Saturday, March 24, 2007

Dance, Monkeys, Dance

From the Arts&LEISURE Section:*

*One in an occasional series of posts with little or no relation to the financial markets, the world economy, or the spending habits of Blackstone partners and their spouses

Like many of you, Dear Readers, I have a number of e-mail accounts for both work and home, in addition to the ultrasecret one connected with these pages. I have noticed that for some reason, the spam filters connected with one or more of these accounts seem to lose their efficacy over the weekend, and my inboxes become clogged with more junk e-mails than normal during the working week. I do not mind, however, because this phenomenon allows me to better enjoy what I have come to appreciate as the sheer beauty and poetry of the internet.

Take, for example, the subject and sender fields from two e-mails which graced my inbox this morning:
"Or primordial so leggy," from Kwept Debug; and

"That my everything," from Ifwainscot Mockingbird.

Admittedly, these were the only two among many unblinkered by mundane concern for the terms of my mortgage or the state of what I shall translate euphemistically as my love life. (At least I have no reason to think otherwise: like you, Dear Reader, I practice safe internetry by not opening e-mails from unknown senders, no matter how alluring.) Upon seeing them, my pulse quickened and my mind raced.

To whom, or what, could Mr. Debug be referring? Could it be some prehistoric Giselle Bundchen, or perhaps the first spider-like creature to crawl from the ocean onto the rocky shore? In contrast, my mind could not even begin to divine the meaning behind Mr. Mockingbird's missive, but could only marvel at its apparent genius: "That my everything." How true that is.

And the senders' names. I want to meet these people. Just think what glorious conversation we three could have over absinthe and croques monsieur at Les Deux Magots, what humbling epiphanies and playful badinage we could share. It would be another Algonquin Round Table, another Plato's Academy.

Such is the beauty of the culture garden known prosaically as the internet, where serendipity and random word generators combine daily—even hourly—to add shining jewels to our civilization's canon. Cogito, ergo spam.

However, when my attention turns to that festering plot of weeds known as the blogosphere, my brow clouds and my eyes darken. My mind cries out, "My kingdom for an editor!" The dreck, bombast, and self-indulgent twaddle fomented by legions of knuckleheaded morons—Yours Truly, and the authors on my blog roll, of course, fully excepted—is truly overwhelming. Sometimes I feel like I am drowning in a sea of half-baked ideas, ludicrous opinions, and poorly written position statements.

And don't get me started on personal "blogs." My throat begins to choke with bile whenever I stumble across blogs about babies, family vacations, kitty cats—"My kitty Milo has his own blog!"—or the author's thoughts on viewing the umpteenth rerun of the UNC basketball game. The colors! The pathetic graphic design! The clotted prose! The horror!!

But, upon calmer reflection, I realize that blogs are the exact analogue of spam. Just as those rare and precious jewels by authors such as Messrs. Debug and Mockingbird float in a veritable sea of tacky and useless e-mails selling Viagra and teaser rates, so too do a few beacons of intelligent, reasoned thought and lucid prose stand out from the millions of blogs in futile search of a reason to exist.

I guess it should not surprise me that this is so. After all, after careful research I have come to the conclusion that the entire internet is a very clever social experiment jointly initiated and funded by the Department of Psychology and the Department of Literary Theory at Harvard University to test, once and for all, the validity of the Infinite Monkey Theorem. You know: the theory that postulates that if you put enough monkeys and enough typewriters in a room—and you give them enough time—eventually they will produce the entire corpus of William Shakespeare. The way we are going, and the speed at which new blogs sprout into existence every day, leads me to believe we are not far from having a definitive answer.

In my darkest moments, however, I begin to wonder whether spouting any opinion on the internet—no matter how well-reasoned or -written—is a fool's exercise in futility. Then again, I guess you could classify much of intellectual history in the same bucket.

Some of the monkeys think
that they have it all worked out.
Some of the monkeys read Nietzsche
The monkeys argue about Nietzsche
without giving any consideration to the fact
that Nietzsche
was just another fucking monkey.1


1 Ernest Cline, "Dance, Monkeys, Dance." Text here. Spoken word by Mr. Cline, with animation added by Paulo Ang here. You might want to close your office door, if you have one, before you listen to this.

© 2007 The Epicurean Dealmaker. All rights reserved.

Friday, March 23, 2007

Jabberwocky, Part 2

Market Poetry has posted a concise summary of the Business section of the Blackstone IPO registration statement, which in the original extends for some 38 pages. It clears up a great many questions which I—and, by extension, I imagine you, Dear Readers—have had concerning the offering.

We are in MP's debt. Send them money.
"And, has thou slain the Jabberwock?
Come to my arms, my beamish boy!
O frabjous day! Callooh! Callay!"
He chortled in his joy.
— Lewis Carroll

© 2007 The Epicurean Dealmaker. All rights reserved.


"Beware the Jabberwock, my son!
The jaws that bite, the claws that catch!
Beware the Jubjub bird, and shun
The frumious Bandersnatch!"
— Lewis Carroll

Well, that's a relief.

Blackstone finally filed the initial registration statement for its IPO yesterday, and the financial and mainstream media are frantically earning their keep by turning the shiny object over in their hands as fast as they can. I will not provide any links to articles about the filing, Dear Reader, because you would have to be fly fishing in Kazakhstan with Blackstone #2 Tony James and TPG honcho David Bonderman (q.v. the WSJ, page C1) to have missed it. (No offense to my loyal readers in Kazakhstan.)

