The Biggest Reset Looms for Corporate Credit Market

[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience.” line_height=”1.4″][tm_spacer size=”lg:25″][tm_heading tag=”div” custom_google_font=”” text=”Leveraged loans,” extended to junk-rated and highly leveraged companies, are too risky for banks to keep on their books. Banks sell them to loan mutual funds, or they slice-and-dice them into structured Collateralized Loan Obligations (CLOs) and sell them to institutional investors. This way, the banks get the rich fees but slough off the risk to investors, such as asset managers and pension funds.”][tm_spacer size=”lg:63″]
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[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Use psychological pricing methods.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”This has turned into a booming market. Issuance has soared. And given the pandemic chase for yield, the risk premium that investors are demanding to buy the highest rated “tranches” of these CLOs has dropped to the lowest since the Financial Crisis.”][tm_spacer size=”xs:30;lg:35″][tm_heading tag=”div” custom_google_font=”” text=”Mass Mutual’s investment subsidiary, Barings, has packaged leveraged loans into a $517-million CLO that is sold in “tranches” of different risk levels. The least risky tranche is rated AAA. Barings is now selling the AAA-rated tranche to investors priced at a premium of just 99 basis points (0.99 percentage points) over Libor, according to S&P Capital, cited by the Financial Times.”]
[tm_spacer size=”xs:30;lg:52″][tm_heading tag=”div” custom_google_font=”” text=”Also this week, New York Life is selling the top-rated tranche of a CLO at a spread of less than 100 bases over Libor. And Palmer Square Asset Management sold a $510-million CLO at a similar premium over Libor. In the secondary markets, where the CLOs are trading, red-hot demand has already pushed spreads below 100 basis points. These are the lowest risk premiums over Libor since the Financial Crisis.”][tm_spacer size=”xs:30;lg:68″]
[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Demonstrate the differences” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”These floating-rate CLOs are attractive to asset managers in an environment of rising interest rates. If rates rise further, Libor rises in tandem, and investors would be protected against rising rates by the Libor-plus feature of the yields.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Offer a money-back guarantee” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Libor has surged in near-parallel with the US three-month Treasury yield and on Monday reached 1.83%. So the yield of Barings CLO was 2.82%. While the Libor-plus structure compensates investors for the risk of rising yields and inflation, it does not compensate investors for credit risk!”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Test your offer and price, and be creative.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”These low risk premiums over Libor are part of what constitutes the “financial conditions” that the Fed has been trying to tighten by raising its target range for the federal funds rate and by unwinding QE. It’s supposed to make borrowing a little harder and a little more costly in order to cool off the credit party.”]
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Why Trump Is So Clumsy About Fighting ‘Free Trade’

[tm_heading tag=”h5″ custom_google_font=”” google_fonts=”font_family:Poppins%3A300%2Cregular%2C500%2C600%2C700″ font_weight=”600″ text=”President Trump announced last week that he plans to impose 25 percent tariffs on imported steel and 10 percent on imported aluminum.” line_height=”1.4″][tm_spacer size=”lg:25″][tm_heading tag=”div” custom_google_font=”” text=”It’s important to note that any policy pronouncement from this president is done within the paradigm of a real estate wheeler-dealer who sees deals of any kind as a zero-sum game. I win, and you lose; there is no such thing as a good trade deal that works as a win-win for both sides.”][tm_spacer size=”lg:63″]
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[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Use psychological pricing methods.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Expressing the opposite view is Paul Krugman, who writes, “Trade isn’t a zero-sum game: it raises the productivity and wealth of the world economy.” And the corollary also applies as well: any action taken to disrupt the free flow of goods between countries is likely to provoke a counter-reaction, the result being a trade war in which every country loses out”][tm_spacer size=”xs:30;lg:35″][tm_heading tag=”div” custom_google_font=”” text=”The two “sacred tenets,” free trade and comparative advantage, are inextricably linked. After all, a “comparative advantage” begets the question, compared to what? We export goods to other nations when we can do that relatively better than they can and likewise import goods or services that we have a comparative disadvantage in producing.”]
[tm_spacer size=”xs:30;lg:52″][tm_heading tag=”div” custom_google_font=”” text=”So tropical fruit is exported from, say, Mexico or Chile, rather than from Canada. And Australia’s abundance of natural resources explains why it has become a mining superpower. Of course, this classical model of trade and comparative advantage breaks down somewhat in an ultra-globalized world in which capital accounts have been largely liberalized “][tm_spacer size=”xs:30;lg:68”]
[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Demonstrate the differences” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Technology and labor skills can also be altered by national development strategies of the kind exemplified by the countries of Asia (South Korea being a prime example), as Robert Wade illustrated in his seminal work。”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Offer a money-back guarantee” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”The bottom line is that it is a mistake for a country simply to follow an idealized playbook from an economics textbook on free trade/comparative advantage, and allow itself to be out-gamed via strategic trade policy/national development decisions taken elsewhere—particularly when the economy is not operating at full employment, which is key to optimizing the benefits of free trade.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Test your offer and price, and be creative.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”It’s all very well to argue that cheaper imported goods are benefits, but it is hard to consume those benefits when one is unemployed against a backdrop of rusting unused factories that have been shuttered, and where the jobs have been sent to Mexico.”]
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Stock Buybacks Hurt Workers and the Economy

