Monday, April 30, 2007

The Beginning of the War Will be Secret

I spent way too much time today going back and forth to Petco to replace the hamsters which power the ED webservers and online tchotchke store. They keep dying on me, overworked from exhaustion by trying to keep up with the tremendous onslaught of increased traffic from Long or Short Capital, which linked their readership to this blogsite a few days ago.

Like any committed blogosopher desirous of planting my pearls of wisdom as broadly and deeply as possible in the Weltanschauung, I was initially delighted to have received the endorsement of my mentors at LoS. However, as I ruefully dumped my twenty-fifth dead rodent ($13.95 each, plus tax) into the trashbin this afternoon, the delphic utterance pictured at the top of this post popped into my head.

It is one of many such sayings perpetrated on an unsuspecting populace by (conceptual) artist Jenny Holzer. Ms Holzer came to fame in the late 1970s by pasting cheap broadsheets on tenement walls in New York's East Village—back when the primary spoken language in the East Village was still English and real artists actually lived there—and later moved on to granite tables and coffee mugs when her popularity improved. (So much for artistic integrity.) As she herself would (and did) say,

* * *

Later, as I read the latest opinion piece in the Financial Times by John Gapper about how "Private equity needs more charm," it occurred to me that Ms Holzer presciently had a great deal to say about PE's current struggles with its image in the press and society at large.

I get the sense from many private equity types that they are surprised by all the negative attention they are receiving. Ms Holzer—and the press, politicos, and pundits currently busy fitting slings and arrows of outrageous fortune into their crossbows—are not:




* *

Much of the battle for public opinion being waged over private equity takes a form with which most financial sponsors are by definition unfamiliar: it is a war of public relations, waged in nasty little backwaters over thorny social issues like income inequality, the proper relation of labor and capital, and political influence. This is not a war most private equity professionals are used to fighting, and as one might expect they are bringing the wrong weapons and the wrong soldiers to the fight.

Mr. Gapper's piece (subscription required) is instructive. He writes admiringly about TPG founder David Bonderman's public debate performance against saucy little Dallas mayoral minx Laura Miller, and seems to conclude that Mr. Bonderman gave (at least) as good as he got on the issues. But he utterly failed the all-important smell test of politics:


* *

Mr. Gapper writes:

So why did he lose his cool when a self-righteous man from the audience demanded to know whether he felt an ethical responsibility to cease contributing to global warming? “You and others who are absolutists tend to be wrong almost always, in every event, at any time,” Mr Bonderman snapped back, promptly losing the audience’s sympathy.

It was an ingenue’s error. A smile lit up Ms Miller’s face and she said: “That was a really interesting answer.” No smart politician would have been caught losing his temper with a critic in that way, especially not on camera. As they have learned, in the age of YouTube, one reckless moment can doom them.

Being frighteningly smart—as Mr. Bonderman is reputed to be—can indeed be an asset in the public arena, but it is a tool one needs to wield with grace and charm. It tends to be counterproductive to use your intellect, marshalled facts, and superior grasp of the issues to bludgeon your opponents into submission, since being right is completely beside the point if you cannot persuade the audience that you are. In such instances, your audience will usually draw a different conclusion, one based—perhaps unfairly—on what they perceive to be your character:






* *

I have not seen all of the leading private equity founders present in public—I frankly would not have time to earn a living if I attended every bloody PE conference on the calendar—but I have seen enough to know that most of them need serious help in the public speaking department. The slickest and most persuasive, interestingly enough, was Mr. Bonderman's partner, Jim Coulter. He wowed an admittedly sympathetic audience with a description of the state of play in the PE sector, persuasively demonstrating not only that the punch bowl was not at risk of imminent removal but also that private equity has continued to create real value during the current boom. The only problem: he refused to answer questions. Annngkh! Wrong answer!

The good news is that experienced PE professionals know exactly what to do: call up those same public speaking coaches they inflict on their portfolio company management teams when they are planning to take them public. A few weeks of mock debates and speaking on video should whip them into shape toot-sweet.

The bad news is that the PE plutocrats are not going to be able to fob off the task of representing and defending the industry onto their new industry lobbying group. The constituencies that matter—the same ones who can inflict serious harm on the economics, taxation, and regulation of the financial sponsor industry—are going to demand to hear from the horse's mouth. I suggest stocking up on Binaca, Crest Whitestrips, and patience. And do not forget the cardinal rule of politics:


* *

The goal of all of this extra hard work and suffering should be clear. Mr. Bonderman and his peers should devote their considerable talents, energies, and resources to make sure that their epitaphs do not read


* * *
* *

Oh, and David? If you plan any more public appearances, your wardrobe needs work.



Lose the friggin' patterned socks, will you? Christ Almighty.

© 2007 The Epicurean Dealmaker. All rights reserved.

Saturday, April 28, 2007

e = –1

Step aside, Fama & French.

Move on down, Merton, Black & Scholes.

Piss off, Miller & Modigliani.

A new cohort of economic geniuses has shouldered its way to the front of the line, when it comes to true understanding of the global financial markets (and the smokin' hot trade tips which fall naturally out of this revelation).