The statement itself (courtesy of peHub) can be interesting reading, if you like having your head swathed in cotton gauze and bacon grease and being pushed through a warehouse full of foam packing peanuts. I would expect no less from my friends at Simpson Thacher and Skadden Arps. I imagine that it has been some time since so many downloaded a weblink with such fevered anticipation—soft music, candlelight, and personal lubricant at the ready—only to be completely frustrated. The Victoria's Secret Fashion Show web video comes to mind.

The juicy tidbits I am sure you already know, courtesy of the Peanut Gallery (aka the financial press), so I will not bore you with them here. We have learned some interesting things, however.

First, Steve Schwarzman is surprisingly not rich, unlike our and everyody's prior impression. The poor fellow will only collect a salary of $350,000 going forward, which we all know won't even pay the monthly maintenance charge on his co-op at 740 Park Avenue. And, where we expected to find evidence of his purported great wealth—his current ownership position in Blackstone—the table is completely blank. The poor man: we thought he was loaded. I guess that 60th birthday bash at the Park Avenue Armory really wiped him out.

Second, outside of the two co-founders, whose immigrant parents graced them with the unremarkable names Steve and Pete, it appears that you have to have a seriously weird name to be a senior partner at Blackstone. Hamilton E. "Tony" James? J. Tomilson "Tom" Hill? The next thing you know we'll hear that The Artist Formerly Known as Prince ("Form?") is joing the firm as Chief Technology Officer. Maybe it's not too late for me to join. I can fly fish, too. T. Epicurean "Pick" Dealmaker?

Finally, we have learned that Blackstone is selling limited partnership units in its management company, as this author (and many others) recently speculated. For those of you readers unfamiliar with MLP offerings, in simplest terms it is a security which allows you to send all your money to Blackstone in exchange for the right to have their senior management bugger you senseless. And for you to like it, too. This new entity's governance structure and practices should make the Robert Nardelli-era Home Depot look like a beacon of shareholder rights.

I knew there were a lot of desperate masochists in New York City, but apparently I underestimated their numbers and financial wherewithal. Four billion clams (before the underwriters' overallotment option) buys a lot of soap to pick up in the shower.

It just goes to prove the truth of that old saying, "Be careful what you wish for." It also proves the old saw from the poker table: if you can't tell who the mark is, it's you.

"It's a Snark!" was the sound that first came to their ears,
And seemed almost too good to be true.
Then followed a torrent of laughter and cheers:
The the ominous words "It's a Boo—"

Then, silence. Some fancied they heard in the air
A weary and wandering sigh
That sounded like "—jum!" but the others declare
It was only a breeze that went by.

They hunted till darkness came on, but they found
Not a button, or feather, or mark,
By which they could tell that they stood on the ground
Where the Baker had met with the Snark.

In the midst of the word he was trying to say
In the midst of his laughter and glee,
He had softly and suddenly vanished away—
For the Snark
was a Boojum, you see.1

In light of the importance of this issue to all concerned, Dear Readers, I have decided to break with my usual policy and issue an investment opinion on the Blackstone IPO:

Whatever you do, do not

1 Lewis Carroll, "The Hunting of the Snark: An Agony in Eight Fits," Chatto & Windus Ltd., 1981, p. 46.

© 2007 The Epicurean Dealmaker. All rights reserved.

Wednesday, March 21, 2007

Would You Buy Stock from this Man?

I am sure I have not been alone in noodling in my spare time over whether The Blackstone Group will indeed come to market with an IPO and, if so, what said IPO would look like. I await the rumored prospectus with bated breath.

While the media and punditocracy have been busy doing the same, a superficial reading of their output indicates that most of said experts have not devoted much time to thinking carefully about what indeed might happen. (A cynic might ask why I am surprised. I have no good answer.) A dominant strain in most of this commentary seems to assume that Blackstone will somehow collapse the limited partnership fund structures it has carefully constructed over many years into the financial equivalent of a 1960s conglomerate (think ITT) and subsequently offer Jane and Michael Doe suitably engraved stock certificates therein. How these authorities think Blackstone will be able to convince its LPs to consent to such a wholesale (and probably financially-, operationally-, and tax-inefficient) restructuring is beyond me and, I suspect, them as well.

Other pundits (or sometimes the same ones) wave their hands airily and talk about the IPO becoming a source of "permanent capital" for Blackstone's PE operations. Again, press these insta-experts on exactly how this might happen, and suddenly an urgent phone call lights up their other line. Yes, KKR did raise $5.8 billion on the Euronext exchange last May to create a publicly traded "Super LP," which is designed to invest in regular KKR-sponsored private equity funds, coinvest in portfolio companies alongside KKR, and generally invest in all sorts of opportunities identified by—you guessed it—KKR. Sort of like a mini-CalPERS with a Henry Kravis fixation. But said vehicle was carefully constructed to avoid the '40 Act (don't ask) and ERISA regulations (please don't ask), so the only retail investors who can buy the damn thing reside outside of the United States. Onshore, only rich dudes and selected institutions make the grade. Oops.

"Well," some say—these are the ones who actually read the Financial Times more than once a quarter in the Heathrow Airport arrivals lounge—"look at 3i." Yes, let's. Nice company. Very clean. Uses its permanent equity capital to invest in buyouts, venture capital, etc. and hives off a healthy dividend every year to boot. Problem is, its shareholders participate across 3i's entire portfolio. Either you figure out a way to collapse the entire Blackstone portfolio into one neat entity (see paragraph two, above), or you resign yourself to the fact that you are raising permanent equity for a brand new, separate fund, with all the hoo-hah that entails.