[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Workers, innovation, and productivity all suffer when corporations spend their new U.S. tax breaks on stock buybacks.” line_height=”1.4″][tm_spacer size=”lg:25″][tm_heading tag=”div” custom_google_font=”” text=”The deceptively named Tax Cut and Jobs Act slashes the corporate tax rate from 35 percent to 21 percent on the theory that companies will use the extra after-tax profits to make productive investments that will create jobs for Americans. “][tm_spacer size=”lg:63”]
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[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Use psychological pricing methods.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Yet it is clear that instead of helping to rebuild the vanishing middle class, corporate executives will funnel the tax savings to already-rich shareholders through stock buybacks and cash dividends, increasing their take from the stock market. As a result, the nation’s rampantly unequal income distribution will only become worse.”][tm_spacer size=”xs:30;lg:35″][tm_heading tag=”div” custom_google_font=”” text=”When only a very few CEOs tentatively raised their hands, Cohn asked, “Why aren’t the other hands up?” Subsequent interviews made clear that, among the CEOs, it was already a foregone conclusion that the tax breaks would end up as buybacks and dividends.”]
[tm_spacer size=”xs:30;lg:52″][tm_heading tag=”div” custom_google_font=”” text=”For the Republican corporate tax cut to result in job creation, Congress must follow it up with legislation to rein in these distributions to shareholders. There is a straightforward and practical way to accomplish this objective: Congress should ban corporations from doing stock buybacks, more formally known as open-market stock repurchases.”][tm_spacer size=”xs:30;lg:68″]
[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Demonstrate the differences” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”First, the stock-based compensation of senior executives incentivizes them to do distributions to shareholders. Annual mean remuneration of CEOs of the same 475 companies listed on the S&P 500 from 2007 through 2016 ranged from $9.4 million in 2009, when the stock market was in the dumps, to $20.1 million in 2015, when the stock market was booming.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Offer a money-back guarantee” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Second, for more than three decades, executives of major U.S. corporations have preached, conveniently masking their self-interest, that the paramount responsibility of their companies is to “create value” for shareholders. Most recently, from 2007 through 2016, stock repurchases by 461 companies on listed on the S&P 500 totaled $4 trillion, equal to 54 percent of profits.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Test your offer and price, and be creative.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”In addition, these companies declared $2.9 trillion in dividends, which were 39 percent of profits. Indeed, top corporate executives are often willing to incur debt, lay off employees, cut wages, sell assets, and eat into cash reserves to “maximize shareholder value.””]
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SEC Stymies Plans to Offer Bitcoin Funds Anytime

