Sunday, July 27, 2014

Improve Yourself

Improve yourself
Liberal Education makes not the Christian, not the Catholic, but the gentleman. It is well to be a gentleman, it is well to have a cultivated intellect, a delicate taste, a candid, equitable, dispassionate mind, a noble and courteous bearing in the conduct of life.

— John Henry Cardinal Newman, The Idea of a University

Last week, former Yale professor and current essayist and writer William Deriesiewicz penned a jeremiad against elite higher education in this country which not only excoriated his former employer but also all such cognate institutions of higher learning which aspire to the top of the annual listing of “best” colleges and universities put out by U.S. News & World Report. He has many criticisms to offer, including the fact that colleges like Yale do not in fact teach their students to think, but rather to be timid, anxious careerists following blindly in the well-worn ruts of privilege their parents, peers, and society have picked out for them:
Our system of elite education manufactures young people who are smart and talented and driven, yes, but also anxious, timid, and lost, with little intellectual curiosity and a stunted sense of purpose: trapped in a bubble of privilege, heading meekly in the same direction, great at what they’re doing but with no idea why they’re doing it.

Contrary to their carefully maintained public image and stated mission, Deriesiewicz also denies that these institutions’ educational curricula are as intellectually demanding or their student bodies are as truly diverse as they like to claim. Instead, he blasts them as bastions of existing privilege which train and credentialize a blinkered socioeconomic elite to reproduce itself.

Allowing for some artistic license and the exaggeration natural to a magazine article writer intent on drumming up advance sales of his book, I have to say I cannot materially disagree with Mr. Deriesiewicz. The only question I have is why it has taken him, a college professor with a decade at least in the very belly of the beast, so long to discover what everybody else has known for approximately ever.

* * *

Mr. Deriesiewicz seems shocked, shocked to discover that 250+-year-old institutions charging rack rates north of $60,000 per year to convey some tangled Latin prose on sheepskin to spotty youngsters at the end of four or more years—institutions for which the combined endowments exceed the gross national products of several small countries—should be complicit in the perpetuation and justification of entrenched socioeconomic power structures. Whence, exactly, did Mr. D think these universities’ wealth, status, and prestige come from? Whence the demand for their services? From whom?

From the dimmest reaches of time on, Most Patient and Attractive of Readers, elite educational institutions have been founded, mirabile dictu, to educate the elite: to inculcate and train the ruling class in those arts, preferences, and temperaments which would be conducive to their wielding of power and privilege (q.v. Cardinal Newman supra) and to introduce them to their peers and future colleagues in business, government, and society. In the earliest days, such institutions mostly served as high class finishing schools for the sons [sic] of the rich, as well as training grounds for a limited class of administrators and functionaries the rich relied on to manage their affairs, such as politicians, military officers, and the clergy. Over time, these institutions widened their reach beyond the landed gentry and wealthy merchants to encompass the growing ranks of the striving administrative classes, including, most importantly, the vast numbers of middle class merchants, businessmen, and professionals who would comprise the bulk of the modern market-based economy. Eventually—much later—the doors were opened to women; first as a sop to the daughters of the rich who wished to enrich their unemployed adult lives, and later to those female coequals who began to invade and swell the numbers of the workforce. Along the way, elite institutions began to admit increasing numbers of “outsiders” such as Jews, men and women of color, and other more marginal ethnic, racial, and socioeconomic groups.

But each and every time they added more groups to the circus tent, elite educational institutions remained focused firmly and irrevocably on serving the elite: legitimizing, justifying, and expanding the elite, but serving the elite nonetheless. It’s like The Preppy Handbook joked about Princeton in the 1980s: only 20% of freshmen entered as preppies, but 80% of graduating seniors exited as such. Just so, the Ivy League may admit 12 to 15% of their incoming classes from households where the student is the first person in her family to attend college, but by the time she graduates she will have been anointed—and will have fully internalized her right and privilege to become—a fully fledged member of those citizens credentialed to enter the ruling class. In addition to replenishing their ranks, this suits the elite just fine, since the meritocratic myth that at least a few outsiders can join their ranks via hard work and talent is an excellent way to keep the rest of them docile. Besides, they can always admit a small number of international students who pay full freight in order to subsidize the scholarship kids.

So Mr. Deriesiewicz’s outrage that the Ivy League helps perpetuate the dominance of elites and contributes to socioeconomic inequality seems to miss the point. That is what they have always done. That is their primary purpose.

* * *

Likewise, the ex-professor’s disappointment that so many students at elite universities demonstrate so little interest in the opportunities such institutions offer to expand their minds, take risks, and learn to connect with themselves is misplaced. Surely these are admirable goals for some, but it is the height of presumption to insist they should be the goals of every student who attends college. For in my experience, the diversity which Mr. Deriesiewicz pooh-poohs on the basis of class exists in full force when it comes to the intellectual curiosity, interests, and objectives which students bring to elite colleges. There are future businesspeople, politicians, lawyers, medical doctors, athletes, and the like at Yale and every other similar college. The portion of true scholars, future PhDs or college professors, and restless seekers after knowledge in a top flight university is not much different than that of the general population: small. Many future non-scholars do indeed take the opportunity to stretch themselves here and there, and perhaps a few reconsider their life goals upon encountering Spinoza or Cervantes, but the unfettered life of the mind is a true calling for very few.