From my poorly educated, outside-the-tent perspective, the only IPO alternative that makes any sense is offering shares in Blackstone qua Blackstone, excluding its portfolio investments. Investors would have an equity claim against the fee revenues Blackstone earns as General Partner by investing its LPs' money (the famous "2 and 20"), plus other fee activities like its advisory and restructuring business. Shareholders would profit alongside Blackstone's partners from their skills in raising money, investing it wisely, and offering fee-based advice. Sort of like Goldman Sachs minus the capital-intensive trading operations or, more nearly, Greenhill & Co.. The major difference is that Blackstone's business has a far larger exposure to the fees generated from lumpy, intermittent private equity activities than from its other (presumably smoother) transaction advisory business. Whether that makes its results more or less volatile than, say, a Greenhill going forward will depend in large part on your views of the cash flow diversification inherent in Blackstone's huge PE portfolio versus the sustainability of the current activity level in the M&A market.

Alignment with Blackstone's partners and management should be pretty good in this structure, since the economics to outside investors will be driven by the same factors which compensate Blackstone's professionals today. The only potential problem with this scenario is the use of proceeds from the IPO. As described and practiced, Blackstone's role as fund GP requires very little capital: they get all the money for their electric bills, Park Avenue office space, and deal transaction expenses directly from their fund LPs. Plus, pure advisory business has always required very little money to run. (Co-founders Pete Peterson and Steve Schwarzman famously floated the Blackstone shingle with a measly $400,000.)

Therefore, if IPO investors fork over, say, $4 or 5 billion for their shares, the only obvious place to wire the money is into the personal bank accounts of Schwarzman, Peterson, and the other equity-holding Blackstone partners. Then you run the risk of seeing what happened when Goldman Sachs partners were finally able to cash in their IPO shares: a massive brain drain of the most senior and experienced talent to the shores of the Costa del Sol and the Côte d'Azur.

Never mind, though: people seem to have gotten over the reverse-graying of Goldman Sachs, and I am sure they will do the same with Blackstone. It is time to turn to the investment thesis.

Before we do that, though, if you really want to know what drives the private equity market, who is good and why, and what an expert practitioner thinks about current trends in megafunds and private equity overall, visit Going Private. If you have 10 more minutes to waste with me, read on.

The private equity business is pretty simple. Hard, yes, but simple. In my view, there are four ways PE firms can create value in their portfolio companies:
1. Buy cheap. In other words, buy cheap relative to the company's potential value. This does not necessarily mean you buy at a low multiple or even that you bid the lowest clearing price possible. It means you see more potential value in the business than you are being made to pay for it.

2. Finance well. Not just cheap debt. The right kind of debt, with the right kind of covenants, and enough flexibility to accomplish the strategic plan you developed in your value thesis.

3. Improve the business. Cut costs, yes. Or not. Invest; acquire; divest; restructure; whatever. Do what it takes to create the value you saw in (1), above. This takes time and effort. It is hard, and often not very pretty. You may change your mind, and reverse direction, more than once. This is where even the best publicly-owned corporations have a difficult time matching the speed, decisiveness, and willingness to inflict and endure pain that a good financial sponsor owner does. This is where the rubber meets the road.

4. Sell well. Time the market. Look for tailwinds. Mail big checks to your LPs.

Of course this is a simplistic view (I am an investment banker, after all), but it is correct in outline. The interesting thing, to me, is that very little of this model is dependent on favorable conditions in the equity or debt markets. Good financial sponsors have been making mouth watering returns in good markets and bad, up cycles and down, with double-digit interest rates and single for a long time. It's a good model, and an important part of our capitalist system. Unlike the public equity markets—which for all their faults are pretty damn efficient funding mechanisms for a broad range of companies in a broad range of situations (and are many multiples of the size of the PE market, to boot)—private equity is the ideal capital provider for businesses, public and private, that need to be transformed. Call it the OR, intensive care unit, and physical therapy ward of financial capitalism.

Blackstone may be drifting from this model, due in large part to its size. Equity Private seems to think so, at least by implication. She would know; I do not. I will say, however, that I have seen up close and personal the real effects of diseconomy of scale in financial services. It's not pretty. And it's not just Citigroup.

That being said, Dear Reader, I only give stock tips on micro-cap gold mining stocks and emerging "cleantech" companies. Whether or not to invest in The Blackstone Group IPO I leave up to you.

If you are interested, however, in anticipation of the eventual issue prospectus I would like to point you to a couple sources which might help you calibrate your return expectations from investing in Blackstone or any other PE IPO. Interestingly enough, they are both from CalPERS, an entity with quite a bit of experience in PE investing and a refreshingly clear website for a governmental agency:

· "Understanding Private Equity Performance," with a nifty little graph on the "J-Curve Effect" of PE investing, shown above. (By the way, J-curves happen in all sort of industries. Are they "J"-ier in private equity?)

· A table describing the returns CalPERS has earned from alternative investments (including PE) on its $35 billion portfolio

Until we meet again, keep your eye on the prize, your mind in the game, and your hand on your wallet.

© 2007 The Epicurean Dealmaker. All rights reserved.