[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”The Securities and Exchange Commission (SEC) yesterday put the kibosh on plans to offer exchange-traded funds (ETFs) or other products based on bitcoin or cryptocurrencies to retail investors anytime soon.” line_height=”1.4″][tm_spacer size=”lg:25″][tm_heading tag=”div” custom_google_font=”” text=”n a Staff Letter: Engaging on Fund Innovation and Cryptocurrency-related Holdings, Dalia Blass, the SEC ’s Director of the Division of Investment Management, posed 31 detailed questions over how funds would value, store, and safeguard fund holdings, as well as concerns over whether investors understood the risk of these investments, and the potential for market manipulation.”][tm_spacer size=”lg:63″]
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[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Use psychological pricing methods.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”The SEC has been skeptical over pressure to launch bitcoin funds to appeal to retail investors, as well as expressed concerns over initial coin offerings, determining that the latter should be treated as securities sales and thus conform with existing investor protection rules, according to the WSJ.”][tm_spacer size=”xs:30;lg:35″][tm_heading tag=”div” custom_google_font=”” text=”Last year, the SEC rejected two proposed ETFs that would directly own bitcoin, including one from Cameron and Tyler Winklevoss, arguing that the global market for the digital currency wasn’t transparent enough to support sufficient oversight.”]
[tm_spacer size=”xs:30;lg:52″][tm_heading tag=”div” custom_google_font=”” text=”Some fund companies hoped that the SEC might relent after two Chicago exchanges late last year launched futures contracts on bitcoin. Those contracts are regulated by the Commodity Futures Trading Commission, a smaller federal agency whose rules allow Wall Street to more easily market new products”][tm_spacer size=”xs:30;lg:68″]
[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Demonstrate the differences” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Mutual funds and ETFs must value their assets at the close of each business day to calculate a new asset value (NAV). The staff note that appropriate valuation is important, as it determines fund performance, what investors pay for mutual funds, what authorized participants pay for ETFs, and what they receive when they exit, among other issues.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Offer a money-back guarantee” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”The thrust of the CNBC report is that the SEC’s concern is fixated on structure, rather than arises from a more bedrock concern about whether the agency wishes to make it easier for retail investors to enter a market that’s vulnerable to the fraud and manipulation Clayton has outlined.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Test your offer and price, and be creative.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Just last week, the SEC confounded these expectations, by asking sponsors to withdraw proposals to offer ETFs based on bitcoin futures.”]
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Shareholder Proposals Target Climate Change Risk

[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”As the Trump administration has backed away from extending even the modest efforts on climate change initiated by his predecessor– let alone initiating any policy even remotely adequate toward confronting the magnitude of the problem– three types of efforts loom larger.” line_height=”1.4″][tm_spacer size=”lg:25″][tm_heading tag=”div” custom_google_font=”” text=”First, are those by other countries to move away from fossil fuels, toward renewable sources of energy. These are not limited to developed countries, but as I wrote here, now also include China and India, the world’s two most populous countries, each of which is attempting to curtail use of fossil fuels.”][tm_spacer size=”lg:63″]
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[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Use psychological pricing methods.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”The Journal notes that last year, three successful proposals at Occidental, Exxon, and PPL “were the first to garner majority votes on resolutions for annual disclosure of the impact on business from global efforts to limit the average rise in temperatures.”][tm_spacer size=”xs:30;lg:35″][tm_heading tag=”div” custom_google_font=”” text=”As investors such as BlackRock look deeper into strategy and climate change issues (and call them out specifically in their shareholder engagement activities), they are increasingly becoming more active in their support for calls for increased transparency and disclosure regarding portfolio companies’ preparedness for climate change.”]
[tm_spacer size=”xs:30;lg:52″][tm_heading tag=”div” custom_google_font=”” text=”EY’s 2017 investor survey on ESG issues found that investors routinely included ESG considerations as part of their investment decisions. Shareholders are not only paying closer attention to non-financial indicators, but they are also more likely to take action on such information.”][tm_spacer size=”xs:30;lg:68″]
[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Demonstrate the differences” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”According to the study, the percentage of respondents who consider nonfinancial disclosures to be seldom material or have no financial impact dropped from 60% in 2013 to 16% in 2016. “][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Offer a money-back guarantee” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Furthermore, the report found that, when faced with disclosures of risk or history of poor environmental performance, 15 percent of investors responded that they would rule out the investment immediately, while 76 percent would reconsider the investment.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Test your offer and price, and be creative.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Similarly, 8 percent of investors responded that they would rule out an investment with disclosures involving risk from climate change, while 71 percent would reconsider the investment.

Actual voting data seems to confirm the study; many shareholders are coming off the sidelines on environmental and social shareholder proposals.”]