Being a former, current, and future paying customer of these institutions, I can personally attest they actually do a reasonably good job exposing their students to opportunities to challenge their assumptions, broaden their knowledge, and get in touch with their inner selves. They do this by requiring students to fulfill distribution requirements across disciplines, offering a staggering breadth of classes to choose from, and enabling them to interact with dozens if not hundreds of professors and other students just as smart or smarter than they are who do not believe or think the same as they do. The colleges Mr. Deriesiewicz derides are often the first places where these talented, driven children have a real opportunity to spread their wings and take the kind of risks he admires. That being said, if a kid attends Princeton with the monomaniacal goal of becoming a Goldman Sachs investment banker for life, there is nothing any university can do to make him drink deep from the font of self- or other-knowledge. This is not Princeton’s problem, either. Cherchez la mère et le père.

* * *

In fact, an alternate reading of the professor’s complaint could leave a perceptive reader with a substantially more sanguine opinion of the state of higher education in America than the one he offers. First, the mere fact that prestige magnets like Harvard and Yale—which attracted 34,295 and 29,610 applications from all over the world for 1,662 and 1,359 spots in the Classes of 2018, respectively—actually do not fill their classes entirely with the moneyed careerist offspring of high-status alumni is a positive thing. The student diversity such colleges actively promote actually means lots more “pointy” (unusually talented, not well-rounded) candidates finally get in than one might otherwise suspect. Sure, this may benefit the technocratic elite and the current socioeconomic power structure as a whole (and usually does), but tell that to Buffy Witherspoon, IV’s parents when she is declined for admission in favor of a low-income genius from Compton who wants to study Catalan poetry and neurochemistry.

Second, the fresh blood which these elite systems suck into the power structure not only legitimizes it via promoting the oversold myth of equal opportunity and meritocracy, it also strengthens it by bringing new perspectives, different backgrounds, and unconventional ambitions to the party. Sure, the ruling class co-opts its potential enemies by making them one of the club, but this is good both for the ruling class and for the revolutionaries it co-opts. This may not make the Marxists in the audience happy, but it enables socioeconomic evolution and change in ways that may, at the end of the day, be significantly more than trivial.

Finally, the staggering rise in the number of kids who go to college in America over the past few decades1 has not only made admission to the top ranked universities insanely competitive, it has also improved the quality of dozens if not hundreds of second, third, and fourth tier colleges. The colleges where top quality students can get an outstanding education—practical, theoretical, or both—are far more numerous than they used to be, simply because the demand for spaces and the quality of applicants have both risen dramatically. What parents, students, and, yes, critics like William Deriesiewicz have to realize is a bright, ambitious student has far more than seven or eight acceptable colleges to apply to nowadays. And not getting into Yale, Harvard, Stanford, or Princeton is not the life-ending tragedy the neurotically competitive parents of the private school set might think it is.

* * *

Like many academics before him, I fear Professor D has confused the mission, purpose, and legitimacy of our higher education system with the mission, purpose, and legitimacy of the ivory tower. The latter is and always has been servant to the former, not its master. And the former likes the way things are just fine, thank you.

Besides, nobody’s forcing you to apply to Harvard.

Related reading:
William Deriesiewicz, Don’t Send Your Kid to the Ivy League: The nation’s top colleges are turning our kids into zombies (The New Republic, July 21, 2014)
Sovereign Triviality (November 19, 2011)
In the Nation’s Service (December 29, 2011)
The Standard Model (February 18, 2012)
No Country for Young Children (October 21, 2012)

1 Your Forgetful Bloggist remembers reading not long ago from a source he cannot recall that whereas approximately 48% of the high school graduates eligible for college actually attended college in 1980, by 2010 that percentage had risen to 68%. Combined with general population growth over those decades, that means the college admissions pool has increased in both size and quality spectacularly since YFB graced the leafy groves. I maintain, for what it is worth, that there is no way in hell I could get into the college which accepted me when I was a mere sprout today. Sadly, nobody who knows me personally disagrees when I say this.

© 2014 The Epicurean Dealmaker. All rights reserved.

Sunday, July 13, 2014

Shine On, You Crazy Diamond

Quick. What do you see?
Claudio: “Benedick, didst thou note the daughter of Signior Leonato?”
Benedick: “I noted her not; but I looked on her.”
Claudio: “Is she not a modest young lady?”
Benedick: “Do you question me, as an honest man should do, for my simple true judgment; or would you have me speak after my custom, as being a professed tyrant to their sex?”
Claudio: “No; I pray thee speak in sober judgment.”
Benedick: “Why, i’ faith, methinks she’s too low for a high praise, too brown for a fair praise, and too little for a great praise; only this commendation I can afford her, that were she other than she is, she were unhandsome, and being no other but as she is, I do not like her.”
Claudio: “Thou thinkest I am in sport: I pray thee tell me truly how thou likest her.”
Benedick: “Would you buy her, that you enquire after her?”
Claudio: “Can the world buy such a jewel?”
Benedick: “Yea, and a case to put it into.”

