What the fat IPO pipeline means for investors

The size of the opportunity

We’re gearing up for some really interesting activity in the IPO market in 2010.  To put things in perspective, in 2010, IPOs returned 72% more money than the companies that exited in 2009 (although at $40B, that’s still about 40% less than peak levels in 2007).

According to Sarah Lacy’s recent article in TechCrunch, Exits Lag in the 4th Quarter, but IPO Hype Boils for 2011:

There is a lot of hype swirling that 2011 is going to be the big comeback year for the venture-backed IPO. And we’re talking about big, gaudy IPOs, not small ones that essentially function as another funding round. And interestingly, pundits and investors expect some new $1 billion companies to debut in both cleantech and Internet sectors.

Certainly firms like LinkedIn, Groupon, Facebook, Pandora, and Zynga have raised lots of VC money from investors who would welcome public liquidity.

Private Equity also benefits from IPO window

Venture backed firms — those started from scratch and basically birthed into existence for large splashy IPOs — aren’t the only ones benefiting from the opening of the IPO window for increased investor demand in new offerings.  Companies that received funding/buyouts from private equity firms are also gearing up for an exciting 2011.

According to Renaissance Capital

The past year has seen an modest uptick in offerings of companies backed by buyout firms – 37 in total, more than the two previous years combined

Big firms like HCA, TXU, and Harrah’s Entertainment are poised, waiting for the right opening to go public and make their PE-backed investors richer.

But…

It’s not all clear sailing for a couple of reasons

  1. time and money to exit:  In spite of the rah-rah of VCs saying how easy and quick it is for companies to prosper in the social media era, the inverse is actually true — successful companies may require more money and time to prepare for public markets.  According to TechCrunch’s Lacy, “The venture-backed economy is rapidly becoming polarized between quick flips or a long, hard-fought slogs even for the hottest companies.”
  2. fuzzy pricing for private firms: Investors in pre-public firms frequently talk their books, inflating performance and valuation of their portfolio companies.  Without a public mechanism to discover pricing, it’s hard to line up institutional investors for a large offering. The NYT has an article today about energy company, TXU and how pricing analysis by KKR and TPG has differed wildly.
  3. rise of secondary markets: Companies like SharesPost have provided necessarily outlets for founders and investors to cash out.  With the ability to take some money off the table and enrich themselves, certain companies would rather persist as private firms without the necessary headaches and scrutiny of running publicly-traded firms. Xpert Financial, recently launched, will play into this dynamic as well.  It’s possible that Facebook doesn’t go public for a loooong time.

Performance into 2011

While total IPO numbers still haven’t returned to 2007 levels in the US, performance is best since 2006, as average IPO rose by 23% this year.  Renaissance Capital is predicting a big year in small cap tech, consumer, and health care sectors.

Given last year’s result and if we see continued momentum, Asia Pac and Latin America look poised to not only float more new firms but good firms, with nice sized returns.

And this makes sense.  Many of the hottest Internet firms continue to find willing and able investors in the venture capital world (and out, as witnessed by Goldman’s interest in Facebook).  Other firms that have spent the past few years developing great products and even more interesting business models will tap the markets because they’re ready to grow into being real firms.

Source:

Exits Lag in the 4th Quarter, but IPO Hype Boils for 2011 (TechCrunch)

Buyout Firms Look for Easier Exits in New Year (Dealbook)

A Portfolio’s Price (NY Times)

DowJones data on 2010 transactions (DowJones)

Xpert Financial Offers Start-Ups an IPO Alternative (gigaOM)

Why Facebook won’t go public (Felix Salmon/Reuters)

2010: The Year in IPO Dealflow and Performance (The Reformed Broker)

Could the rise of the minivan signal good things for autos?

OK, OK, I think the marketing of new minivans has gotten away from itself.  Breaking the stigma of the vehicle of choice for soccer moms, new adverts use heavy metal and romance to lure new buyers But, according to the NY Times, this edgy messaging to rebrand the minivan as something really cool is working.

Analysts credit the Toyota campaign with helping to increase sales of the Sienna by 18.5 percent through November — double the industry average for minivans and a rare bright spot for Toyota, whose overall sales have been flat since bad publicity over product recalls.

Sales of the Honda Odyssey are up 42 percent since October, when the 2011 model and new ad campaigns were introduced.

