 figures, say $250K+. The second problem requires US government intervention, which makes it almost impossible to see how one would ever get past this limitation.
I also imagine many larger endowments would want to avoid the kind of incessant inquiries that small investors would bring with them. No matter how experienced those investors are, they are probably going to require or request some level of hand holding, and endowments likely aren't interested in such time sinks. The larger endowments (Harvard and Yale in particular) would not need to resort to this kind of asset gathering; it would purely be a "perk" offered to alumni. There are plenty of smaller institutions, with smaller endowments, that would probably seek to use this re-configuration of the landscape to draw assets and increase their management fees. The new laws would have to take this into account. It makes sense if this structure only imposes fees on profits when the investor withdraws, and reduces the management fees. Endowment investors shouldn't be paying standard hedge fund management fees, especially when the endowments are non-profit organizations and they employ their own managers. A range of 0.5% - 1.25% in fees seems appropriate, based on whether the endowment managers are in-house (lower) or outsourced (higher).
Even so, investing in your university's endowment, with the management fee going to your university, would be a nice way to contribute and still benefit from the expertise the university employs. (That is, if the endowment is large enough to employ in-house investment managers and strategists. If they outsource significant amounts of their endowment management, then this idea is probably unworkable.) Maybe all the drama which led to the founding of Convexity Capital by Jack Meyer could have been avoided if those vocal alumni had been able to invest alongside the endowment, instead of watching from the sidelines. Felix's idea has some obvious tax benefits as well, and if one did not need the money from the endowment, they could let it ride or donate it to the university easily. Brilliant!
Anyway, I had to comment on that idea. I'd love to see alumni offered this kind of investment opportunity. It would sure take a lot of work to make it happen though, which makes me cautiously pessimistic that it would ever occur. (Thanks to Paul Vixie for that phrase, one of my favorite quotes of all time, received from him in personal e-mail!)
Still, how awesome would this be if it became real! A man can dream, can't he?
Until next time, peeps!
As John Mauldin is one to point out, regular people should be allowed to invest in alternatives as a way of enhancing returns in their retirement portfolios (or whatever other funds they allocate to the alternatives space). You can find his 2003 congressional testimony on the subject here.
I imagine the biggest problems would be the administration of small(er) investor accounts and the accredited investor rules. You could attack the first problem by allowing minimum investments of greater than 6 figures, say $250K+. The second problem requires US government intervention, which makes it almost impossible to see how one would ever get past this limitation.
I also imagine many larger endowments would want to avoid the kind of incessant inquiries that small investors would bring with them. No matter how experienced those investors are, they are probably going to require or request some level of hand holding, and endowments likely aren't interested in such time sinks. The larger endowments (Harvard and Yale in particular) would not need to resort to this kind of asset gathering; it would purely be a "perk" offered to alumni. There are plenty of smaller institutions, with smaller endowments, that would probably seek to use this re-configuration of the landscape to draw assets and increase their management fees. The new laws would have to take this into account. It makes sense if this structure only imposes fees on profits when the investor withdraws, and reduces the management fees. Endowment investors shouldn't be paying standard hedge fund management fees, especially when the endowments are non-profit organizations and they employ their own managers. A range of 0.5% - 1.25% in fees seems appropriate, based on whether the endowment managers are in-house (lower) or outsourced (higher).
Even so, investing in your university's endowment, with the management fee going to your university, would be a nice way to contribute and still benefit from the expertise the university employs. (That is, if the endowment is large enough to employ in-house investment managers and strategists. If they outsource significant amounts of their endowment management, then this idea is probably unworkable.) Maybe all the drama which led to the founding of Convexity Capital by Jack Meyer could have been avoided if those vocal alumni had been able to invest alongside the endowment, instead of watching from the sidelines. Felix's idea has some obvious tax benefits as well, and if one did not need the money from the endowment, they could let it ride or donate it to the university easily. Brilliant!