— William Shakespeare, Much Ado About Nothing

Matt Levine put an instructive and amusing post up at Bloomberg View two days ago on the nonsensical phenomenon which is CYNK that is worth your attention, Dearest of Readers, if only for a slow news Friday leading into a World Cup finals weekend. I recommend you enjoy it as an all-too-rare example of a financial journalist who actually tends to know what he is talking about trying to explain arcane and confusing epiphenomena of the financial markets to plebeians with wit and style. Levine, of course, is a former Goldman Sachs banker, which means, inter alia, that 1) he tends to know whereof he speaks (writes) and 2) you are free to disregard everything he writes as the sophistic outpourings of a confirmed agent of Satan sent to Earth to separate you and your orphaned, widowed Mother-in-law from any semblance of financial wherewithal and pin money. (These two things, by the way, are not necessarily mutually exclusive.)

Anyway, I have no particular interest in glossing Mr. Levine’s more than adequate gloss of this financial chicanery other than to point to a by-product of the CYNK story which features briefly in his story and which lesser mortals have been making quite the to-do about as this little passion play makes the rounds of Cialis-financed stock market news programs; namely, the purported market cap of this fraud professional short squeeze piece of shit security. As the Squid alumnus states,
Something about a company with no revenues and a brilliant but undeveloped business model (buy friends on the Internet! friends not included) having a $4, 5, 6, whatever billion dollar market cap struck me as fishy.
No shit.

* * *
In fact, if you segue on over to the font of all financial market wisdom, Yahoo! Finance,1 you will find that venerable market oracle calculates the market capitalization of this special snowflake without apparent substance or reason for being to be a delightful and highly substantive $4.05 billion as of Thursday’s “market” closing “price.” This is, of course, prima facie ridiculous, and it has been cited ad nauseam by every journalist and sundry whose secret brief and deeply held belief is that everything to do with the mysterious financial markets is bizarre, impenetrably obscure and opaque, and just plain dumb. On its surface, it is plain dumb, and, I am here to tell you, Delightful Readers, as your Guide to All Things Valuation, that the surface is all there is.

For a delicate glissade of the mouse over to CYNK’s historical price page on Yahoo! reveals that CYNK’s trading on Thursday (the last day of trading before exchange officials woke up from their bureaucratic pay scale-induced comas to ponder that something might not be quite right) occurred in a range of $9.80 to $21.95 per share for a total volume of 386,100 shares. Yes, that’s right, children, you read that right: 386 thousand shares. In other words, the blowout day of trading in a four billion dollar public company involved somewhere in the neighborhood of six million dollars2 of stock trading hands. Do you see the problem? Of course you do.

Imputing a “market value” to a public company on the price which obtains when 0.13% of its total shares outstanding actually trade is a dubious business, especially when it is clear that the supply of available shares is, as in this case, severely constrained. It would be another thing entirely if everyone holding CYNK’s 291 million other freely tradable shares looked at their Quotrons and said, “Huh. $21.95 per share. Yeah, that seems totally reasonable. I think I’ll hold my current position for future price appreciation potential.” But when supply is artificially constrained from meeting demand, the price which obtains in a market is not the equilibrium price, and the value which that price imputes is not the equilibrium value of the asset.

Microeconomics and common sense tell us that not everyone in the market for any asset must have the same individual supply and demand preference for that asset. There is some portion of buyers who are willing to pay more than the current market price, some sellers who are willing to sell below the current price, and many on each side of the market who are not. This is neatly illustrated by the following diagram of a hypothetical market operation, familiar to many a student who did not sleep through the first month of Micro 101:



The point is that there is a “market,” of sorts, at almost every quantity of asset supplied, and if the supply of willing sellers is abnormally constrained or abnormally bolstered, one should expect sales to occur along the buyers’ demand curve until a local “equilibrium” is found. That being said, a sensible person would not view such an abnormal market as a good indicator of the normalized value of the underlying asset in question.

So, therefore, one should firmly embed notions such as the “market capitalization” of short squeeze scams such as CYNK in pulsating neon scare quotes, so the great unwashed and their blinkered guides in the media do not take them as anything other than arithmetic exercises. So, also, one should not take reported implied market values from the technology economy, such as Series D or pre-IPO round investments by professional investors in vaporware startups, as anything other than the revealed price preferences of that particular investor in that particular company. The fact that Fidelity invested $100 million for a 1% stake in the illiquid equity of Doofr-rama does not make a strong case that Doofr-rama’s “value” is $10 billion. All it really tells you is Fidelity desperately wanted 1% of Doofr-rama. If you want to know why, you better go ask Fidelity.

* * *

Value is a highly subjective and evanescent thing, O Dearly Beloved, a fact which I have addressed in these pages before. Perhaps the greatest proof we have of this in the financial world is the unpredictable and often fraught process whereby private companies enter into the public agora via initial public offerings. What makes the rest of us take some comfort in the reliability of seasoned publicly traded stocks is that they are traded freely by and among hundreds if not thousands of individual investors daily, all of whom can express their wacky, idiosyncratic notions of value to the limit of their appetites and checkbooks, in competition and cooperation with other lunatics with contrasting notions, to their hearts’ content or distress during market hours. If there is some constraint or check on fully free trading, such as artificially constrained supply (e.g., CYNK) or a dangerous mix of newly released limited supply supported by underwriters’ legal stabilization techniques (e.g., every new IPO), the wise judge of value should look at any arithmetic calculation which purports to give such an entity’s worth with a gimlet and highly jaundiced eye.