You cognoscenti already know whereof (whomof?) I speak. For all those else among my benighted readership still in search of said clue, prepare yourself for a new set of names to be graven upon the shining brow of Athena:

Yes, I speak of those shining geniuses, those paragons of portfolio proselytizing holding court at go-to stock tip website Long or Short Capital. Those of you Dear Readers who have not followed the web link to their site which has been winking invitingly at you from the lower left side of this blogsite for many moons are urged—no, commanded—to pay your respects posthaste. Your wives, your children, and even your mistresses will thank you profusely.

Some shameless cynics among you (yes, I am speaking of you, Mr. Frank Willicott) might scoff at this timely apotheosis of my pals Mr., Johnny, and Kaiser, and claim baselessly that it is due to their recent recommendation of this blogsite to their readership. I should not dignify such pathetic cavilling with a response, but I will point out that I have been a fan and acolyte of Messrs. LoS for much longer than most of you have been alive, as this post can attest. Quibble if you will, but I have been cleaning up in the market by following their investment recommendations; have you?

Ever since that beery night at the Cedar Tavern in 1983 when Robert Merton sobbingly told me that the Capital Asset Pricing Model was a crock of shit, I have been searching in the wilderness for a prophet to follow. I tell you from experience, these guys are the real deal.

P.S. – Those Readers who click through to LoS and read my comment there should not be offended that I implied any of you were short a card or two in your deck: I was just buffing their egos a little. (Academics can be so needy.) I have documented proof that 86.3% of you are card-carrying members of Mensa.

© 2007 The Epicurean Dealmaker. All rights reserved.

Thursday, April 26, 2007

The Plot Thickens

Herewith, Dear Readers, a mystery worthy of Hercule Poirot, or at least Miss Marple. Whilst raping and pillaging some poor unfortunate company this morning away from my quotidian domicile—or office, for those among you habituated to respirating with mouths agape—my trusty Blackberry shivered invitingly with the arrival of the 6:00 am cut from FT Alphaville. At the first opportunity, I turned eagerly to the missive, as is my wont, in order to discern what fresh outrage my brethren across the pond might have precipitated upon victims corporate or institutional, so better as to incorporate the model of their misdeeds into my own repertoire of misbehavior.

Imagine my delight, then, when I perused the following item secreted demurely near the end of the communiqué:
Blackstone ensures no more ‘secrets with Stephen’
Those of you who have Blackstone chief Stephen Schwarzman’s “anonymous” blog - “Secrets with Stephen” - bookmarked may have noticed a drop-off in dish, says DealBreaker. No speculation concerning the how’s and why’s of Henry Kravis’s new puppy, Mr Barky Von Schnauzer, and his recent “operation”. Not even a thinly veiled account of dining at the home of someone sounding suspiciously like Kohlberg, who served a sea bass that Stephen felt “left something to be desired”. What’s up? Well, it could have something to do with the fact that Schwarzman received a note from Blackstone IT last week informing him that they’d been keeping track and found an average of 4.5 hours a day on something called to be “inappropriate use of a company computer”. Or it could just be because Blackstone is currently in its “quiet period”[?]

Now, while I modestly number myself among the Wise and Great when it comes to decades of experience with investment banking rapine and slaughter, I openly acknowledge being a neophyte when it comes to all things internet. I had never heard of Mr. Schwarzman's eponymous blogsite, and I chafed with eagerness to investigate it once I had returned to a locale more conducive to full-screen browsing.

But lo, when I returned to my secret volcano lair and attempted to click through to the blogsite cited in the DealBreaker link referred to by the FT piece, I came up distinctly empty. There was no "" to peruse. Thorough canvassing of the blogosphere by my sainted assistant—after she had returned from her appointed task of delivering me a double tall soy milk latte from Starbucks—turned up no trace of the missing link, either.

Now, I am aware that some commentators out there view DealBreaker as a silly and nonsensical blog aggregator with delusions of grandeur, but I for one am convinced of the reverence and utter seriousness with which its contributors approach the world of private equity. (After all, who else among their sources can afford to buy them $40 martinis at the latest downtown hotspot?) I know the DealBreaker staff would never intentionally mislead their readers—much less the Financial Times—and I also know that their fact-checkers are second only to those employed by that peerless exemplar of financial journalism in our times, The New York Post. Therefore, I can only conclude that there indeed was a website so named, so authored, and containing content so outlined, but that it has been taken down without a trace.

Given its authorship by one of the preeminent literary commentators of our time, and the no doubt penetrating insights said blog offered into the mind and morals of a Titan of New York Society, the fact that a person or persons unknown had the temerity to censor the most intimate thoughts of Steve Schwarzman strikes me as a great crime, one ranking in enormity with such modern-day horrors as soy milk lattes and Donald Trump's combover.

I am outraged, outraged; and I want answers.

© 2007 The Epicurean Dealmaker. All rights reserved.

Tuesday, April 24, 2007

Destroy All Monsters

Tokyo, April 25, 2007: Toho Company, Ltd. announced today that it is commencing development, in partnership with a newly formed production company co-founded by American filmmakers George Lucas and Quentin Tarantino, of a new series of daikaiju (monster) pictures themed around the recent hypergrowth of private equity and hedge fund companies. The first film in the series is planned to be a remake of the 1964 classic, Ghidorah, the Three-Headed Monster.

"Quentin and I are very excited about working with Toho to bring back the monster movies we enjoyed in our youth," commented Mr. Lucas. "Nothing is more frightening than the mega-growth of private equity and hedge funds today, and we think Toho's proven model is the perfect medium to convey the excitement and terror so many people feel when they pick up The Wall Street Journal every morning," he added.