Swagger Wagon

Super Metal Honda Odyssey 2011

The auto industry has climbed back from the abyss and seems to be making a go at building profitable businesses.

Just for kicks, check out the Swagger Wagon Lyrics:

[INTRO MOM AND DAD]

Yeah

This one goes out to all you minivan families out there.
Sienna SE…in the house.
Where my mother/fathers at?
Where my kids at?

Where my kids at?
Where my kids at?
Where my kids at?
Where my kids at?
Where my kids at?

No, seriously honeywhere are the kids?
They’re right there, see?
Oh, cool beans. (Read more at Will Minivans Rise Again)

Source:
Mocked as uncool, the minivan rises again (NY Times)

Stock markets continue to lose share to private exchanges

Institutional investors with large blocks of shares to sell don’t just open up an account at E*Trade and dump them into the market.  Doing so tips their hands and astute short sellers can hop a ride on stocks being disposed, making money along the way and reducing profits for the institutional seller.

Conversely, if an institution wants to accumulate shares in a relatively thinly traded stock, they can’t go out to a retail stock broker and say, “Hey buddy, get me 10 million shares of that hot new small cap tech stock.”  Doing so would cause the price to rise just by announcing such intentions.

How Institutional Investors Trade

To handle insitutional volumes of stock trading, traders do the following

  1. VWAP: Some traders will program trading software to purchase a maximum % of volume on given days (called VWAP or Volume Weighted Average Price).
  2. Smaller trades at various brokers: Sometimes traders will parcel out trades to multiple brokers to mask the fact that a large number of shares are being traded by one institution.
  3. Dark pools: And sometimes, when there is really an impetus to sell/buy a large chunk of stock, traders will go to their brokers and ask them to cross a block of shares on the low — by not going too public with the info.  Execution speed is paramount here and the action is as much in the data centers in New Jersey as it is on Wall Street.  These dark pools now account for 1 in 3 shares of stocks traded according to the Wall Street Journal.

In ‘Dark Pools’ Pick up Stock Trading Share, the WSJ takes aim at the rise in these dark pools.

The rise of so-called dark pools and other off-exchange strategies aimed at large banks and institutional traders comes as regulators on both sides of the Atlantic grapple with balancing the market efficiencies the alternative venues say they generate with the impact on individual investors.

Private venues are seen as a more efficient way for transacting large chunks of shares, but critics worry that if so much trading is done privately, publicly available prices set by exchanges will become less accurate. Dark pools are electronic platforms designed for institutions to carry out major stock trades anonymously.

Varying forces

Having 30% of trading beyond the veil of regulators and common investors creates a tiered trading system, something inherently seen as unfair and anti-competitive.  The emergence of internal stock trading platforms like powerhouse BlackRock recently announced are not new, they’re just taking on more volume and therefore, importance.  In general, we’re witnessing the rise of the machines and algorithmic trading which is the purest combination of technology and investing.  The stock exchanges like NASDAQ OMX ($NDAQ) and NYSE Euronext ($NYX) are pleading and crying to regulators to help right this wrong.

Beyond the histrionics, the stock exchanges are also developing technology to help lure institutions back to their platforms.  The NASDAQ OMX CEO was on Forbes recently touting the work they’ve done on PSX, an exchange that doesn’t give preference only to speed but also to size of trades.  This platform has already demonstrated its ability to bring many of the institutional trades happening offline, back online.

As Felix Salmon said in Wired, “In the wake of the flash crash, Mary Schapiro, chair of the Securities and Exchange Commission, publicly mused that humans may need to wrest some control back from the machines.”

‘Automated trading systems will follow their coded logic regardless of outcome while human involvement likely would have prevented these orders from executing at absurd prices.’

Giving up control to the computers is not really what’s at stake here.  Computer trading just reflects the rules-based logic entered by the humans who program the algos.  Rather, it’s the essential bifurcation of the markets: one for pros and one for the rest of us.  It’s the unleveling of the playing field at stake here that should have everyone concerned.

Source:

Dark Pools Pick up Stock Trading Share (WSJ)

Algorithms take control of Wall Street (Wired)

BlackRock to launch trading platform (FT.com)

photo courtesy of tenaciousme

Retail Brokerage Manifesto

I’ve been in the investment business for 10 years now wearing a variety of hats.  I’ve been a hedge fund analyst (small cap/tech/retail/food), ran business development for Seeking Alpha, and hold both a brokerage rep license (Series 7) and an investment advisory license (Series 65).