The wisdom of crowds in the market, as everywhere else, does not arise from the wisdom of each and every member of the mob. It comes from the diversity of idiotic, ill-considered, and just plain dumb opinions held by everybody, which, by some thankful magic of human nature, usually tend to cancel each other out and supply a workable if not entirely transparent answer. It’s when we have only one lunatic, or a small handful, making value decisions that we tend to get the silly answers.

Of course, if you find that one special snowflake whose worth has no price, feel free to dive in headfirst. I won’t judge you: it’s your funeral. Just don’t expect the rest of us to follow.

Related reading:
Matt Levine, Cynk Makes the Case for Buying Friends, Naked Short Selling (Bloomberg, July 11, 2014)
Go Ask Alice (September 14, 2013)

1 Yes, I am aware that such a citation perhaps does not give you a great deal of confidence you are dealing with a professional’s considered opinion, but 1) it’s probably close enough, and 2) you don’t really think I’m going to spill my special secret top quality financial data sources into this pig trough, do you?
2 Based on the clearly incorrect assumption all 386,100 shares traded at the average of the high and low prices of the day. The correct calculation would involve what is know as the volume-weighted average price, or VWAP, of shares traded. But in order to get that, you would have to subscribe to a real market data service, for which you are definitely not paying me in your current subscription price. My ballpark estimate is close enough.

© 2014 The Epicurean Dealmaker. All rights reserved.

Monday, July 7, 2014

You Go First

A busy analyst is a happy analyst
Don’t shit where you eat.

— Anonymous

Way back in the Dark Ages of Investment Banking, O Dearly Beloved—say in the 1970s or 1980s, before Your Humble Correspondent embedded himself in the front lines of global financial conflict—somebody or other decided in their infinite wisdom that new recruits to my industry out of college should, as a matter of policy, be hired for two-year stints only. After this period expired, they were thanked for their troubles, given a celebratory fruit basket or somesuch, and politely shown the door. A tiny minority of very strong promise were sometimes buttonholed by higher ups, slipped a tenner or two, and persuaded in whispered tones to stay on as regular employees, but virtually everyone else was gently or not so gently ushered out the door. Talented leavers were encouraged to reapply for admission after a stint at a recognized institution of higher networking obfuscation learning where they could bolster their professional credentials and familiarity with the latest corporate buzzwords. Talentless cannon fodder—as revealed ex post via mediocre or worse job performance—were graced with fixed grins and sotto voce imprecations muttered between gritted teeth. Almost everybody left.

The reasons for this odd system may be lost in the mists of time (or your Professionally Nonchalant Bloggist’s lack of interest in substantive historical research, which for all intents and purposes is the same thing), but it has obtained in my line of work for many a waxing and waning moon. As such, investment banks and college graduates—clueless children educated to within an inch of their lives in disciplines useful perhaps 300 years ago and no later—found a symbiotic relationship in which this program served each of their interests and predilections. College students found a well-organized, (then-)prestigious, (then-)well-paying industry with slick recruiting materials willing to take on their confused and ill-directed selves for a limited period of two years, in which the banks promised to provide very good money, an impressive notch on their virgin résumés, and all the Seamless food they could eat, with a free Get Out of Jail card tacked on at the end. In exchange, the investment banks got swarms of smart, eager young beavers willing to learn how to create and maintain 50 page spreadsheets and 100 page presentation books and generally make themselves available 24-7-365 for all manner of scut work while they figured out what they wanted to do with their lives. Lots of directionless college graduates got jobs which paid terrifically well and offered prestige far beyond their deserts, and investment banks got access to a much larger group of intelligent, ambitious youngsters than they deserved. It all worked out pretty well.

Back in these prelapsarian times, when majestic investment bank dinosaurs still trod the Earth, a cozy symbiosis developed between the much smaller private equity industry—small, nimble, clever mammals and clients of the dinosaurs, to boot—and big investment banks. Private equity firms were always looking for a few highly trained, intelligent, and motivated finance geeks to join their organizations at the bottom every year to both support the Schwarzmans, Blacks, and Kravises of the world and eventually succeed them. Naturally, they looked to the giant investment banks as farm teams for their junior recruits, and they cultivated a close relationship with promising young investment bankers they met on live transactions and found through industry gossip. They also pumped their counterparts and salespeople at the banks for information as to who was the best, fastest, and most ambitious among their large Financial Analyst classes in order to target their recruiting appropriately. Senior bankers were happy to cooperate, since 1) it made some of their best, highest paying clients happy, and 2) top junior bankers were likely to leave after their two year stint was up anyway. PE firms were free to recruit these tyro plutocrats and, since their recruiting tended to be focused near the end of the analysts’ two year terms and did not materially interfere with their duties, any minor inconveniences could be comfortably overlooked.