"George and I are doubly excited, because we have convinced Toho to contribute its extensive library of 30- and 40-year old special effects—including the classic Godzilla and Ghidorah monster suits—to the production," Mr. Tarantino remarked. "We intend to produce the new movies in all the cheesy glory we first saw the originals, so many years ago. That way, we can maintain the integrity of our artistic vision while keeping production costs under $10 million per movie," the filmmaker said.

Pre-production is already underway on the Ghidorah remake, which cineastes remember for its climactic showdown between Godzilla and the three-headed menace from outer space, Ghidorah. Andrew Ross Sorkin of The New York Times is authoring the initial screenplay, which he is basing on the original movie as well as recent articles in the WSJ and other sources in the financial press.

"My working premise is that the crusty but lovable Godzilla represents established PE behemoth KKR, and the three-headed menace Ghidorah represents challenger Goldman Sachs, freshly-arrived from raising $20 billion for its own private equity fund," said Mr. Sorkin. "However, I am also working on alternate scenarios that might involve Steve Schwarzman of Blackstone, Steve Cohen of SAC Capital, or even hedge fund Cerberus Capital Management. The beauty is that we do not have to decide which scenario to use until we add subtitles to the movie," he explained.

Messrs. Lucas and Tarantino have reserved the right to release different versions of the movie in different markets, depending on the results of focus-group marketing among first-year MBA students at leading business schools.

"After all," observed Mr. Tarantino, "what does it matter who Godzilla and Ghidorah are supposed to represent? The whole point of these movies is to watch the spectacle of gigantic egos clad in silly rubber suits bellowing and clawing at each other over who has the biggest radioactive death ray."

© 2007 The Epicurean Dealmaker. All rights reserved.

Thursday, April 19, 2007

The Devil's Glossary

Nassim Taleb's new book, The Black Swan: The Impact of the Highly Improbable, just landed on my desk with a satisfying thump. This is good news, because if it had not arrived I would have had to go out and buy a copy of Condé Nast Portfolio this weekend and read that. The prospect was not appealing to me.

While I found Mr. Taleb's previous book, Fooled by Randomness, unevenly written and occasionally a bit infuriating, my quibbles were largely overwhelmed by the clarity and force of the ideas he expounded. I am expecting no less from this book, and I will report my findings if and when appropriate to my adoring audience (i.e., you, Dear Readers). Do not worry, however: I will steer my discussion away from the more technical and recondite aspects of Mr. Taleb's treatise. This will be no punishment for me, as I can cheerfully confess that I would have difficulty recognizing a Gaussian distribution with a Poisson jump if it bit me on the leg and pissed in my shoe.

Until then, Dear Reader, I can do you no better service than citing a few selections from the book's glossary. Especially for those of you unfamiliar with Mr. Taleb's previous work, these excerpts1 should give you a good flavor not only of some of the ideas Mr. Taleb expounds, but also of his literary style. Where appropriate, I have appended a comment or two of my own.
Bildungsphilister: a philistine with cosmetic, nongenuine culture. Nietzsche used this term to refer to the dogma-prone newspaper reader and opera lover with cosmetic exposure to culture and shallow depth. I extend it to the buzzword-using researcher in non-experimental fields who lacks in imagination, curiosity, erudition, and culture and is closely centered on his ideas, on his "discipline." This prevents him from seeing the conflicts between his ideas and the texture of the world. [I might extend it to great swaths of the financial industry, where most of us rarely take the time to look up from our particular grindstones.]
Confirmation error (or Platonic confirmation): You look for instances that confirm your beliefs, your construction (or model)—and find them. [Yeah: that happens to me all the time. Is that a problem?]

Empty-suit problem (or "expert problem"): Some professionals have no differential abilities from the rest of the population, but for some reason, and against their empirical records, are believed to be experts: clinical psychologists, academic economists, risk "experts," statisticians, political analysts, financial "experts," military analysts, CEOs, et cetera. They dress up their expertise in beautiful language, jargon, mathematics, and often wear expensive suits. [Hey, that sounds like me. Who does this guy think he is?]
Epistemic arrogance: Measure the difference between what someone actually knows and how much he thinks he knows. An excess will imply arrogance, a deficit humility. An epistemocrat is someone of epistemic humility, who holds his own knowledge in greatest suspicion. [Not me. Wait a minute. What's humility?]
Fooled by randomness: the general confusion between luck and determinism, which leads to a variety of superstitions with practical consequences, such as the belief that higher earnings in some professions are generated by skills when there is a significant component of luck in them. [This completely describes the compensation philosophy of Wall Street, private equity, and the hedge fund community. When it comes to me, however, I do not get paid a lot of money because I'm lucky, I get paid because I'm good.]

Do yourself a favor: go out and buy a copy. You didn't want to read Portfolio this weekend, either.

1 N. Taleb, "The Black Swan: The Impact of the Highly Improbable," Random House, 2007, pp. 307–308. Copyright © 2007 by Nassim Nicholas Taleb.
© 2007 The Epicurean Dealmaker. All rights reserved.