Tuesday, March 20, 2007

Naughty, Naughty

DealBreaker is atwitter today about a 13-D letter filed recently by activist hedge fund Chapman Capital in its ongoing battle with Embarcadero Technologies, which Chapman wants to sell itself. In it, Chapman recounts a heated exchange with the company CFO in which the latter responded to certain aspersions cast by the former with a familiar idiomatic expression for an anatomically impossible feat (letter quoted via
Furthermore, in response to certain comments made by Mr. Shahbazian during a conversation later that day, Mr. Chapman conveyed to Mr. Shahbazian Chapman Capital’s concern that, according to background checks directed by Chapman Capital, Mr. Shahbazian had been viewed negatively by various shareholders of Niku Corporation, ANDA Networks, Inc. and Walker Interactive, all of which in the past had employed Mr. Shahbazian in the capacity of Chief Financial Officer. Mr. Shahbazian reacted temperamentally to Mr. Chapman with the eloquent response, “Fuck you!” Mr. Chapman then forcefully informed Mr. Shahbazian that it was inappropriate and inadvisable for the Chief Financial Officer of a public company to utter such blasphemy to the advisor of a 9.3% ownership stakeholder in the Issuer.

DealBreaker gleefully notes that, to the best of its knowledge, this is the first time the "f-bomb" has been intentionally used in a filing with the SEC.

Reading the excerpt from Mr. Chapman's letter, we were shocked too, but not by the same phrase that caught DealBreaker's attention. What made us cringe was Mr. Chapman's use of the word "blasphemy" to describe Mr. Shahbazian's outburst. We turned, as is often our wont, to Merriam Webster to verify our gut reaction:

\[pronunciation stuff]\ noun pl -mies (13c)
1 a : the act of insulting or showing contempt or lack of reverence for God b : the act of claiming the attributes of deity
2 : irreverence toward something considered sacred or inviolable

Exactly who or what is Mr. Chapman implying requires reverence here? Is God the otherwise unnamed 9.3% stakeholder in Embarcadero? (Now there's a Limited Partner!) Or—heaven forfend—is Mr. Chapman suggesting that he himself is the victim of Mr. Shahbazian's blasphemy?

I am personally unfamiliar with Mr. Chapman's purportedly prodigious output of 13-D letters, which DealBreaker describes as "witty" and "literary," but I certainly hope that this one at least has been penned either (a) in great haste or (b) with tongue planted firmly in cheek. Otherwise, I think we need to notify the Booby Hatch men that they have another inmate for the Delusions of Grandeur Ward at Bellevue.

That Mr. Chapman might have a God complex should not necessarily surprise us. What with the explosion in the hedge fund industry to well over $1 trillion in assets under management and the reverse migration of hundreds of mediocre Wall Street traders to the leafy confines of Hedge Fund Central (Greenwich, CT), earning "2-and-20" is now considered among the hedgie set as prima facie evidence of your own Godhead. Should the oft-mentioned Liquidity Bubble ever burst, I am certain that Mr. Chapman would enjoy plenty of convivial company in the loony bin.

But perhaps I am being too hard on Mr. Chapman, and his malaprop was unintentional. In that case, I would diplomatically refer him to one of the earliest posts on this blog, "Mistakes." After all, I am sure a talented man like him does not want to be confused with one of those horrid investment bankers who does not know how to write good English.

© 2007 The Epicurean Dealmaker. All rights reserved.

Money is the New Black

The Blackstone Group :: private equity?

Blackwater USA :: private army?

Conrad Black :: privateer?

There's a blog in there somewhere.

© 2007 The Epicurean Dealmaker. All rights reserved.

Monday, March 19, 2007

The Self-Made Man Club

In the neverending quest to satisfy you, Dear Readers, by delivering the trenchant financial commentary, biting social satire, and smokin' hot stock tips that you have told me you require, I have begun a habit of devoting at least 20 minutes out of my busy work week to reviewing my own performance, qua bloggist.

(While you may view this as admirable dedication on my part, I must admit it is time I would otherwise spend on finding financing for the high-speed rail project in Mogadishu. However, it now appears that the Somalis have taken fright at all the negative publicity hedge funds, private equity, and the recently volatile public equity markets are generating in the world press, so they have approached Robert Mugabe for money instead. C'est la guerre.)

Imagine my surprise, then, when perusing Google Analytics© this weekend I discovered that the most popular post on this site since its inception was my little bagatelle on Steve Schwarzman's 60th birthday bash last month, "L'État, c'est moi." And I—like the editors of Playboy—thought you read me for the (serious) articles. Hmph.

However, upon further reflection I have decided to swallow my pride, in blind devotion to your happiness, and offer up some closing thoughts on Mr. Schwarzman's bacchanal for your delectation.

My source, in this instance, is only the most authoritative one available in such weighty socioeconomic matters; namely, that peerless investigative journalist, Liz Smith of the New York Post. Normally I only read the financial news section of the Post, the superiority of which to every mainstream financial news alternative is so apparent that no less an authority than Ross Sorkin of The New York Times Dealbook seems to quote the Post as his primary source material in every other article. Dear Old Liz, as she lets me call her, I normally find as appetizing as nails on a chalkboard, but even I must make some sacrifices in pursuit of my Muse.

Reading between the lines of DOL's initial column, I get the distinct impression that the black tie fun-fest was a little less enjoyable than those of us with our noses pressed to the glass would imagine. Marching bands? Military cadets? Men from Yale singing "The Whiffenpoof Song?"
[W]ho else but Mr. Schwarzman can have Philip Baloun come into the cavernous Armory and do entire 50-foot silkscreen re-creations of his own 740 Park Ave. apartment? [. . .] Who else would think to outfit the rest of the daunting Armory in red velvet from top to carpet and hang a magic circle of chandelier lights over tiers of beautifully set tables and a silver-lighted dance floor?

Who else? How about anyone willing and able to drop four large on rubber chicken and birthday balloons?

Who else would invite what's left of the crème de la crème, beginning with Colin Powell surging on to assorted Rothschilds and ending with Donald Trump?