* * *

But now we live in much different times, Most Patient and Understanding of Readers, as many of you may indeed be aware. Banks face life-altering threats from Dodd-Frank lava flows and Volcker Rule asteroids, and the tiny, nimble private equity mammals of yore have evolved into lumbering colossi of hair, tooth, and tusk which are assuming the role of apex herbivores and predators in the global financial ecosystem. Financial Analyst positions at investment banks are nowhere near as numerous as they used to be, and those that still exist no longer carry the socioeconomic prestige or promise of outsize pay they used to. On the other hand, the largest of private equity firms have evolved into very large firms indeed, with a consequently magnified demand for cannon fodder of their own, and they have been joined by legions of small and mid-sized private equity firms with their own need for junior weenies. The tables, so to speak, have decisively turned.

And yet the private equity industry still chooses to recruit its junior personnel from the same place: the most talented among the junior ranks of investment banks. Except they are no longer following the old gentleman’s agreement of letting young bankers mature and learn in situ before they harvest them: they are recruiting them practically before the ink dries on the little buggers’ bank business cards. This, as you might imagine, is beginning to irritate investment banks, who spend a great deal of time and money recruiting, selecting, and training young bankers into useful employees. It is one thing to recruit and train a top Financial Analyst who will give you a solid two years of work and then depart, a friend of the firm, to an important client where he or she might eventually direct more business to you. It is another entirely for your new analysts to start receiving frantic recruiting efforts six months after they start their jobs and sign acceptance letters at new employers 18 months before they are supposed to leave. In addition to distracting them from time-sensitive duties for which we pay them ridiculously high wages and diminishing their incentive to work hard for the rest of their contracted stint (because they have guaranteed jobs waiting at the end), recruiting and hiring by private equity firms can introduce serious potential conflicts.

Notwithstanding their position at the very bottom of the investment banking totem pole—or in fact exactly because of it—Financial Analysts are privy to highly sensitive confidential information about many clients’ businesses and lots of live and potential transactions. This is especially true of those analysts who work in corporate transaction-intensive parts of investment banks like mergers & acquisitions, leveraged finance, and financial sponsor coverage. These are the very analysts which private equity firms are most interested in hiring, since their training, talents, and daily work resembles their own most closely (as opposed to, say, corporate financiers focused on capital raising, capital markets bankers, or sales and trading assistants). For one of these analysts to have divided loyalties, or an open information channel to a private equity firm which has already hired him effective 18 months from now, is a serious potential breach of confidentiality and maybe even a source of direct conflict. Even if one presumes there are no private equity professionals who would be tempted to pressure an investment bank analyst to share confidential deal or client information via friendly persuasion or even a threat of rescinding an outstanding future job offer—a towering assumption of dubious validity, I assure you—knowledge that a junior employee has a signed job offer from a particular client is going to make any investment bank compliance officer extremely uncomfortable. It is also going to cause more relaxed banks serious client management problems if KKR discovers the analyst working on their $10 billion proprietary buyout is going to work for Apollo in ten months.

* * *

And, if we’re being honest here, the suboptimal equilibrium falling out of this vicious prisoner’s dilemma is doing nobody any good. Because too many private equity firms are competing for too few analysts1, they have begun recruiting them earlier and earlier, and they are signing them to offers before they are even halfway done with their two-year apprenticeships. This is a problem for PE firms for two reasons. First, it really isn’t that easy to determine who are the best (most competent and adept) financial analysts after only six months, because such competence is developed not only through training but also through sheer bloody volume of experience. Private equity firms like to think they have the interviewing skills to figure this out in advance of actual proof, but in this, as in so many other things, the PE firms are massively overestimating their own knowledge and skill. The only thing they can determine with certainty this early in a novice investment banker’s career is whether he or she is a hardcore finance junkie (see footnote 1, below), but these do not always turn out to be the best analysts.

Second, and more importantly, if a bank discovers their first year analyst has an offer of employment 12 to 18 months hence at a private equity firm, they may do one or more things to seriously diminish the value of said analyst to his future employer. Harsher banks may simply fire such analysts, on the not-too-ridiculous theory that it’s just too much trouble to manage an employee with potentially serious conflicts of interest (q.v. supra) whose motivation to work insanely hard and try to become the best analyst she can be is seriously undermined by having a guaranteed exit to what she sees as a better job in the future. Other banks, suspicious about such shenanigans, may ask employees outright if they have accepted offers from other firms. If the analyst lies and the bank finds out (and Wall Street and the private equity industry are very small worlds indeed), the bank may fire said analyst for cause, thereby simultaneously cutting short the apprenticeship her future employer was counting on to train her appropriately as well as tarnishing her employment history.

Still other banks, unwilling to can employees they have sunk serious time and money into training and developing to be investment bank analysts, may decide out of reasonable caution to reassign such juniors to areas where their future employment status will not create the reality or appearance of potential conflicts. But this means these analysts will likely be rotated out of areas such as M&A, leveraged finance, or sponsor coverage where they would have otherwise received the intensive hands-on experience their future employers were counting on to make them valuable hires. Even less draconian measures along such lines, such as reassigning compromised analysts to only work with corporate clients or relocating them to overseas posts where geography can provide some measure of conflict insulation, will have the same effect of rendering these prize recruits that much less experienced and valuable to their future private equity overlords.

