Private Equity and Venture Capital
Maurice Greenberg's piece in today's Wall Street Journal nearly provoked an attack of apoplexy. I'm unsure if I've read such a slanted, self-serving editorial during a long, long time. I'm pretty shocked that the WSJ would publish such pandering drivel. Be that because it may, we all know that the large Mo controls gobs of AIG shares both directly and thru his management of CV Starr, so let's just say that we all know where he's coming from. When he starts out with the bailout-inconsistency argument, he quite had my ear. But when he went on to praise the Citigroup package while chastizing the AIG deal, i could not help but call bull$hit.
To date, the govt has shown everything but a uniform approach. It didn't give assistance to Lehman Brothers. But it did push for a much-publicized and now abandoned decide to purchase troubled assets. the govt also pushed for a punitive program for American International Group (AIG) that benefits only the company's credit default swap counterparties. And it's now purchasing redeemable, nonvoting preferred shares in a number of the nation's largest banks.
The Citi deal is sensible in many respects. the govt will inject $20 billion into the corporate and act as a guarantor of 90% of losses stemming from $306 billion in toxic assets. In return, the govt will receive $27 billion of preferred stock paying an 8% dividend and warrants, giving the govt a possible equity interest in Citi of up to about 8%. The Citi board should be congratulated for insisting on a deal that both preserves jobs and benefits taxpayers.
But the government's strategy for Citi differs markedly from its initial response to the primary companies to experience liquidity crises. one among those companies was AIG, the corporate I led for several years.
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The maintenance of the established order will end in the loss of tens of thousands of jobs, lock in billions of dollars of losses for pension funds that are significant AIG shareholders, and wipe out the savings of retirees and many other ordinary Americans. this is often not what the broader economy needs. it's a lose-lose proposition for everybody but AIG's credit default swap counterparties, who are going to be made whole under the new deal.
The government should instead apply an equivalent principles it's applying to Citigroup to make a win-win situation for AIG and its stakeholders. First and foremost, the govt should provide a federal guaranty to satisfy AIG's counterparty collateral requirements, which have consumed the overwhelming majority of the government-provided funding so far .
********************
The purpose of any federal assistance should be to preserve jobs and permit private capital to require the place of state once private capital becomes available. The structure of the present AIG-government deal makes that impossible.
The role of state shouldn't be to force a corporation out of business, but rather to assist it stay in business in order that it can still be a taxpayer and an employer. this needs revisiting the terms of the federal government's assistance to AIG to avoid that company's breakup and therefore the devastating consequences that might follow.
Hank, you've to be kidding me. The U.S. taxpayers saved Citigroup's life, and for that we may rise up to eight of the corporate . that's called a "punitive program" in Hank's parlance for the U.S. taxpayer. In my world once you save a corporation you own ALL the equity, not 1/12th of the equity. the very fact that the taxpayer gets up to 80% of AIG - now that starts to form sense. I accept as true with the large Mo's contention that "The purpose of any federal assistance should be to preserve jobs and permit private capital to require the place of state once private capital becomes available." But that has nothing to try to to with post-restructuring equity ownership. He then pulls on the heartstrings by saying "The maintenance of the established order will end in the loss of tens of thousands of jobs, lock in billions of dollars of losses for pension funds that are significant AIG shareholders, and wipe out the savings of retirees and many other ordinary Americans." Well, Hank, that's 100% on you. you ought to have thought things through before building a corporation and a culture that gambled it all - and lost. You tell that retiree, that pensioner how you screwed them. That's called integrity. This thinly-veiled involve personally getting bailed out is both insulting and offensive. and i am not buying it. I'm sure that my fellow U.S. taxpayers aren't, either.
Private Equity: The daisy chain of secondary sales of PE L.P. interests will almost certainly accelerate. it's one among those slow-motion train wrecks that's painful to observe . calculus is straightforward to understand: public equity values plummet, PE values are stickier and fall more slowly, PE as a percentage of overall assets rises to unacceptable levels, precipitating a wave of sales of PE L.P. interests. a stimulating feature of this dynamic is autocorrelation, where PE values are slow to regulate notwithstanding the general public market comparables that are available. If industrials are down 40%, then don't you think that a portfolio of PE holdings within the industrials sector should trade well beyond 40% down thanks to illiquidity? this is not the way many PE funds prefer to see the planet , however. Regardless, the secondary market is simply that - a market - and therefore the discounts being placed on marquee funds like KKR and land reflect this reality. Pensions and endowments need to dump stuff, and try to try to to so at a fraction of their basis. But even at fire-sale prices it's hard to maneuver the merchandise. within the next few months we'll see just how desperate these investors are. Might we see KKR trade at 30 cents on the dollar? It's possible. And frightening.
Venture Capital: I attended a stimulating brownbag today with my pals at betaworks. an enormous a part of the discussion was around funding in today's hostile environment. Here are a couple of of the tidbits that came out of the dialogue:
Be prepared to measure together with your current investment syndicate.
If possible, have a deep pocketed investor as a part of your syndicate.
Raise 18-24 months of capital, no less. this will be done through a mixture of capital raised plus a discount of operating burn.
Restructurings are becoming ugly. Investors, whether inside or outside, are demanding both haircuts from the last round plus and a priority return of capital such they're fully repaid before anyone else gets anything. Looks, smells and seems like a cram down. this is often why having 24 months of capital within the bank upfront is so important.