Wednesday, April 18, 2007

The Way We Live Now

It was at any rate an established fact that Mr Melmotte had made his wealth in France. He no doubt had had enormous dealings in other countries, as to which stories were told which must surely have been exaggerated. It was said that he had made a railway across Russia, that he provisioned the Southern army in the American civil war, that he had supplied Austria with arms, and had at one time bought up all the iron in England. He could make or mar any company by buying or selling stock, and could make money dear or cheap as he pleased. All this was said of him in his praise,—but it was also said that he was regarded in Paris as the most gigantic swindler that had ever lived; that he had made that City too hot to hold him; that he had endeavoured to establish himself in Vienna, but had been warned away by the police; and that he had at length found that British freedom would alone allow him to enjoy, without persecution, the fruits of his industry. He was now established privately in Grosvenor Square and officially in Abchurch Lane; and it was known to all the world that a Royal Prince, a Cabinet Minister, and the very cream of duchesses were going to his wife's ball. All this had been done within twelve months.1

Equity Private is annoyed. You might ask what else is new, but she has a good reason: some PR flack almost crashed her e-mail account with a ludicrous promotional mailing for the new Condé Nast business rag, Portfolio, which seems to have consisted primarily of a high resolution screenshot of the magazine launch cover. I would be pissed, too, but thankfully TED flies below CN's promotional radar at present.

From what I can tell, EP has nothing but scorn for CN's venture into "business intelligence," as they rather hopefully subtitle the magazine. This seems to be based upon the rather reasonable sounding assumption that a magazine so subtitled, and one where the corresponding website home page is titled "Breaking Business News and Opinion, Executive Profiles and Careers," should have more than the passing or accidental connection to, well, business. In this, I am sorry to say, EP is mistaken. She has been taken in by a canard, a mere dissimulation.

I have not invested the money—or, more importantly, incurred the future payment liabilities to my local chiropractor—to buy a print copy of the 300-page table brick magazine, so I cannot say that my conclusions are based upon a thorough and impartial examination of the magazine's actual content. (I find it so much easier to criticize from a state of ignorance, don't you?) However, I did take a quick troll through the magazine's website last night after my second bourbon of the evening, and my analysis is based on the impressions formed by that experience.

My conclusion is clear and irrefutable: Portfolio is not a business magazine, it is social pornography.2

Let's look at a few selections from the current issue's primary table of contents, and see if you don't agree with me:

· Profile of Tom Wolfe, writing about silly, vulgar rich people — Check
· Profile of some rich Arab guy with a horse — Check
· Profile illustrated with a picture of Bill Ford wearing sunglasses in a convertible, desperately trying to recapture the 70s, when he was young enough to do such things without looking foolish — Check
· Profile of some redhead in cowboy boots and an evening dress who likes to kick butt somewhere in Canada — Check
· Profile of a young Hollywood hedge fund guy on a beach with a cute dog — Check

Need I go on? I didn't think so.

"Flagging travel publication 'empire'" (in EP's characterization) or not, one thing Condé Nast does seem to know is its demographic. A quick look at their publications (coyly named "Our Brands" on their corporate website) reveals a consistent theme:

Vogue — Fashion porn
Self — Porn for narcissists
GQ — Metrosexual porn
Architectural Digest — Real estate porn
Vanity Fair — Society and political porn
Gourmet — Food porn
Wired — Tech porn

They're all big, they're all glossy, and they all make you feel cheap and dirty after you have read them, just like Portfolio. Get the picture?

God knows what exact demographic CN thinks they are targeting with Portfolio, but I for one would not bet against them. After all, what with seemingly endless numbers of billionaire private equity founders and hedge fund traders running around Greenwich, Mayfair, and Manhattan snapping up overpriced modern art and every co-op and condominium priced over $5,000 per square foot, they are simply spilling out of the pages of Vanity Fair, Arch Digest, and The New Yorker. Condé Nast needs a dedicated publication just to profile them all. Besides, what else is an upwardly mobile young trophy-wife-wannabe supposed to read to figure out her target market? The Economist? The Wall Street Journal? No, she needs (*ahem*) "business intelligence."

How else would you explain the excessively icky profile of Citadel's Ken Griffin and his "glamorous" wife, who is [cringe] "the champagne to [his] Budweiser"?:

They tend to speak in unison and are fond of using the word passion. Such as when Griffin says, "We are, with time, coming to terms with what we’re passionate about in the way of our involvement in the community." Or Dias, on the subject of collecting: "I’ve always been passionate about art"—to which Griffin responds, "It was an unexpected surprise in the context of the relationship that we shared this passion."

Every time the subject of their relationship comes up, they swivel in their chairs to face each other, grinning and batting their lashes. If confronted with a question they aren’t sure how to answer, each stares at the other, as if attempting some form of telepathic communication.

Yeah, like, "Remind me why we're talking to this knucklehead, honey?"

In conclusion, I think it best to close with the mission statement prominently posted on CN's own corporate website. After reading it in conjunction with the profile of M. et Mme. Griffin, the heart and soul of Portfolio suddenly became blindingly clear to me:

Passion is the core of our philosophy at Condé Nast Publications. Our mission is not only to inform readers but to ignite and nourish their passion for myriad aspects of life.

Week after week, month after month, we attract millions of dedicated, highly focused readers. They come to our pages and Web sites knowing they will be engaged by the leading minds of our time: writers, editors, contributors and artists who share their passions and who bring them to The Point of Passion.

The Point of Passion, indeed: Yes! Yes! Yes! Ohhh, yes!