For the nuanced, a broker makes a living transacting stuff and an advisor is prohibited from doing this.  Even though the vast majority of my business is done as a fee on assets (not based on commissions), it’s sometimes strange wearing both hats.  I approach the business as an investment advisor would but typically manage accounts under my brokerage license — this allows me to develop unique portfolios for individual clients.  It’s inherently less scalable than an one-size-fits-all portfolio but it’s also good service and good business.

As I reflect on the past and plan for the future, I’d like to share the tenets of how I personally approach the business of investments.  It’s the creed I live by and it’s what helped me continue to grow.  Some of this is required by law, regulatory statute or is just plain my opinion.

Tradestreaming Broker’s Manifesto

  1. I don’t believe it’s inherently wrong being paid to manage client assets, even if I get paid a commission
  2. That’s because I always have the client’s best interest in mind
  3. Even if it conflicts with my own personal financial incentives
  4. Even if I *lose money* on the trade (independent reps have transaction costs on trades that they need to cover)
  5. I always told myself that in spite of the power a broker has over client decision making, I would never hard sell anything
  6. Always look for ways for clients to save money
  7. That may mean comparing Mutual Fund A vs. Mutual Fund B but it also means comparing Mutual Fund A vs. ETF A (one pays a trailer, the other is a transaction)
  8. Nobody says anyone needs to be in the market or needs to have a 60/40 portfolio
  9. The extension of this is that the best client performance sometimes comes from designing a portfolio from the ground-up, not top down and not by cramming a client into a pre-ordained portfolio or allocation
  10. I don’t believe in the Efficient Market Hypothesis (EMH) and do believe that clients can do better than the markets without having to assume more risk
  11. That said, while the potential to beat the market exists, it may be elusive and in specific cases, may not be worth trying
  12. Sometimes an honest broker makes his money by keeping clients out of trouble and that’s worth something, too, even if clients don’t necessarily recognize this
  13. There are a lot of brokers making their clients a lot of money and really doing good by them.  I want to be part of this group.
  14. Everyone in financial services has conflicts of interests and how you get paid is just one of them.  Regardless of licensing structure, good financial advice requires being honest and open with yourself and clients.
  15. Clients don’t begrudge their advisors making money and some feel good giving the business even if they could transact using an online broker
  16. But they won’t forgive if it’s done at their expense
  17. That said, very few clients could rightfully decipher if this was the case so the whole thing rests upon the broker/advisor being honest and open with him/herself.
  18. There aren’t many of us who behave as we do and that’s OK.

Do you have anything to add? Let me know in the comments.

photo courtesy of battlecreekCVB

Credit Suisse Hedge Fund Index finishes down for November

Dow Jones Credit Suisse Hedge Fund Index saw a down month in November finishing down -.18%. The index is still up almost 8% for the year.

Category Nov 2010 Oct 2010 YTD 10
Dow Jones Credit Suisse Hedge Fund Index -0.18% 1.92% 7.82%
Convertible Arbitrage 0.04% 1.98% 9.68%
Dedicated Short Bias -2.36% -3.60% -17.64%
Emerging Markets -0.38% 2.21% 9.69%
Equity Market Neutral -2.51% 0.93% -2.54%
Event Driven 0.15% 1.80% 8.37%
Distressed 0.33% 1.32% 7.33%
Multi-Strategy 0.04% 2.17% 9.14%
Risk Arbitrage -1.44% -0.62% 2.01%
Fixed Income Arbitrage 0.74% 1.10% 11.82%
Global Macro -0.52% 1.62% 10.52%
Long/Short Equity 0.46% 2.00% 5.66%
Managed Futures -4.11% 4.29% 6.44%
Multi-Strategy 0.30% 2.03% 7.46%

What Urban Meyer’s retirement means for investors

Massively winning University of Florida football coach Urban Meyer announced his resignation (again) from coaching. After some health problems and a premature announcement of his exiting coaching last year, this move appears is permanent

What prompted a coach that has built one of the most successful and winningest football programs in the US to just give up and quit?