Donald Trump? Are you kidding me? If that short list of luminaries is any indication of the entire guest list, I for one am glad I missed it. That little journalistic gem stands right up there with that other paragon of jaw-dropping anticlimax—amusingly enough from Mr. Schwarzman's alma mater—H.S. Durand's coda to Yale University's fight(?) song:

"For God, for Country and for Yale!"

Well, even though no-one laughed at Martin Short's jokes at Steve's expense—whether because they were terrified of Steve or the jokes were so lame, it is not clear—it appears that Liz had a good time hanging out with the B-List boldface names at her table. How many copies of "Winning" Suzy and Jack Welch made poor Liz buy before the evening ended I shudder to think. And her on a journalist's salary, too.

If I do say so myself—and who's going to stop me?—the whole sordid affair seems to confirm my suspicions about the purpose and subtext of the party from the start. After all, no-one has any fun at a coronation, except the king. And maybe his wife.

In parting, I would just like to clarify what I perceive to be some confusion which may be engendered by a "correction" Liz posted in a follow up column a few days after the event. It seems Missus S. was none too pleased with DOL's characterization of her hubby as a member of the "Rich Kids Club."

She says, "The term is generally held to refer to the offspring of the privileged class - the trust-fund gang. It therefore couldn't have been less accurately applied to Steve, who grew up working in his family's linen store in Abington, Pa., and is the consummate self-made man!"

Well, I don't see how Liz's original coinage was so inapt, except for the "Kids" part: after all, ol' Steve is sixty. However, I cannot agree with Mrs. Schwarzman that "Rich Kids Club" is the preferred moniker for trust fund babies.

Back in the Old Country, up the Main Line, and down Gin Lane, we have a juicier and more telling term to describe those fortunate souls born gumming the silver spoon: "The Lucky Sperm Club." I do believe Mr. and Mrs. Schwarzman's children will be able to claim charter membership.

© 2007 The Epicurean Dealmaker. All rights reserved.

Sunday, March 18, 2007

Life During Wartime

I was "surfing" the web the other day (don't you just love hackneyed phrases?), when I stumbled across a couple nuggets that have (temporarily) restored my faith in humanity, or at least in that small and elusive subsection of it that can occasionally be found hiding in the dark corners of the financial Goat Rodeo known as investment banking. I speak, of course, of the Financial Analysts.

Now, for those of you not in the know, Financial Analysts are those bright, promising, and often attractive college classmates of yours who disappeared into someplace called Douche Bank or Golden Slacks after graduation and from whom you have not heard since. Sometimes you will run across one in the street, usually late at night when you are stumbling home from a hot nightspot with some smokin' cutie on your arm and images of the Kama Sutra running through your head. Invariably, you are shocked and (temporarily) sobered by their altered appearance: pasty complexion, dark circles under the eyes, slouched posture, and a furtive, shifty expression marked alternately by booming bonhomie and snarling, sobbing cynicism. My God, you think to yourself, what happened to Jock/Bif/Muffy? You promise to stay in touch, and you even leave a voice mail or two at their home or office, but you are frankly relieved when they do not call you back.

Well, let me tell you why that Golden Girl or Golden Boy has sunk so low: they have been through the Mother of All Wringers, my friend, and they are lucky to be alive. (The image that pops into my head is the old Hustler magazine cover with a woman's legs being put through a meat grinder, but then again I am probably older and certainly less politically correct than you.) You know that old phrase, "S**t flows downhill"? Well, Dear Reader, your college drinking buddy is sitting at the very bottom of a veritable mountain of aromatic ordure that an army of Associates, Vice Presidents, Managing Directors, and Important Clients is busy shoveling downhill at him or her as fast as they possibly can.

Among you Dear Readers, there will still be some of you whose Sympathy-O-Meters are flickering at "Feeble," since you have heard that your friend is raking in approximately three to five times what you and your other college friends are making. This is probably true. Nevertheless, let me remind you of another unfortunately scatological yet apropos chestnut: "Life is like a s**t sandwich: the more bread you have, the less s**t you have to eat." In the case of the Financial Analyst, the proportion of fertilizing filler is still way out of whack with the surrounding pumpernickel, no matter how much pumpernickel there is. Hence the tendency for newly minted Financial Analysts to morph in appearance from Rock Hudson to Marty Feldman within three months of starting the job.

Now for the Restored Faith in Humanity bit. You would think that tender young shoots such as these, exposed to the withering blasts of endless pitchbooks and monstrous LBO models demanded 24/7/365 by the clay-footed demigods of High Finance, would eventually shrink and curl into catatonic little blobs. But no. There are some—at least a few—who toughen their skins, stiffen their spines, and stand forth upon the broken bodies of their fellow Financial Analysts to shout, "Wage slaves of the world, unite!" Or at least, "Up yours, a**hole!" Such youthful bravery and defiance brings a tear to my jaded eye.

So, with that preamble, I refer you to the following classic posts from one of the many guerrilla websites for Financial Analysts and their ilk, The Bull Pen Report:
Editorial: Interns – They Don't Make 'Em Like They Used To, by "Darren Bowman," Second Year Analyst; and

Study: Killing A**hole Associate May Not Negatively Affect Bonus

PARENTAL ADVISORY: Foul language and naughty situations enclosed. As with troops in wartime, Financial Analysts tend to develop functional Tourette's syndrome as a coping mechanism for their plight. If you have winced at my coy use of asterisks above—after all, this is a family blogsite—you will definitely not appreciate the articles linked to above. Stay home and read the Kama Sutra instead. Hypocrite.

UPDATE September 10, 2009: Fixed broken links to The Bull Pen Report. Enjoy in moderation.