1 A. Trollope, The Way We Live Now, Project Gutenberg edition, Chapter IV.
2 Nikki Finke, via, asserts that Portfolio is "CEO porn." Unh-unh. Right characterization; wrong audience. Most CEOs I know—and I am guessing I know approximately umpty-three million more CEOs personally than Ms Finke—wouldn't touch this shit with a 10-foot pole held by Marty Lipton wearing rubber gloves. Now, CEO wives, maybe ...

© 2007 The Epicurean Dealmaker. All rights reserved.

Monday, April 16, 2007

On a Knife's Edge

This just in, from a survey of 340 European M&A bankers, lawyers, and other riffraff by virtual datasite provider (don't ask) IntraLinks for swingin' UK finance trade rag Financial News (subscription required):

Surprised outside a posh London eatery with this stunning new perspective on the future return expectations for his industry by some of his most important service providers, Permira pooh-bah Damon Buffini looked visibly shaken. "Well, this is news, an' no mistake. We're obviously going to 'ave to 'ave a complete refink of the business model at the next partners' meeting," he exclaimed.

Mr. Buffini claimed not to be surprised that M&A professionals do not think higher purchase prices paid for French companies will make it harder to meet return expectations: "Well, that's no surprise, innit? No-one can make a return off the bloody French no matter what price they pay."

Mr. Buffini's companion Victoria Beckham offered no reaction to the news.

© 2007 The Epicurean Dealmaker. All rights reserved.

Sunday, April 15, 2007

Screwtape for the Defense

La plus belle des ruses du diable est de vous persuader qu'il n'existe pas. — Charles Baudelaire, Le Spleen de Paris

I have been spending a very relaxing and enjoyable afternoon just linking around the blogosphere, while Mother Nature attempts once again to clean the Augean Stables know as New York City by drowning us with torrential downpours. I should be finalizing my income taxes, but I cannot complete my Schedule A itemized deductions until my brother-in-law the accountant tells me whether I should classify those business bribes to the Somali government as medical expenses or charitable donations. (I suggested charity, but he assures me the fact I paid the bribes under threat of having my legs broken is strong support for the assertion that they were preventive health care.) Ah, the things I do to keep my business partners in Cristal champagne and Russian prostitutes ...

As I was trolling through the usual list of suspects and their rantings, I happened upon a post about the widening income disparity in this country by reluctant free-market apologist Free exchange which took a potshot at Yours Truly and my fellow capital markets parasites investment bankers:

Meanwhile, a handful of professionals [are] sitting atop the rivers of capital flowing into the United States and skimming just a tiny bit for themselves: bankers, lawyers, consultants. To the extent that the superrich are pulling away from the rest of us (and some question whether this is really true), the most parsimonious explanation seems to be the massive increase in the efficiency, and size, of American capital markets.

I myself am prepared to argue that investment bankers and traders make more money than they deserve to, and let's not even start on the lawyers. But I cannot think of any way to reverse this trend without doing enormous violence to America's admirably efficient financial markets, and thence its economy.

Naturally, I could not let this vile outrage stand, so I toddled off to econoblog Marginal Revolution, whence I found FE's scurrilous calumny, to raise a calm and measured voice in support of myself and my slandered brethren (and sisteren).

What I found there shocked me. Here, in the presence of trained economists, authors, and market practitioners who apparently comment regularly on MR, I discovered vast and seething ignorance about my profession, as well as most of the rest of the financial services industry. Supposedly educated people threw around terms like "financial workers" with abandon, and treated them as uniformly rich, without realizing that said workers encompass a broad range of chiselers, including such luminaries as Steve Cohen, Yours Truly, and Lypsinka the Cristal-swilling Ukranian call girl. Surely these PhDs in economics realize that the only thing the three of us have in common is a corporate account with Louie's Black Car Service and investment condos in Boca Raton?

Anyway, I rolled up the french cuffs of my $300 custom shirt—you know, the knockabout one I wear when not pitching clients or stuffing twenties into lap dancers' G-strings for the Somali Minister of Transport—and set about setting the record straight. You will be happy to learn, Dear Readers, that I seem to have redirected the focus of attention and opprobrium away from investment bankers and onto those people best able to handle the pressure; namely, hedge fund managers. I even had help in this task from a couple of hedgies who not only seemed to know something about their industry but also demonstrated impeccable manners.1 (They must be ringers.) My only regret is that I had to use the Big Boy Voice in my comments, but what else would you have me do when the other commenters included such people as James Surowiecki and Tyler Cowen? After all, I'm not writing this blog for my health: I want a book deal.

So, at least for the nonce, it appears that our supersecret noncompetitive pricing cartel is safe. Feel free to pad your fee estimates at will.

There is no need to thank me for this public service to the investment banking community. However, if you simply feel you must, send me an e-mail and I will forward the location of a drop box where you can deposit a case or two of Cristal. In the meantime, just say "hi" to Lypsinka for me when you see her next.

1 At least until I unwittingly pissed one off. Touchy guys, these hedgies.

© 2007 The Epicurean Dealmaker. All rights reserved.

Saturday, April 14, 2007

Mine's Bigger than Yours

Dennis Berman over at The Wall Street Journal recently penned a piece on one of the perennial bugbears of Wall Street, league tables, in which he managed to sound both amused and plaintive at the same time:
The tables have become home to the most petty and wheedling impulses of the industry's most-respected institutions, which are rabid about staying high in the rankings. If you want to understand the Street at its absurd best, watch men in Rolexes grub for credit for deals they barely worked on for clients who probably won't pay them.