Anyway, I had to comment on that idea. I'd love to see alumni offered this kind of investment opportunity. It would sure take a lot of work to make it happen though, which makes me cautiously pessimistic that it would ever occur. (Thanks to Paul Vixie for that phrase, one of my favorite quotes of all time, received from him in personal e-mail!)
Still, how awesome would this be if it became real! A man can dream, can't he?
Until next time, peeps!
Tuesday, May 13, 2008
Tax the Bastards!
Wow!
And wow again!
I was led to this from Paul K's blog post. I think some of the comments over at Felix's blog tough on some things that Harvard could and should do. First, I'd vote for decreasing tuition even more, so that even more low income students can attend (in accordance with admission criteria, of course). Then taking a high school under its wing, and possibly even an elementary school, would be a great community service.
Harvard has the numbers to make this work without affecting either its asset gathering ability or its endowment size. From what I've heard about it (not much, admittedly), this might position them to take a liability driven investing (LDI) approach which may not necessarily make sense. At least, this is something I could see occurring, the endowment becoming more risk averse to the point of abandoning risk management.
Considering the compensation levels for faculty, I don't really get why there was an uproar about Meyer's compensation, or that of any of his lieutenants. They did good work -- active investment management -- and Harvard needs to put more of that money to use in the surrounding community if they want to keep Congress off their back. However, the 2 go hand in hand, right? More investment in the community, more spending of the funds that come in (or rather, are generated as investment returns) will keep the DC doctors away.
And wow again!
I was led to this from Paul K's blog post. I think some of the comments over at Felix's blog tough on some things that Harvard could and should do. First, I'd vote for decreasing tuition even more, so that even more low income students can attend (in accordance with admission criteria, of course). Then taking a high school under its wing, and possibly even an elementary school, would be a great community service.
Harvard has the numbers to make this work without affecting either its asset gathering ability or its endowment size. From what I've heard about it (not much, admittedly), this might position them to take a liability driven investing (LDI) approach which may not necessarily make sense. At least, this is something I could see occurring, the endowment becoming more risk averse to the point of abandoning risk management.
Considering the compensation levels for faculty, I don't really get why there was an uproar about Meyer's compensation, or that of any of his lieutenants. They did good work -- active investment management -- and Harvard needs to put more of that money to use in the surrounding community if they want to keep Congress off their back. However, the 2 go hand in hand, right? More investment in the community, more spending of the funds that come in (or rather, are generated as investment returns) will keep the DC doctors away.
Tuesday, February 20, 2007
A Profile of Yale's Money Man
This is noble! Very cool stuff. A great money manager who hasn't lost touch with his humanity. (And humanity is not a word I use often.) Much respect.
I'd love to think one day that a guy of similar mind to David Swensen could be running the endowment at my alma mater. What a nice thought. Of course, as Paul Vixie once said to me, I'm cautiously pessimistic.
I'd love to think one day that a guy of similar mind to David Swensen could be running the endowment at my alma mater. What a nice thought. Of course, as Paul Vixie once said to me, I'm cautiously pessimistic.
Monday, January 29, 2007
Alpha in University Endowments
While I'm sure most of my readers have already devoured this piece at The Economist, I want to take it from a different angle. (Thanks to Abnormal Returns for the lead in analysis that started me down this path.)
First, I have to say that I love this line:
"Perhaps they can stay solvent longer than the market can stay irrational."
We shall see.
Anyway, we all know the story of the big endowments. The Economist article throws out a few stats to help support that story - the big funds have the best returns from employing the best, most swashbuckling managers and occasionally even paying them well. (I'm sure Jack Meyer might disagree with that assessment, which is the cause of the "occasionally" in that sentence.)
But what about the smaller endowments, the ones not blessed with the girth of Harvard, Yale, Stanford, Duke or MIT? How are they looking on the alpha generation front? I imagine the picture is not as pretty.