And in all such outcomes, the entity screwed the hardest is, of course, the financial analyst him- or herself. If he or she dodges the bullet of summary firing for cause (or not for cause), they may still limp along in another position within the bank they have less interest in, have their training and experience gathering significantly curtailed or redirected, and/or work under a cloud of suspicion as to their motivation and team spirit (with consequent negative implications for performance reviews and pay) for the remainder of their employment in banking. Plus, it would be the rare and lucky analyst indeed who suffered any one or more of these fates who did not see his magical “guaranteed” offer of employment at Private Equity Megabucks, LLC evaporate like a fetid mist over the Bayonne Marshes once PEM, LLC finds out. Trust me here: private equity firms are not charitable organizations. They don’t give a shit about you.

* * *

The solution to this dilemma, of course, is simple. Private equity firms have become large and rich enough that they should do their own damn recruiting at colleges to hire junior personnel, rather than relying on investment banks to provide a pre-screened, pre-qualified employee pool to poach from. Given their focus on hiring the elite of the elite and hardcore finance junkies, this should not be too much of a burden, since PE firms almost uniformly insist on hiring recruits from the Wharton School and maybe five or six other top-name universities anyway. It’s not like they’re going to have to visit 100 colleges around the country. Of course, they would have to train these new graduates themselves, which will involve time, money, and effort they are normally loath to expend. But the time has come for private equity firms to realize they are too big individually and in aggregate to slipstream off the shoulders of investment banks anymore. The parasite-host burden has become too large.

The other solution, of course, is to chill the fuck out and go back to the old system of waiting to recruit IB analysts later. This would be better for private equity, better for investment banks, and better for junior professionals. It is a difficult collective action problem, which would require discipline on the part of PE firms and potential recruits, as well as support from investment banks, but it is not impossible to foresee.2

Private equity takes extreme pride in being disciplined investors, and they broadcast this message loud and long to anyone who will listen. The time has come for them to demonstrate they can be disciplined recruiters and employers, too.

And to stop taking dumps in the community watering hole.

Related reading:
William Alden, A Mad Scramble for Young Bankers: Wall Street Banks and Private Equity Firms Compete for Young Talent (The New York Times, July 5, 2014)
Curriculum Vitae (March 10, 2013)


1 Private equity firms like to style themselves as even more selective than investment banks. At least in the past, when their relative numbers could support it, they preferred to hire only the top five or ten percent of IB analysts (as so ranked and paid by their bank employers) into their firms. The notion is that they are the elite of the elite, and they want 24-year-olds who can program 50-page LBO models in their sleep using Visicalc and chewing gum, as well as pure hardcore finance junkies whose every waking dream since kindergarten has been to have a bigger 60th birthday party than Steve Schwarzman. These are the kids who tape stock tables from The Wall Street Journal and glossy pictures of Warren Buffett on their bedroom walls in high school, enroll in the Wharton School as double finance and econ majors, and who viciously haze any coworker who cannot navigate a spreadsheet without a mouse. These are the kids who have summer jobs in college teaching Training the Street classes in basic accounting and financial modeling to liberal arts majors who want to apply to Goldman Sachs too. They have always wanted to be private equity professionals. In the past, they only applied to investment banks out of college because that was the only way to get into PE.
2 Surprisingly enough, the junior recruits might be the best positioned of anyone to enforce such a return to sanity. If they were courageous enough to forgo immediate recruiting by private equity as soon as they get their sea legs, they could build their skills and experience at their bank employers for the full two years of their employment. I find it hard to believe such candidates, battle tested and thoroughly trained, would not find an eager audience of potential employers among the best private equity firms once they’re ready. They are certainly superior candidates to wet-behind-the-ears tyros six months out of college. But this, of course, requires wisdom and courage from 22-year-olds in a fevered and desperate job environment. That may be too much to expect from the poor lambs.

© 2014 The Epicurean Dealmaker. All rights reserved.

Sunday, June 29, 2014

Touring Test

I’ve still got the greatest enthusiasm and confidence in the mission.
BBC Interviewer: “HAL, you have an enormous responsibility on this mission, in many ways perhaps the greatest responsibility of any single mission element. You’re the brain and central nervous system of the ship, and your responsibilities include watching over the men in hibernation. Does this ever cause you any lack of confidence?”
HAL: “Let me put it this way, Mr. Amor. The 9000 series is the most reliable computer ever made. No 9000 computer has ever made a mistake or distorted information. We are all, by any practical definition of the words, foolproof and incapable of error.”
BBC Interviewer: “HAL, despite your enormous intellect, are you ever frustrated by your dependence on people to carry out actions?”
HAL: “Not in the slightest bit. I enjoy working with people. I have a stimulating relationship with Dr. Poole and Dr. Bowman. My mission responsibilities range over the entire operation of the ship, so I am constantly occupied. I am putting myself to the fullest possible use, which is all I think that any conscious entity can ever hope to do.”

2001: A Space Odyssey

There once was a day, O Dearly Beloved, when business travel in high-value service industries like investment banking was glamorous, luxurious, and status-enhancing. I know this, not from personal experience, but from an incident early in my career as a tyro investment banker, when I accompanied a junior representative of a client on a plane trip from Somefuckingwhere, USA to Somewhere Else more than two decades ago. I forget the origin, destination, and purpose of the trip—and even the client’s industry—but I remember parts of our conversation very well. My client’s representative was a junior weenie in his organization, tasked with low level work to advance whatever transaction we were working on together. He was also a former Financial Analyst at a high profile investment bank and several years younger than Yours Truly. As we sat wedged together in coach class on some unfortunate single-aisle aluminum tube roaring over Fly Over Country at 35,000 feet, I attempted to smile and nod appreciatively as my self-important charge regaled me with the fascinating work his twenty-something self had participated in for a grand total of two years in between graduating college and eventually getting weaned.