Mr. Berman does a good job outlining the issue, and was even able to persuade a few investment bankers to admit on the record what a joke the whole thing is. (Of course, when the sharpest comments come from big bank apostates like DLJ- and Citigroup-refugee Hal Ritch, it's sort of hard to hear the message over the sound of axes grinding.)

While he does mention securities underwriting league tables in passing, Berman focuses primarily on those rankings which purport to show investment banks' market position in advising on mergers and acquisitions. This is appropriate, since at least the debt and equity underwriting tables published by Thomson, Dealogic, etc. are based on facts. In order to be given credit for underwriting a securities placement, a bank actually has to underwrite part of it, and given the risks and liabilities involved in fobbing off dodgy trash to widows and orphans (not to mention Fidelity Investments), the SEC and the Plaintiff's Bar make damn sure everyone responsible is listed in clear 14 point type on the prospectus front cover. (This is not to say that these tables cannot be and are not manipulated, both before and after they are published, but at least they maintain some tenuous connection to reality.)

M&A league tables, in contrast, are and always have been a farce. There are no uniform reporting requirements concerning advisory roles or fees for M&A transactions. In order to be given credit for advising on a deal, all a bank has to do is persuade a client to confirm to the reporting services that it worked on it. No real work need take place, and no real money need change hands. Hence, you get examples of highly-discounted or no-fee "services" being "performed" by five, six, or eight otherwise totally uninvolved banks solely in order to claim credit for a big or high profile deal. It is not unheard of or even rare for a bank to deliver a last-minute "fairness opinion" for no fee at all in order to get full credit for "advising" on a $30 billion transaction.

But if, as Mr. Berman reports, everyone knows these league tables are crap, why does Wall Street spend so much time and energy gaming them?

Well, for one thing they are good recruiting tools. All those eager university and business school graduates who are aching to rub shoulders with John Mack, Stan O'Neal, and Henry Paulson What's-His-Name are massively impressed by league tables that show which of their preferred future employers has bragging rights in particular business areas. Their starry-eyed naiveté usually vanishes the first time they are ordered by a superior to "massage" a league table to show a prospective client that notwithstanding a #8 ranking in published tables their bank is really #1 in the narrowly defined subset of deals the bank's Managing Director wants the client to care about. (Strangely enough, the footnotes describing the constraints and limitations imposed on the virgin data rarely seem to survive the printing and binding process for the presentation books that make it to the client. It must be something in the software.)

Second, the published league tables, which tend to appear in the general financial press every quarter and often with higher frequency in the i-bank trade rags, are a nifty form of free advertising. Who, I ask you, does not like free advertising?

But third—and perhaps most surprising—at the end of the day investment banks spend enormous energy and real money on league table positioning and presentation because their customers want them to.

"But wait," you say, "I thought every client knows that league tables are crap." They do, but they want them nevertheless.

Before I explain that little paradox, however, let me preface my remarks by adding that not every client values league tables. As you might expect, i-banking clients that are knowledgeable, experienced, and frequent deal-doers treat traditional league tables the way you or I would treat a piece of dog doo-doo on the street: they wrinkle their noses, step around the mess without really looking at it, and move on. Such customers know all the banks involved, they are familiar with the products or services they are asking the banks to deliver, and they often have more direct deal experience than the Kiton-clad idiot purporting to service them. League tables are completely superfluous to such clients.

For a sense of how an educated consumer of investment banking services does select and evaluate its advisors, I invite you to turn to a recent Bloomberg News profile of Pamela Daley, chief M&A honcho (honchette?) at General Electric Corporation. GE spends about half a billion smackeroos per year on securities underwriting and M&A advisory fees (about the same as the biggest private equity shops), so Ms Daley and her minions have enough in-house data and experience to develop and track their own i-bank performance criteria. I can't imagine they have looked at a standard league table in years:

GE evaluates and measures everything, rating its bankers every six months. It asks about 50 questions to gather complaints, praise and comments on recent deals. This year, Daley is adopting a second survey.

The main question in both is: How likely are you to recommend this bank to a colleague? A score from 0 to 6 is labeled a detractor, from 7 to 8 is termed passive and from 9 to 10 is a promoter. GE calculates the percentage of promoters and subtracts from it the percentage of detractors.

"It's a very small handful of banks that have a positive net promoter score,'' she says.

GE shares reviews, good or bad, companywide, potentially blowing chances for bankers in dozens of industries. "If you're great on energy and lousy in health care, doing something mediocre in health care will get over to the guy at energy,'' Daley says.


Admittedly, GE is an extreme example, but this article puts me in mind of Miss Elizabeth Bennet's reaction upon hearing Mr. Darcy's criteria for an accomplished woman:

"I am no longer surprised at your knowing only six accomplished women. I rather wonder now at your knowing any."

(Note to self: Cancel plans for introductory M&A advisory pitch to GE.)

But most potential investment banking clients have nowhere near the expertise or experience that GE does in this area. M&A, for most companies, is a rare thing, a once in a lifetime event fraught with all sorts of terrors and confusions. Furthermore, it is not trivial to say that every M&A situation is truly different, so even if you are in the minority of corporate managers who have actually been involved in a deal, it is almost certain you will not be completely prepared for the next one. Lastly, very few corporate executives are capable of judging the quality of advice given to them in the course of a deal, since (a) they usually cannot figure out exactly what is going on in the room at any particular time and (b) the outcome of any deal depends on an extremely complex interaction of numerous factors, only one of which is the skill of their advisor.