In these down times coalitions get formed between Management and New investors vs. Old investors. This mis-alignment of interests can cause gridlock and push a corporation to the brink.
There was far more but these were the high points. Even with today's difficulties there was still tons of pleasure about new companies and new ideas, with the arrogance that cash would come to people who truly deserve it. In short, there's hope.
To date, the govt has shown everything but a uniform approach. It didn't give assistance to Lehman Brothers. But it did push for a much-publicized and now abandoned decide to purchase troubled assets. the govt also pushed for a punitive program for American International Group (AIG) that benefits only the company's credit default swap counterparties. And it's now purchasing redeemable, nonvoting preferred shares in a number of the nation's largest banks.
The Citi deal is sensible in many respects. the govt will inject $20 billion into the corporate and act as a guarantor of 90% of losses stemming from $306 billion in toxic assets. In return, the govt will receive $27 billion of preferred stock paying an 8% dividend and warrants, giving the govt a possible equity interest in Citi of up to about 8%. The Citi board should be congratulated for insisting on a deal that both preserves jobs and benefits taxpayers.
But the government's strategy for Citi differs markedly from its initial response to the primary companies to experience liquidity crises. one among those companies was AIG, the corporate I led for several years.
********************
The maintenance of the established order will end in the loss of tens of thousands of jobs, lock in billions of dollars of losses for pension funds that are significant AIG shareholders, and wipe out the savings of retirees and many other ordinary Americans. this is often not what the broader economy needs. it's a lose-lose proposition for everybody but AIG's credit default swap counterparties, who are going to be made whole under the new deal.
The government should instead apply an equivalent principles it's applying to Citigroup to make a win-win situation for AIG and its stakeholders. First and foremost, the govt should provide a federal guaranty to satisfy AIG's counterparty collateral requirements, which have consumed the overwhelming majority of the government-provided funding so far .
********************
The purpose of any federal assistance should be to preserve jobs and permit private capital to require the place of state once private capital becomes available. The structure of the present AIG-government deal makes that impossible.
The role of state shouldn't be to force a corporation out of business, but rather to assist it stay in business in order that it can still be a taxpayer and an employer. this needs revisiting the terms of the federal government's assistance to AIG to avoid that company's breakup and therefore the devastating consequences that might follow.
Hank, you've to be kidding me. The U.S. taxpayers saved Citigroup's life, and for that we may rise up to eight of the corporate . that's called a "punitive program" in Hank's parlance for the U.S. taxpayer. In my world once you save a corporation you own ALL the equity, not 1/12th of the equity. the very fact that the taxpayer gets up to 80% of AIG - now that starts to form sense. I accept as true with the large Mo's contention that "The purpose of any federal assistance should be to preserve jobs and permit private capital to require the place of state once private capital becomes available." But that has nothing to try to to with post-restructuring equity ownership. He then pulls on the heartstrings by saying "The maintenance of the established order will end in the loss of tens of thousands of jobs, lock in billions of dollars of losses for pension funds that are significant AIG shareholders, and wipe out the savings of retirees and many other ordinary Americans." Well, Hank, that's 100% on you. you ought to have thought things through before building a corporation and a culture that gambled it all - and lost. You tell that retiree, that pensioner how you screwed them. That's called integrity. This thinly-veiled involve personally getting bailed out is both insulting and offensive. and i am not buying it. I'm sure that my fellow U.S. taxpayers aren't, either.
Private Equity: The daisy chain of secondary sales of PE L.P. interests will almost certainly accelerate. it's one among those slow-motion train wrecks that's painful to observe . calculus is straightforward to understand: public equity values plummet, PE values are stickier and fall more slowly, PE as a percentage of overall assets rises to unacceptable levels, precipitating a wave of sales of PE L.P. interests. a stimulating feature of this dynamic is autocorrelation, where PE values are slow to regulate notwithstanding the general public market comparables that are available. If industrials are down 40%, then don't you think that a portfolio of PE holdings within the industrials sector should trade well beyond 40% down thanks to illiquidity? this is not the way many PE funds prefer to see the planet , however. Regardless, the secondary market is simply that - a market - and therefore the discounts being placed on marquee funds like KKR and land reflect this reality. Pensions and endowments need to dump stuff, and try to try to to so at a fraction of their basis. But even at fire-sale prices it's hard to maneuver the merchandise. within the next few months we'll see just how desperate these investors are. Might we see KKR trade at 30 cents on the dollar? It's possible. And frightening.
Venture Capital: I attended a stimulating brownbag today with my pals at betaworks. an enormous a part of the discussion was around funding in today's hostile environment. Here are a couple of of the tidbits that came out of the dialogue:
Be prepared to measure together with your current investment syndicate.
If possible, have a deep pocketed investor as a part of your syndicate.
Raise 18-24 months of capital, no less. this will be done through a mixture of capital raised plus a discount of operating burn.
Restructurings are becoming ugly. Investors, whether inside or outside, are demanding both haircuts from the last round plus and a priority return of capital such they're fully repaid before anyone else gets anything. Looks, smells and seems like a cram down. this is often why having 24 months of capital within the bank upfront is so important.
In these down times coalitions get formed between Management and New investors vs. Old investors. This mis-alignment of interests can cause gridlock and push a corporation to the brink.
There was far more but these were the high points. Even with today's difficulties there was still tons of pleasure about new companies and new ideas, with the arrogance that cash would come to people who truly deserve it. In short, there's hope.
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