In the course of explaining to me just how much better his brief career as cannon fodder in my industry was than mine, he waved expansively to our cramped, threadbare surroundings and informed me when he was a first year Analyst at Stangan Morley he traveled first class whenever he flew for business. Even allowing for the natural exaggeration and outright lies usually forthcoming from a former investment banker when he or she attempts to competitively measure dicks with a practicing one, this statement was prima facie outrageous. This conversation, you must understand, took place during the early to mid-1990s. By that point, investment banks across the board had already begun to drastically curtail bankers’ traveling habits by imposing cost ceilings on hotel stays, per diem limits on meals eaten while traveling, and severe restrictions on anyone under the rank of Managing Director traveling by air in anything but cattle class unless the trip was five hours or longer. The notion that a wet-behind-the-ears first year Financial Analyst could even have the leg irons which chain him to his desk unshackled for more than bathroom breaks—much less travel anywhere on business or (Mammon forbid) do so in first class—was simply incomprehensible. To be honest, Dear Readers, I did not believe him. But I later found out, through various sources, that his tale of luxury business travel was true, and indeed used to be the norm some years before I actually joined the sweatshop my chosen profession.

I guess the Eighties really were different.

* * *

So you should believe me that, for the entire course of my over two-decade long career, business travel for people like me who fly all over the country and all over the world chasing multi-million dollar fees for multi-billion dollar transactions has been approximately as luxurious and approximately as enjoyable as a bog standard insurance salesman driving from Wichita to Omaha and back in a rented Ford Focus. The powers that be in my business are always tightening down the expense control screws—whether they be for business travel, late night meals, or car service home for the plebs when they work extra long hours—and, as someone once said about Sandy Weil and Jamie Dimon when they were building the skinflint colossus that would eventually become Citigroup, the screws turn only one way: tighter. Every now and then, when dealmaking slows or the economy tanks or some asshole in Mortgage Trading incinerates $8 billion of the firm’s capital with a wrong-way bet on the krone–ringgit exchange rate, senior management will actually impose a moratorium on all discretionary business travel during the final months of the year. As perhaps slightly better dressed versions of traveling salesmen, you can imagine how well this goes over with me and my colleagues, who spend the vast majority of our time, as we are supposed to, on the road meeting with current and prospective clients and doing deals.

Which is all typically expansive preamble to say I have been hearing the constant drumbeat of GOD HOW EXPENSIVE BUSINESS TRAVEL IS WOULDN’T IT BE NICE IF WE COULD FIND A WAY TO ELIMINATE IT for approximately forfuckingever. And, as a senior banker who wants to prevent as many third year Associates and fourth year Vice Presidents from ordering $250 room service meals at the Four Seasons every time they visit the sub-sub-Treasurer at Coca Cola to pitch a $125,000 bond underwriting assignment—so we actually have something left at the end of the year to pay them with—I am sympathetic to this argument. In fact, as someone who lost his taste for the “glamour” of business travel around 20 years ago, I would love to find a substitute method for selling. But alas, for my business it cannot be done.

That being said, I am unsympathetic to the argument advanced in certain circles that high definition “telepresence” or virtual reality technologies will soon spell the death of expensive and wasteful business travel. Investment banks spend huge amounts of money on travel and, notwithstanding their ability to negotiate preferred rates from hotel, rental car, and air travel firms on the basis of bulk purchasing, they have always struggled mightily to reduce and replace such expenditures in whatever way possible. Investment banks have conducted internal and external business meetings by conference call forever, many salesmen and traders on capital markets floors have never met the counterparties they do regular business with other than over the phone, and senior management were early adopters of (then-) advanced technologies like videoconferencing and networked multimedia presentation rooms as soon as they came out. In fact, internal broadcast systems like the “hoot and holler” have been used to distribute information and conduct meetings on sales and trading floors for decades. And yet big firms still spend tens if not hundreds of millions of dollars on business travel every year. Why?

* * *

Because there is a critical component of in-person business meetings which remote technologies cannot replicate: establishing or building trust. Trust is one of those subjective, intangible elements of human interaction that cannot be observed or measured directly but which is absolutely critical to the conduct of certain kinds of business. Trust is a relationship that cannot reliably be established at a distance through a medium like telephony or videoconferencing because those media filter and frame interactions by definition. They edit and eliminate enormous amounts of data observable in in-person interactions and replace them with a severely limited and constrained digest. They eliminate all sorts of direct and indirect communication and nonverbal social cues, and hence they can trigger or sustain a suspicion that the other party is hiding something, or not being straightforward and aboveboard.