Mergers and acquisition advice is an archetypal example of what Charles Green over at The Trusted Advisor calls "complex intangible services." M&A advice is hard to deliver, impossible to evaluate ex ante, difficult to evaluate ex post, and embedded in a deal process where the criteria for success are multifaceted and highly variable across deals. It is widely viewed as expensive, although at around 1% of aggregate deal value (and declining as a percentage the larger the deal gets), M&A fees are trivial in relation to the value at stake, whether you consider that value to be the future health of the company, the reputation and personal financial condition of the senior executives involved, the net worth of the company's shareholders, or the lives and livelihoods of its employees, vendors, and other stakeholders. This is one reason why everyone pays what in absolute terms look like obscenely large advisory fees even as they complain loudly about having to do so. As many an investment banker has asked a reluctant client during fee negotiations, "You wouldn't pick your brain surgeon solely on the basis of who offers the lowest price, would you?"

Mr. Green explains that brand reputation among sellers of complex intangible services is an important screening factor, but by itself cannot clinch the sale:

Buyers of complex intangible services are buying specialized expertise. They dread the thought of having to become expert in the thing they are buying—in fact, that is why they are seeking an expert. Given a choice, they prefer to find a qualified expert they trust, rather than evaluate the expertise of many experts.

In complex intangible services, branding can provide the initial "short list." Since these are fragmented markets (consider the market share of the top 5 law firms or consulting firms, compared to the top 2 soft drinks), name recognition is helpful.

Once in the door, however, the trust evaluation dynamic takes over. Differentiation at a brand level may have existed when the short list was put together; but another more powerful form of differentiation begins to take over in an actual sales meeting, and brand impressions are rapidly overtaken.

He recommends that a seller of complex intangible services win over a potential client by "demonstrating" his product; in other words, by beginning to work on the problem or issue at hand so the client can see how they would work together and therefore be able to evaluate the advisor's skills and capabilities.

However, for business, regulatory, and legal reasons, this is not possible in M&A. (How do you demonstrate how you would advise on a deal?) Therefore, i-bankers fall back on a weak proxy: they try to demonstrate their skills and knowledge of the client and its needs by pitching merger, acquisition, and buyout "ideas." Often this takes the form of telling a potential client which company or companies it could or should buy, and what the combined entity would look like from a financial point of view. But any self-respecting company which does not already have a good idea of which companies in its industry it might buy and why should be taken out behind the woodshed and shot, and—assuming a basic level of competence with GAAP and spreadsheet tools—pro forma financial projections are trivial.

Therefore, unlike for many other complex intangible services like accounting, law, and consulting—where a client has a good chance of being able to "test drive" its advisors before it hires them—potential consumers of M&A advice are thrown back on two primary sources of information to use in choosing an advisor: public brand or reputation, and what the investment bankers tell them. Now, most corporate executives are clever enough to perceive when they are being sold, and most investment bankers are pretty effective salesmen and women, so being able to point to some sort of external validation of a bank's skills and reputation is a valuable thing. (Remember how no-one used to get fired for picking IBM? Well no-one gets fired for picking the #1, 2, or 3 M&A advisor, either, even if the deal goes completely pear-shaped.) Hence the continued reliance on published league tables.

The fact that these league tables are widely known to be manipulated does not dissuade the average client, either. You can argue that the fact that a bank is able to persuade big clients to give it public credit for work it has not done is a pretty good indication of decent client relationships and persuasive negotiating skills, both of which are important M&A advisory skills in their own right. And, the mere fact that i-banks so obviously scrap, struggle, and expend copious resources they could otherwise use in their main business trying to reach and stay at the top of the industry league tables month after month is reassuring to clients that the bank in question (a) has surplus resources to devote to an apparently noneconomic activity and (b) cares about its reputation. This is analogous to what naturalists would call a marker of genetic or reproductive health: the same reason peahens look for the gaudiest peacocks with the most energetic courtship dances, even though such activities and energy expenditures on the part of the male are wasteful and even dangerous from a pure survival perspective.

Finally, it is important to remember that investment banking is at its core a network business. Investment banks' skills and capabilities derive from the extensive personal and business relationships of its professional employees, and this is arguably the most compelling value proposition any investment banker brings to a client. What better way to demonstrate the strength of your network, and the extent of your connectivity, than a league table showing how many deals you worked on and how many clients you served? Even if some of them are fake.

That is why league tables won't go away, and probably will not materially change from their present form. Besides, Mr. Berman and his compatriots in the financial press should be ecstatic that Wall Street is as venal, corrupt, and farcical as it is. After all, that makes for better stories, doesn't it?

© 2007 The Epicurean Dealmaker. All rights reserved.

Tuesday, April 10, 2007

Talking of Michelangelo

Let us go then you and I,
When the evening is spread out against the sky
Like a patient etherised upon a table;
Let us go, through certain half-deserted streets,
The muttering retreats
Of restless nights in one-night cheap hotels
And sawdust restaurants with oyster-shells:
Streets that follow like a tedious argument
Of insidious intent
To lead you to an overwhelming question ...
Oh, do not ask, 'What is it?'
Let us go and make our visit.