I stumbled across this link while doing a search on the topic of the endowment of the university I attended (Howard University in Washington, DC). A few hundred million in your endowment does not provide access to the best resources, the best talent, or the best vehicles, clearly. So how does a small endowment go about generating returns even approaching those of the the largest endowments? Is it even possible? I mean, if Meyer's guys could take enough flak to make it more worthwhile to leave Harvard, how is a small private university, or an HBCU, supposed to attract the talent necessary to drive the returns of its endowment?
Now, of course, the answer is probably "it isn't supposed to". That leaves these institutions even more beholden to the well known public markets - equities, bonds (maybe, especially Treasuries), and the other usual suspects. However, participation in true alternative investment markets remains sorely lacking, I'm sure.
A small university endowment (< $1B) should have some flexibility to generate better absolute, risk adjusted returns, however, even if not being able to exploit the same level of alpha generation as the big boys. There are (unfortunately?) hedge funds in this size range. Maybe the optimal approach is the application of so-called "portable alpha" strategies? Maybe its about shelling out the extra compensation for the proper talent, even if it is a small group of individuals (ex-Amaranth traders, maybe)? Of course, the numbers could get big quickly, and if Harvard alumni had the temerity to protest the compensation of one of the best (THE best?) manager in the endowment universe, how can a small liberal arts school or HBCU even fathom hiring a team of such people. How much risk is there for a college or university president, at this level, of such a move?
Anyway, this is something that bothers me on a personal level. Although it fundamentally has little to do with alternative investments and access to them, that is a symptom of a much more pervasive problem. I don't believe it to even be a "race" issue (in the case of HBCUs). It is really a class and size issue. But I still don't like it.
Whew! Finally done. Until next time, gentle readers...
First, I have to say that I love this line:
"Perhaps they can stay solvent longer than the market can stay irrational."
We shall see.
Anyway, we all know the story of the big endowments. The Economist article throws out a few stats to help support that story - the big funds have the best returns from employing the best, most swashbuckling managers and occasionally even paying them well. (I'm sure Jack Meyer might disagree with that assessment, which is the cause of the "occasionally" in that sentence.)
But what about the smaller endowments, the ones not blessed with the girth of Harvard, Yale, Stanford, Duke or MIT? How are they looking on the alpha generation front? I imagine the picture is not as pretty.
I stumbled across this link while doing a search on the topic of the endowment of the university I attended (Howard University in Washington, DC). A few hundred million in your endowment does not provide access to the best resources, the best talent, or the best vehicles, clearly. So how does a small endowment go about generating returns even approaching those of the the largest endowments? Is it even possible? I mean, if Meyer's guys could take enough flak to make it more worthwhile to leave Harvard, how is a small private university, or an HBCU, supposed to attract the talent necessary to drive the returns of its endowment?
Now, of course, the answer is probably "it isn't supposed to". That leaves these institutions even more beholden to the well known public markets - equities, bonds (maybe, especially Treasuries), and the other usual suspects. However, participation in true alternative investment markets remains sorely lacking, I'm sure.
A small university endowment (< $1B) should have some flexibility to generate better absolute, risk adjusted returns, however, even if not being able to exploit the same level of alpha generation as the big boys. There are (unfortunately?) hedge funds in this size range. Maybe the optimal approach is the application of so-called "portable alpha" strategies? Maybe its about shelling out the extra compensation for the proper talent, even if it is a small group of individuals (ex-Amaranth traders, maybe)? Of course, the numbers could get big quickly, and if Harvard alumni had the temerity to protest the compensation of one of the best (THE best?) manager in the endowment universe, how can a small liberal arts school or HBCU even fathom hiring a team of such people. How much risk is there for a college or university president, at this level, of such a move?
Anyway, this is something that bothers me on a personal level. Although it fundamentally has little to do with alternative investments and access to them, that is a symptom of a much more pervasive problem. I don't believe it to even be a "race" issue (in the case of HBCUs). It is really a class and size issue. But I still don't like it.
Whew! Finally done. Until next time, gentle readers...
Subscribe to:
Posts (Atom)