At the end of the day, I’m very convinced that you’re going to be judged on how you are as a husband and as a father and not on how many bowl games we won (Washington Post blog)

Winners leave on top

Being successful in investing — like life — means knowing when you’ve seen your fortunate share.  Exiting a winner shows a certain gratitude for what you’ve been given, whether monetary abundance, family bliss, or other gifts.  Staying around too long, trying to push the envelope beyond this natural departure point doesn’t work.
I’m sad when I watch Brett Favre play football.  I’m embarrassed for him.  He doesn’t know when to say goodbye.  One of my favorite players of all time, Detroit’s famed running back, Barry Sanders surprised everyone when he just bowed out.  He had a few more years and a few more thousands of yards in him.  But he was done.  Michael Jordan battled with his fate, returning to basketball, when he should have been at home, coaching, investing — anything but continuing to do the same things that had made him so successful in the first place.

Leaving is harder than staying

Sticking around for Meyer would have been the easier decision, but not necessarily the right one.  It took a huge pair of testicles to do what he did.  That’s a true sign of leadership and success.
History has a natural replacement cycle.  People die and new generations of people replace them and their roles.  Successful investors should recognize this pattern, be thankful for what they have and realize at some point, it’s someone else’s turn to take over.
No one says you have to remain invested.  That’s just one of many false aphorisms we’ve been fed.

Tradestream Radio #2: hedge fund replication, insider trading, more

tradestream radio, discussing investing and technology

This week’s episode of Tradestreaming Radio is up and ready for listen. Let me know what you think and if you have ideas for future shows. You can listen below, find the transcript below or download directly to you iPod/iPhone via iTunes — search for Tradestream or go here.

This episode includes

  • the huge insider trading probe into many of the largest US hedge funds
  • research networks (expert networks) and how they play a role in the investing process
  • interview with hedge fund replication research provider, AlphaClone CEO and founder
  • Ivory Tower Report: Smart investors think like economists (is that a good thing?)
  • Trend Watch: Seeking Alpha continues to grow and introduces its own investing app store

Transcript Continue reading “Tradestream Radio #2: hedge fund replication, insider trading, more”

Blowing up the fine print in financial product marketing

As a user of various financial products over the years, I sometimes wonder what it is I actually own (most of the time this occurs sometime after hitting some single malt before bed and sometime before day break).  I dunno — I read the labels on food that I ingest.  Just thought it might be interesting to know what’s in the mutual fund into which I invested all my life’s savings.  Just for kicks, you know?

So, I decided to do a little sleuth work and *pull back the covers* on the disclaimer language on some of the most widely held financial products.  What I found written in Arial font size 6 might be a little surprising to owners of mutual funds and ETFs:

Of course, past results are not at all, in any way, form, or fashion indicative of future performance.  No way and it doesn’t even matter that we have to say that.  We probably would anyway just to cover our own asses.  Anyway, in terms of performance, it’s really just a crapshoot.  Who wrote that Random Walk thingie again?  We’re not big fans of him (he’s probably an academic).  We don’t love Bogle either — he’s the one who tried to force us into buy and hold strategies.  Cramer’s more our speed, if you care.  We sell/market financial products that trade in a secondary market so we don’t really care all that much anyway how they perform.  As long as we grow our assets under management and provide liquidity to the products.  In fact, we’re not quite sure what to make of all the blogger research that shows that our ETFs don’t come close to tracking the indices they’re supposed to follow.  And those leveraged ones — the 2x, 3x, 4x, XXXs — who really understands how all those things work?  I mean, can you really use daily future rebalancing as part of a core strategy anyway??  Thankfully for us, it’s products like these that enable us to raise our management fees in an environment that continuously pushes fees down.  We had it good with mutual funds — whose stupid idea was to transition to lower-fee ETFs? By the way, if you really want performance, why not try just giving your money to one of those fancy hedge fund vehicles?  They seem to know what they’re doing, right?  Man, I’d like to be in their shoes.  Me?  I’d be David Tepper or maybe  Bill Ackman.  Yeah, Ackman.  With his build and that gray heirhair, he’s totally a baller investor. Also, you should know, that we don’t really believe all that new-fangled behavioral research that shows that for investors, our products are sort of like drugs in the hands of addicts.  In essence, there’s no way these people are going to make money in the market anyway.  So, why not provide a vehicle that purports to do as much.  Is that so bad?  Is it?

Wow, who knew what was written in all that small print?

photo courtesy of somegeekintn