— T.S. Eliot, "The Love Song of J. Alfred Prufrock"

In the Here,-You're-Not-Beating-That-Dead-Horse-Properly,-Let-Me-Show-You-How-to-Do-It department, I was inspired to take keyboard (and cudgel) in hand by an article in the April Fools Day issue of The Deal by Vipal Monga, "Hooked on a Feeling." I just read the piece today, after my return from a relaxing spring break holiday en famille at a deluxe beachside resort outside Mogadishu. (The little Dealmakers really enjoyed skipping unexploded ordnance out over the coral reefs.)

VM's topic is clearly limned at the outset of the piece: "What is liquidity, and where does it come from? Why is it here and where will it go?" Unfortunately, after a great deal of journalistic hand-waving, Vipal concludes that liquidity equals confidence. Not that confidence inspires liquidity, or any other such reasonable sounding formulation, but that it is confidence. To be fair, few of the eminences grises quoted in the article come off sounding much better. James Grant of Grant's Interest Rate Observer, for example—who up until now I was under the misapprehension actually understood how to use the English language—comes up with this gem: "Liquidity is the expectation of not getting into trouble."


Perhaps I am being persnickety ("Duh," I hear you murmur), but I tend to get a little peevish when someone pens an article purporting to define or identify some concept, object, or issue of interest and then proceeds to disregard all proper usage of the common English verb "to be." Such articles, in my weary experience, tend to obscure more than they illuminate, and this doleful effect is almost always entirely due to the fact that the wastrel writing the piece is not careful in how he or she uses language. Being careful with words, in contrast, usually sheds some interesting light on troublesome topics and can often advance the state of common understanding.

Let me demonstrate.

The stalwarts at Merriam Webster define the adjective "liquid" as "flowing freely like water." Therefore, in common English usage, the noun "liquidity" can be unambiguously understood as "the property or condition of flowing freely like water." Accordingly, we can understand someone's comment that there is a lot of liquidity in the market to mean that a lot of something or other is sloshing about quite freely. Exactly what is sloshing about, and why, are separate questions worthy of their own answers.

The what, of course, we can assume to be capital, in the form of cash and securities, looking eagerly for new homes in the form of investment vehicles of various form and description. Exactly where this capital is coming from—China, India, Warren Buffett's mattress—is an interesting subsidiary question, as well, and if any of you Dear Readers has the answer, please do send it to Mr. Bernanke and his fellow central bankers so they can settle the betting pool they have been running for the last many moons. Drop me a bcc while you're at it, too.

(Some of you in the audience may question whether there is in fact an unusually large amount of capital sloshing about in the markets (i.e., volume) or whether we are just seeing the same $4,327.82 speeding by us repeatedly in a sort of high speed capital market spin cycle (i.e., velocity). However, anyone clever enough to perceive this conundrum is obviously too intelligent to waste his or her time mooning over my pathetic doodlings and has clearly stumbled on this blogsite in error while looking for the minutes of the last Federal Reserve Board Open Market Committee meeting. Nobody likes a cleverboots, so piss off.)

Why there is so much liquidity is the more interesting question.

If I have correctly translated the central conclusion of the Deal article from journalese into standard English, VM asserts that the markets are so liquid because market participants are confident, and, by extension, confident that they will be able to unload their (risky) securities and investment positions when and if the worm turns. This is the standard formulation, is it not, for an investment bubble?: Everybody but a few unfortunate knuckleheads knows there is a bubble which is bound to burst at any moment, but they are all (irrationally) confident that they can get out before the great unwinding.

Sorry, I just don't buy it.

In the late stages of any investment bubble, virtually everyone I know is grimly whistling past the graveyard, simultaneously trying to make as much hay as possible while the sun shines and completely certain it will all end in tears. Only the madly delusional, in my experience, plan to get out in one piece. (That some lucky souls do get off scott free in every bubble is impetus enough to encourage the next generation of knuckleheads. Thank you, Mark Cuban.) Why, then, do we continue to get caught in this trap of our own making?

Well, someone more clever than me could offer all sorts of contributory reasons, but I already told them to piss off a few paragraphs back, so I am afraid you are stuck with me. Sure, sure, there's moral hazard, structural institutional bias, and even sun spots to blame, but the real reason is that humans are pack animals (or herd animals, for you vegans out there). Millions of years of evolution have programmed our tiny little reptilian brains to feel safest when we are moving together, even when that movement is taking us collectively over a cliff. As long as we are wearing the right Hermes tie, belong to the right country club, and eat at the right restaurants, we feel safe, even if we do have negative equity in that third vacation home we bought in Las Vegas last year and our limited partnership stake in Blackstone Capital Partners XXVI winds up losing money. Better to be battered and bruised, but whole, together, than cut out from the herd and slaughtered alone.

Truly acting alone—and investing according to your own principles and no-one else's—is not easy or even natural for Homo sapiens. We Americans, in particular, admire those rugged individualists who follow the beat of their own drum, but we usually prefer to read about them in Time and Fortune, rather than share their lonely fate. We all admire Warren Buffett, but I am sure some of you can remember how foolish he looked a few years ago when the world was being transformed by technology and the NASDAQ Composite was marching inexorably to 30,000. Now he's a genius again.

Or at least until the next sun spot flares up.

© 2007 The Epicurean Dealmaker. All rights reserved.