UPDATE January 11, 2012: The late, lamented Bull Pen Report seems to have passed irrevocably into the ether, mirroring no doubt the investment banking careers of its founders and contributors. Sic transit miseria. Oh well, trust me: it was funny while it lasted. Regular readers will note that I have done my small part to pick up their baton by no longer blanking out cusswords with asterisks. Someone’s gotta fuckin’ care.

© 2007 The Epicurean Dealmaker. All rights reserved.

Saturday, March 17, 2007

Crooked Timber

Rick: How can you close me up? On what grounds?
Captain Renault: I'm shocked, shocked to find that gambling is going on in here!
[a croupier hands Renault a pile of money]
Croupier: Your winnings, sir.
Captain Renault: [sotto voce] Oh, thank you very much.
Captain Renault: Everybody out at once!

Free exchange at is confused. Poor FE. (S)he writes:

"BLACKSTONE in advanced IPO talks" says the FT this morning (requires subscription), and now I really am confused. Isn't the whole point of private equity supposedly that you can run a company more profitably and efficiently as a private corporation than as a public one? That in the private world you escape the short-termism, the compliance overhead, the social responsiblity that dogs the publicly listed? And here is a top private equity firm that wants to go public: who's fooling who?

Well, FE, I hate to break it to you, but I would reply that it is Private Equity (Blackstone, proxy) which has fooled you (proxy for similarly befuddled media and the Great Unwashed). Take heart, though. Your lament, while refreshingly candid (or is it outraged?), is being echoed in various forms and fashions across the mainstream media this morning.

While few others I have read this morning seem to be channeling Claude Rains' Captain Renault in Casablanca (see above) quite as forcefully as FE, almost every reporter out there is calling attention to the same apparent disconnect between word and deed.

From The New York Times:

A public offering by Blackstone would be a remarkable about-face for an industry that has long extolled the virtues of being private. Executives in private equity have criticized the public markets for being overly regulated and shareholders for focusing too much on short-term earnings.

And The Wall Street Journal:

There would be plenty of irony in a Blackstone public offering. [Co-founder] Mr. Schwarzman has for years evangelized against the failings of public-market ownership to companies he hoped to acquire. In a series of recent public appearances, he has called public stockholding "a broken system" and criticized the 2002 Sarbanes-Oxley corporate-accountability law as having "taken a lot of the entrepreneurial zeal out of a lot of corporate managers." Quarterly earnings reports for public companies, he has said, create a "tyranny."

Now, it seems, Mr. Schwarzman and his fellow PE plutocrats want to exchange a smidgen of their entrepreneurial zeal and a dollop of freedom from tyranny for a few billion of the folding. Hmmm. "Out of the crooked timber of humanity no straight thing was ever made."

Well, the irony is certainly thick enough to cut with a proxy statement, but I might respond to FE and its brethren in the punditocracy by positing a slightly different spin on the situation.

Blackstone and its fellow Star Chamber members in the financial sponsor community have never disliked the public equity markets. In fact, they have always been quite fond of them, since they have been one of the principal sources of their enviable profits and gluttonous personal wealth. After all, if you can't get some knuckleheaded public corporation or desperate fellow PE firm to buy your portfolio company when you are ready to sell, you have no choice but to slap lipstick on the pig and trot it back out to the public equity trough for an IPO hootenany. And there have been periods in this writer's memory when portfolio exits through initial public offerings were private equity's preferred route. Heck, it would not take the fact checkers at The Economist, the NYT, and the WSJ too long to figure out that PE firms have been happily dressing up their darlings for a return trip to the public markets all along. Hertz, anyone?

And this affection is not, as the cynics among us might suggest, simply limited to a seller's fondness for the Greater Fool. In almost every instance of a portfolio exit through an IPO, the PE sponsor is required to hold a substantial portion of its equity stake in the company for a significant period after the initial offering, during which time it remains exposed to all the risks attendant on concentrated stakeholdings in publicly traded companies. In those instances, the private equity partners remain substantial shareholders and members of the Board, where they can presumably observe firsthand the gradual erosion of their handpicked managers' entrepreneurial zeal and the stealthy return of SarbOx sclerosis.

For proof that this experience does not unduly traumatize those tender PE souls who witness it, or reduce their appetite for buying public companies which have suffered under such duress, one need only look to the numerous examples of repeat buyouts of the same company, often by the same PE firm, after it has made repeated roundtrips to the public equity markets. Furthermore, financial sponsors have always known that they would not be in business if certain kinds of company—especially those in need of some form of strategic, operational, or financial restructuring—were not roundly despised and undervalued by public shareholders.

You see, FE, you simply have not been paying attention. Financial sponsors have always looked to the public equity markets as both a source of buyout deals and a destination for their portfolio companies once they have fixed them up. PE firms are opportunists, in the clearest and best sense allowed by capitalism: they exploit the opportunity inherent in the particular situation at hand. If they want to buy a juicy public company which has a say in whether it gets bought or not, of course they will excoriate the public markets' failure to appreciate the company's true value and fulminate against the infamous restrictions being public imposes on the company's managers, who would otherwise be worldbeaters. If, on the other hand, they want to sell a portfolio company to realize their 20% carried interest in the value they have created with their LPs' money, and there are no strategic buyers at hand—or the value offered by an IPO is greater even though the PE firm will have to wait to realize it all—they will call up the investment bankers forthwith for the IPO beauty parade.