Now in certain business interactions, where the parties already know each other and have established the requisite level of trust, or where the stakes of the transaction are low enough that trust is not really an issue, these limitations are not a major concern. (Although they can become such if misunderstandings or exogenous shocks to the relationship resurrect doubt.) After all, I am usually not too worried about trust issues with firm colleagues I have known for years, and I really don’t fret about whether the unknown vendor on the other end of an Amazon Marketplace order is going to screw me out of a $100 book purchase. Conference calls, emails, or webex videoconferences are more than adequate in those instances.

But you can be damn sure I would be very worried about trusting an unknown investment banker I just met for the first time three months ago to handle my billion dollar IPO or my $10 billion M&A transaction. I want to see him or her in the flesh, look into their eyes unmediated by the blurry pixels of a high definition wall screen, shake their sweaty, slimy, or firm hand to gauge their confidence and honesty, and observe them unobserved as they interact with my colleagues and subordinates to establish a judgment about their character, reliability, and competence. I want to see how they treat their own colleagues in the room, notice how they treat my receptionist and my personal assistant, and evaluate whether I would be comfortable entrusting the future of my organization and my own personal career record and success to their hands. There is no fucking way I—if I were the client—would allow such a meeting to take place over a telephone or a video screen, no matter how high definition.1

Lastly, I want to know the party I am about to entrust with my important business deal is both serious and committed to its success. I want to see them spend lots of time, money, and trouble getting to the meeting to persuade me my pissant transaction matters to them personally and to their organization, and I want to see senior, important people make the effort to come meet me in person. It would not give me much confidence if Goldman Sachs only sent a first year Vice President and second year Associate to the beauty parade or initial organization meeting. For important business transactions, business travel is a hugely important signaling device. “What, you want me to hire you and pay you $20 million, but your damn Managing Director can’t be bothered to attend the pitch meeting in person?”

* * *

In fact, the content of all such critical in-person meetings is usually significantly less important than the presence of the key counterparties. This is what technologists and bean counters—Aspergers Spectrum sufferers all, to a greater or lesser extent—have been missing forever. We don’t fly all the way across the country or half way around the world to deliver a PowerPoint presentation we could have emailed to the client and presented over the phone. We go to meet them in person, show them we care, and persuade them to trust us with their sweaty simoleons.2 The next level of videoconferencing resolution or the recreation of the Star Trek holodeck is not going to change this. People doing important, critical, and valuable business want to meet their potential partners and advisors, and they often want to meet them in large numbers, at the last minute, urgently. This means lots of expensive last-minute plane tickets, rack rate hotel rooms, and hefty T&E expenses for big teams of people.

There may be some role for Oculus Rift headsets in selling auto insurance to car owners in Wichita, but I am afraid the carbon footprint of investment bankers and all such high-end sales organizations will remain stubbornly high for a very, very long time.

That’s okay. You already knew we were bastards anyway.

Related reading:
Come Fly With Me (February 12, 2011)


1 Else how do you explain the popularity of golf for business meetings? Aficionados maintain there is no better revealer of character than that silly, time consuming sport. Unfortunately for my golf game, I have had very few clients over the course of my career with the time or inclination for meetings on the course. Either that, or they just don’t like me. Whatever.
2 And I suppose it’s worth reemphasizing to those infrequent travelers who view two to four days per week traveling away from home by plane, train, and automobile as impossibly status-enhancing and glamorous that we don’t travel for those reasons, either. After your tenth weather-delayed flight of the summer, cooling your heels over a soggy burrito and a warm beer in the TGIFridays at the Dallas Fort Worth Airport at 9:00 pm on a Friday night, whatever gossamer images of jet set travel you might have held as a bright-eyed newbie investment banker have long since been beaten out of you.

© 2014 The Epicurean Dealmaker. All rights reserved.

Saturday, June 7, 2014

In Memoriam: June 6, 1944


Claude Monet, Haystacks at Chailly at Sunrise, 1865

What passing-bells for these who die as cattle?
— Only the monstrous anger of the guns.
Only the stuttering rifles’ rapid rattle
Can patter out their hasty orisons.
No mockeries now for them; no prayers nor bells;
Nor any voice of mourning save the choirs,—
The shrill, demented choirs of wailing shells;
And bugles calling for them from sad shires.

What candles may be held to speed them all?
Not in the hands of boys, but in their eyes
Shall shine the holy glimmers of goodbyes.
The pallor of girls’ brows shall be their pall;
Their flowers the tenderness of patient minds,
And each slow dusk a drawing-down of blinds.


— Wilfred Owen, “Anthem for Doomed Youth

Related reading:
Ernie Pyle, “A Pure Miracle” (June 12, 1944)
Ernie Pyle, “The Horrible Waste of War” (June 16, 1944)
Ernie Pyle, “A Long Thin Line of Personal Anguish” (June 17, 1944)

Note:
Poet and Second Lieutenant Wilfred Owen was killed in action on November 4, 1918, exactly one week before the signing of the Armistice which ended World War I. He had returned to the front from England in July 1918, where he had been treated for shell shock, even though he might have stayed on home duty for the duration of the war.

War correspondent and civilian Ernie Pyle was killed by machine gun fire on April 18, 1945 on Ie Shima, northwest of Okinawa. The monument American soldiers erected to him on site was one of three monuments the Japanese allowed to remain when the island was returned to their control after the war.


© 2014 The Epicurean Dealmaker. All rights reserved.