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Artificial Intelligence and the Stability of Markets

[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Artificial intelligence (AI) is useful for optimally controlling an existing system, one with clearly understood risks. It excels at pattern matching and control mechanisms.” line_height=”1.4″][tm_spacer size=”lg:25″][tm_heading tag=”div” custom_google_font=”” text=”Given enough observations and a strong signal, it can identify deep dynamic structures much more robustly than any human can and is far superior in areas that require the statistical evaluation of large quantities of data. It can do so without human intervention.”][tm_spacer size=”lg:63″]
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[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Use psychological pricing methods.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”However, the very same qualities that make AI so useful for the micro-prudential authorities are also why it could destabilise the financial system and increase systemic risk, as discussed in Danielsson et al. (2017).”][tm_spacer size=”xs:30;lg:35″][tm_heading tag=”div” custom_google_font=”” text=”In successful large-scale applications, an AI engine exercises control over small parts of an overall problem, where the global solution is simply aggregated sub-solutions. Controlling all of the small parts of a system separately is equivalent to controlling the system in its entirety.”]
[tm_spacer size=”xs:30;lg:52″][tm_heading tag=”div” custom_google_font=”” text=”The first step in risk management is the modelling of risk and that is straightforward for AI. This involves the processing of market prices with relatively simple statistical techniques, work that is already well under way. “][tm_spacer size=”xs:30;lg:68”]
[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Demonstrate the differences” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”The next step is to combine detailed knowledge of all the positions held by a bank with information on the individuals who decide on those positions, creating a risk management AI engine with knowledge of risk, positions, and human capital.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Offer a money-back guarantee” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”While we still have some way to go toward that end, most of the necessary information is already inside banks’ IT infrastructure and there are no insurmountable technological hurdles along the way.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Test your offer and price, and be creative.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”All that is left is to inform the engine of a bank’s high-level objectives. The machine can then automatically run standard risk management and asset allocation functions, set position limits, recommend who gets fired and who gets bonuses, and advise on which asset classes to invest in.”]
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More Signs of Private Equity Market Frenzy: Firms Selling Stakes

[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”As an insider once told me, the most important skill that private equity firms possess, aside from their ability to hide their sociopathic tendencies, is their finely-honed sense of when to sell.” line_height=”1.4″][tm_spacer size=”lg:25″][tm_heading tag=”div” custom_google_font=”” text=”A Wall Street Journal report today is therefore a strong indicator that the private equity is at or near a market peak. In Private Equity Bubble? What Private Equity Bubble? the Journal describes how firms are selling ownership stakes. Recall that the last time that happened was in 2007. Blackstone launched its IPO just before the crisis. KKR filed for an offering in 2007 but missed the window.”][tm_spacer size=”lg:63″]
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[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Use psychological pricing methods.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”The amusing part of the story is the effort of the parties who have acquired interests in private equity firms recently, are keen to do so, or are otherwise allies of general partners to depict these firms as great buys. These purchases are taking place when the private equity industry has been paying nosebleed prices for deals for two years and central banks are looking to end their massive monetary stimulus. “][tm_spacer size=”xs:30;lg:35″][tm_heading tag=”div” custom_google_font=”” text=”Even the ECB, which was a believer in super low and negative interest rates after the Fed recognized that its QE experiment hadn’t worked out as it had expected, is now looking to unwind QE, then raise rates.”]
[tm_spacer size=”xs:30;lg:52″][tm_heading tag=”div” custom_google_font=”” text=”Thus the tremendous central bank tailwind to asset prices is not only stopping but is going to start turning in the opposite direction. Even though any tightening is sure to be administered slowly and with great caution, a central bank regime change is unfriendly to risky investments like private equity.”][tm_spacer size=”xs:30;lg:68″]
[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Demonstrate the differences” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”The boosters also tout private equity’s supposedly illustrious returns, which as we’ve written repeatedly, are in fact exaggerated. Private equity firms use IRR, which is a misleading metric. For the last decade, private equity has regularly underperformed public equities on a risk-adjusted basis.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Offer a money-back guarantee” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Moreover, the story depicts the entry of sovereign wealth funds and family offices as direct private equity investors as a plus for private equity, when that is a negative.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Test your offer and price, and be creative.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”First, more parties bidding up deals means even more likelihood of overpayment and disappointing returns. Second, these very same sovereign wealth funds and family offices have been significant private equity fund investors.”]
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Silicon Valley Rejects Shareholder Value Theory