Finally, let's be clear exactly what is (proposed to be) going public here. An IPO of Blackstone is not an IPO of one or more of their portfolio companies, but rather an IPO of the investment management company itself. Like the recent moonshot IPO of hedge fund manager Fortress Investment Group, buyers of a potential Blackstone IPO will get a share in the company which generates monster fees for buying and selling portfolio companies (plus some other fund management and advisory business doodads). You, oh would-be part-owner of Blackstone, Inc., will get a little piece of the same business that Steve Schwarzman and his partners have been pulling gazillions out of for the past 20+ years. Appetizing, huh?

There's only one little nagging worry. Up until now PE firms have been remarkably consistent about one thing: they should remain private. (Many of the biggest did not create public websites until recently, natch.) One can see their point. If what they do is focus intently on dramatic strategic, operational, and financial transformations of a series of diverse companies over a period of many years—where success, if it comes, cannot be known for sure until the company is sold or brought back to market 3 to 10 years later—then why oh why do they want or need ill-informed public shareholders kibitzing from the sidelines? Or whining about how many dead presidents Steve S. and his henchmen are skimming from the till? Other than money—a noble objective; don't get me wrong—what are the owners of Blackstone getting out of this?

Perhaps at this point it would be worth reviewing the two primary reasons why any private company contemplates going public. One is that the company needs capital, and for whatever reason public equity is the best source of that capital. The other is that the management and owners of the company think the public equity markets will overvalue the company's shares, and they want to sell while the price is high.

Whaddya think? Does Blackstone need the money?

© 2007 The Epicurean Dealmaker. All rights reserved.

Monday, March 5, 2007

Separated at Birth?

I know, I know, this is soo cheap and obvious, but once I saw Rudy Giuliani's photo on the FT website today I just couldn't resist.

The smile is wrong, the hairline is wrong, and Rudy's suit does not appear to have a batwing collar. But look at the ears, and the hair on the temples. And the eyes. Look at the eyes.

I hope this doesn't mean I can't be on Rudy's Campaign Finance committee.

I am so ashamed.

© 2007 The Epicurean Dealmaker. All rights reserved.

It's a Small World, After All

This story just in, from the We're-All-Connected-in-a-Great-Chain-of-Being department, along with additional reporting from the Sometimes-Bloomberg's-Top-News-Page-Alone-is-(Almost)-Worth-the-Price-of-a-Subscription bureau:
March 5 (Bloomberg) — An increase in the cost of tortillas, a staple of the Mexican diet since the Maya ruled 1,000 years ago, has triggered a slump in the peso.

Tortilla prices jumped 5.9 percent in January, the most in eight years, after costs climbed for corn, the main ingredient. That increase fanned inflation and a bond market rout that curbed demand for the currency. The peso has fallen 2.4 percent in the past month, making it the world's third-worst performer against the dollar among the 70 currencies tracked by Bloomberg.

"There's a big risk that tortilla price increases will lead to higher wage demands and fuel inflation," said Eduardo Perez, head bond trader at Mexico City-based brokerage Valores Mexicanos SA, the country's largest independent brokerage. "Foreign investors don't like this environment and are selling. This is directly linked to peso weakness."

Now, in addition to the Tequila Effect, Latin America has given us the Tortilla Put. This just goes to show that you cannot forget our friends south of the border when you are compiling a catalogue of potential Exogenous Events lurking in the sagebrush to derail the global economy.

No word yet as to whether Henry Paulson plans to flood the Mexican market with surplus pierogi from the Polish wards of Chicago.

© 2007 The Epicurean Dealmaker. All rights reserved.

Friday, March 2, 2007

Clothes Make the Man

Damn! I forgot how good that dusty old tome "Doing Deals: Investment Banks at Work"1 really is. Full of juicy nuggets, still fresh from the literary oven after 19 years.

Attentive readers will know that Dennis Berman's recent article on underappreciated investment bankers in The Wall Street Journal triggered a post from me yesterday, and after I went back to the Doing Deals book for reference I could not put it down until late in the evening. It almost made me late this morning for a conference call on the high speed rail project in Mogadishu. (We are trying to decide between Steve Cohen of SAC Capital and Warren Buffett of Berkshire Hathaway as lead investor, although they have agreed to share the role.)

Anyway, this little jewel of a book explains so much about The Life, which is surprising given its provenance from Harvard Business School.

On the topic of relations between i-bankers and their corporate customers:
The vast disparity in compensation between investment bankers and their customers exacerbates the tensions between them.

. . .

It is difficult to explain the differences in rational economic terms. Instead, investment bankers and their customers have developed an implicit contract based on rhetoric and behavior that enables each side to rationalize the differences in income among people performing similar tasks but on different sides of the transaction.

The basis of the contract is that investment bankers are trading quality of life for money. Both they and their customers emphasize how hard investment bankers work, both in terms of total number of hours and a willingness to have these hours interfere with their personal lives, to serve the customer and get the deal done. Stories of "all nighters," weekends in the office, canceled vacations, abandoned families, divorces, heart attacks at a young age, and burnout contribute to the belief that investment bankers make substantial and dreadful sacrifices to earn their lavish compensation.

. . .

The stories may well be exaggerated in their telling: the greater the extent to which customers believe investment bankers work under combat conditions, the less concerned they will be about differences in income. Customers can rationalize the discrepancies by telling themselves, "No amount of money is worth this kind of sacrifice."2

Of course, this does not explain the tensions or behaviors between i-bankers and their even better-compensated private equity customers, but cut the authors some slack: back in 1988 private equity guys couldn't get the time of day from the girl at the Tiffany watch counter if they handed her a Rolex.

Continuing on, the authors explain why obnoxious, overdressed investment bankers ("designer-suited legions," in Dennis Berman's parlance) behave the way they do:

The rhetoric about a superior quality of life [outside i-banking] does not reconcile corporate staff to the enormous wage differences. Both investment bankers and their customers need to believe that they are different in fundamental ways in order to justify the differences and the anomalous fact that the power balance favors the customer.

This belief is created and sustained mainly through differences in dress and behavior, which convey differences in status. Investment bankers are artists at managing image and presentation of self by wearing expensive clothes and the ubiquitous suspenders [soo 1988], traveling first class [definitely 1988], demanding access to the CEO, simultaneously conveying an impression of aggressive self-confidence and obsequious servitude, and demanding an explanation from a customer for why another firm got the deal.3

So there you have it: the micro-sociology (or is it anthropology?) of i-banker-customer relations wrapped up neatly in a bow for you, as true today as it was 19 years ago.

And you thought that i-bankers are just obnoxious assholes with too much money and too little clothes sense. Aren't you ashamed?

1 R. G. Eccles and D. B. Crane, "Doing Deals: Investment Banks at Work," Harvard Business School Press, 1988. Go ahead, buy the book: I have arranged a nice kickback from HBS, and I may need the money if the damn Somalis don't approve the maglev rail link through the heart of Mogadishu.
2Ibid., pp. 66–67.
3Ibid., pp. 68–69.

© 2007 The Epicurean Dealmaker. All rights reserved.

Thursday, March 1, 2007

Woe Is Me

I’d lay my head on the railroad tracks
And wait for the Double “E”
But the railroad don’t run no more
Poor, poor pitiful me

— Warren Zevon

In the news category of “Sympathy for the Devil,” or “Schadenfreude for Breakfast,” The Wall Street Journal regaled its readers today with the sorry tale of poor little rich investment bankers sobbing into their bourbon about how none of their clients love them any more. Perhaps like you, Dear Reader, my first reaction was—in addition to a rueful smirk—puzzlement: Is this news? Or even, after we have all cruelly snickered at the dashing of overcompensated young investment bankers’ naive dreams of socioeconomic relevance, really that interesting?

At least the pompous piffle out of the anonymous Goldman Sachs spokesman that “the advisory business is at the center of our franchise” did trigger a reflexive snort of amusement over my morning roll. If the advisory business ever was at the center of that hulking behemoth, it has been many years since it has migrated completely to the surface, resembling nothing so much as too little butter scraped over too much toast. Goldman still wears its M&A pedigree like a fine (if slightly threadbare) silk robe, but the hairy legs and bulging belly of the hedge fund juggernaut underneath have been too obvious for even the casual observer to overlook for some time now. But really, it is far too easy to take potshots at corporate spokesmen nowadays, especially at investment banks. My interest waned.

But later, after my second bourbon of the evening, I remembered a nifty little treatise1 I read not too long ago that seemed to capture some of the reasons for i-bankers’ current anomie. The amusing thing, from my perspective, is that this book, which talks about the replacement of the old one-bank, one-client relationship model of yore with the vicious, mercenary transactional i-banking model of today, was written in 1988. (For those of you arithmetically challenged tadpoles out there in the audience, that is closer to the prelapsarian Golden Age of pre-1973 merchant banking than it is to our present moment.) The fact that this trend has been around for nigh on 20 years is not something an uninformed reader would pick up from the WSJ piece, what with all its references to Google and the deals of the day.

Anyway, the clever geezers who penned this piece—which, as far as I can figure it, was intended as a management screed for would-be Titans of Wall Street—lay the blame for today’s bankers being in their cups squarely on... everybody. It seems that both clients and bankers want the benefits of close relationships, but neither is willing to forgo the advantages of today's transactional world.

In the interest of space and my limited attention span, I will condense the book’s argument for you in simple bullet point form:

1) Markets for capital and strategy get more diverse and complex, leading to more threats and opportunities

2) Formerly monogamous Company XYZ begins to talk with more than one investment bank to identify, analyze, and take advantage of these market threats and opportunities

3) Investment banks which have never had a shot at breaking into Company XYZ before gladly start lobbing in ideas and golf trips to get XYZ’s business

3) XYZ’s CFO and finance staff get smarter about the markets and cleverer at playing the i-banks off against each other for better deal pricing, better ideas, and better golf trips

4) I-banks begin to see they are getting played and begin to play back, lobbing completely unoriginal Ideas of the Week in on a regular basis on the off chance one of them will hit and pestering XYZ’s CFO to let them visit the CEO with A Really Big M&A Idea

5) XYZ’s CFO realizes the i-banks are no longer really paying attention to him and gets pissed, doing everything he can to prevent said i-banks from getting into the CEO’s office and screwing them even harder in pricing negotiations

6) Both XYZ and the i-bankers start bitching to The Wall Street Journal and anyone else who will listen that the other is no longer interested in building relationships, but only wants to do deals

Skip steps 1 and 2 and start with an already clever financial deal guy in place of a company CFO, and the same model applies to our friends in private equity. Simple, huh?

Well, you can see where this all leads:

Contained within [the mutual dependency of investment bankers and their customers] is a certain hostility. Investment bankers believe that customers are somewhat dull witted and unappreciative, more concerned with low prices and free services than with building a long-term relationship, and, at times, inclined to do deals that make no sense. Customers believe that investment bankers are arrogant, obnoxiously aggressive, and more interested in getting deals to make themselves wealthy than in understanding and satisfying customer needs.2

Who can disagree?

1 R. G. Eccles and D. B. Crane, Doing Deals: Investment Banks at Work, Harvard Business School Press, 1988.
2 Ibid., p. 70.

© 2007 The Epicurean Dealmaker. All rights reserved.