[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”I’ve written about problems with Shareholder Value Theory (SVT). The constant need to pump an ever-appreciating stock price to anonymous shareholders, the vast majority who contributed nothing to a company, rewards short-term thinking. Buybacks and other financial tricks tower over innovation and growth initiatives.” line_height=”1.4″][tm_spacer size=”lg:25″][tm_heading tag=”div” custom_google_font=”” text=”Social Capital is founded and managed by Venture Capitalist Chamath Palihapitiya. Their portfolio includes Slack, Forge, Box, Brilliant, and a sizable group of unusually high-quality companies. Palihapitiya sounds like somebody you’d want to stranded on an island with: he’s be interesting company and probably figure a way off. He tends to make a lot of money for himself and the people he works with.”][tm_spacer size=”lg:63″]
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[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Use psychological pricing methods.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Less is known about co-founder Hedosophia, a venture firm founded in 2012, that filings state has over $1 billion in holdings. The firm’s webpage is retro 1990’s, appearing on the second page of a Google search for the company name and referencing a street address which, on Google Maps, is a nondescript building with no signage. “][tm_spacer size=”xs:30;lg:35″][tm_heading tag=”div” custom_google_font=”” text=”Hedosophia’s founder is 34 year-old Ian Osborne, of Osborne & Associates and Connaught. These firms have apparently acted as financial advisers “for eight of the fifteen most valuable private companies in the technology sector.”]
[tm_spacer size=”xs:30;lg:52″][tm_heading tag=”div” custom_google_font=”” text=”The purpose of SCH is to to enable flexibility in the cumbersome IPO process. On one hand, it’s impossible to feel bad for 30-something tech executives flying private jets and repeating the same Power Point dozens of times to potential investors.”][tm_spacer size=”xs:30;lg:68″]
[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Demonstrate the differences” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Especially since, absent a disaster, they will reap a fortune at the end of the process. But those rules can also harm ordinary employees who are subject to rules, because of their tiny stock grants, that are meant for Masters of the Universe.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Offer a money-back guarantee” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”I watched this happen with a number of companies during the first dot-com boom. Regular employees held locked out stock and watched their chance to finally buy a house or pay off student loans vaporize. Many were taxed on phantom income that never materialized under rules I won’t pretend to understand much less explain.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Test your offer and price, and be creative.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”These were not top-tier b-school alum; they were writers, computer programmers, online forum moderators — people who knew nothing about capital markets — and ended up owing a fortune. Their bad for not studying the rules more? Maybe, but since the rules exist to protect the clueless those same rules could have done more to protect them.”]
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Mutual Funds Cut Uber Valuation by as Much as 15%

[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”The Wall Street Journal reported that Vanguard, Principal, and Hartford Funds cut the value of their shares by 15% as of June 30. T. Rowe Price lowered its Uber share price by 12%. Fidelity maintained its price and peculiarly, Blackrock increased its price to $53.88.” line_height=”1.4″][tm_spacer size=”lg:25″][tm_heading tag=”div” custom_google_font=”” text=”Some major investors are finally feeling compelled to apply the scratch and dent markdown to Uber shares. Seven mutual funds own Uber shares, and more than half cut their price from the $48.77 per share price at which they’d held them since the fourth quarter of 2015, the last time Uber raised money.”][tm_spacer size=”lg:63″]
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[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Use psychological pricing methods.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Having high profile investors repudiate the valuations that venture capitalists are touting is proof that the myth of Uber’s inevitable dominance of the ride sharing business, and that that would someone lead to ginormous profits is finally getting long-overdue scrutiny. Mind you, these investors can afford to cut their valuations because they got at lower prices, some at $15.51 a share.”][tm_spacer size=”xs:30;lg:35″][tm_heading tag=”div” custom_google_font=”” text=”Needless to say, the fact that sophisticated investors are already haircutting Uber’s shares is going to put a dent in its fundraising efforts. The Journal repeated the Uber party line about its fundraising effort with SoftBank.
A negotiation of what is a simple sale of existing shares (as in the terms are already set) does not take months to negotiate. The longer talks like this go on, the less likely anything is to get done in the absence of a big development.”]
[tm_spacer size=”xs:30;lg:52″][tm_heading tag=”div” custom_google_font=”” text=”Yet other outlets that picked up on the story that Bloomberg broke on July 25 took up Uber’s spin, with no evidence of any input from SoftBank to justify the pro-Uber hype. The Journal’s account, following close on the heels of the Bloomberg story, and based on only US sources, was headlined SoftBank Seeks Multibillion-Dollar Stake in Uber.”][tm_spacer size=”xs:30;lg:68″]
[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Demonstrate the differences” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”On August 7, the Journal headline was, “SoftBank Chief Says He Wants Stake in Uber or Lyft.” And what did CEO Masayoshi Son say at a press conference? ““We are interested in discussing with Uber. We are also interested in discussing with Lyft.” That is not the normal Japanese locution for negotiations that are underway. That is basically saying SoftBank was prepared to receive an approach.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Offer a money-back guarantee” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Moreover, Son said his interest is self-driving car technology. If he or his due-diligence team were to take a hard look, they would presumably figure out that Google is suing Uber for stealing its key self-driving car technology, and without that, Uber doesn’t have much of value here.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Test your offer and price, and be creative.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Since then, the reports from the Uber side as to where SoftBank stands have kept shifting, to the degree that it looks like Benchmark and its allies can’t keep their story straight. On August 14, the New York Times reported that Uber was taking the “next step” to “move forward” with a supposed proposal from SoftBank to invest in Uber. “]
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Private Equity Firms Sued Over Retailer Bankruptcies

[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Private equity firms are seldom sued for their practice of levering companies for fun and profit and not caring much if they leave smoldering wreckage in their wake.” line_height=”1.4″][tm_spacer size=”lg:25″][tm_heading tag=”div” custom_google_font=”” text=”One big reason has been that it takes a lot of time and effort to prove fraudulent conveyance, which is layperson terms means continuing to bleed cash out of a company into your own pocket when you know it is a goner. And to discourage these suits, private equity general partners go into the legal version of scorched earth mode to deter other bankruptcy victims from getting bright ideas.”][tm_spacer size=”lg:63″]
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[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Use psychological pricing methods.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Today, the Wall Street Journal reports on the outburst of litigation over bankruptcy restructuring plans for private-equity-damaged retailers like Payless Cashways. We’ve discussed how private equity set many retailers up for failure by selling off their real estate at rich, asin inflated prices, giving themselves a nice big payout, and saddling the operator with high lease payments.”][tm_spacer size=”xs:30;lg:35″][tm_heading tag=”div” custom_google_font=”” text=”But in the cases the Journal highlighted, the private equity owners resorted to a strategy that had been discredited, that of the so-called dividend recap. The poster child was when Clayton & Dublier acquired Hertz in 2006, loaded it with debt, and made a big dividend payment with the proceeds.”]
[tm_spacer size=”xs:30;lg:52″][tm_heading tag=”div” custom_google_font=”” text=”Mind you, the reason these chains had owned their own stores in the first place was that retail is a cyclical business. Owning a lot of the property you used was a way to reduce overheads and increase odds of survival.”][tm_spacer size=”xs:30;lg:68″]
[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Demonstrate the differences” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Payless ShoeSource Inc., Gymboree Corp., rue21 Inc. and True Religion Apparel Inc. were all acquired by private-equity firms during the past decade. Now, lawyers for creditors have questioned whether private-equity firms share blame for the retailers’ financial collapse, in some cases by loading debt on the companies.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Offer a money-back guarantee” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”In the case of Payless, investors Golden Gate Capital and Blum Capital, after a leveraged buyout in 2012, over the next two years paid themselves $350 million in dividends—in total putting more than $700 million in debt on the company. In 2016, Payless said in court papers, it had about $2.3 billion in global net sales, and nearly $840 million in debt…”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Test your offer and price, and be creative.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Gymboree’s June bankruptcy filing occurred days after it couldn’t make a semiannual interest payment on debt dating back to Bain Capital’s $1.8 billion 2010 buyout. Public filings show Bain also received fees from Gymboree in the years after the buyout.”]
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