Resurrexit

I. To a Child dancing in the Wind

Dance there upon the shore;
What need have you to care
For wind or water’s roar?
And tumble out your hair
That the salt drops have wet;
Being young you have not known
The fool’s triumph, nor yet
Love lost as soon as won,
Nor the best labourer dead
And all the sheaves to bind.
What need have you to dread
The monstrous crying of wind?

II. Two Years Later

Has no one said those daring
Kind eyes should be more learn’d?
Or warned you how despairing
The moths are when they are burned?
I could have warned you; but you are young,
So we speak a different tongue.

O you will take whatever’s offered
And dream that all the world’s a friend,
Suffer as your mother suffered,
Be as broken in the end.
But I am old and you are young,
And I speak a barbarous tongue.

— William Butler Yeats

Youth will learn soon enough; too soon. Let them have their dance with the wind, the water, and the flame.

Happy Springtime. Happy Easter.


© 2012 The Epicurean Dealmaker. All rights reserved.

These Boots Are Made for Walkin’

These boots are made for walkin’
And that’s just what they’ll do.
One of these days these boots
Are gonna walk all over you.

— Lee Hazlewood

Her favorite position is beside herself, and her favorite sport is jumping to conclusions.

— Danny Kaye¹

Tamara Mellon, social climber, entrepreneur, and enfant terrible of cosmopolitan society everywhere—in addition to her not inconsiderable achievement as cofounder, builder, and seller of high-end global shoe retailer Jimmy Choo—has apparently followed through on her longstanding threats to bite the private equity hands that fed her. In a brief article in the fashion section [sic] of the Financial Times, Ms Mellon lays into her former partners with relish:

“What happens in private equity is they come in and they say we’re going to be a great partner. We want to hold this long term and we’re going to help you nurture and build this brand,” Ms Mellon, who left Jimmy Choo in November, tells the Financial Times. But “the day after signing, they talked about selling the business”.

She complains that, in addition to having a frustratingly short investment horizon—Jimmy Choo changed hands among three financial sponsors from 2001 to 2011—her (all male) private equity partners did not understand the business, fought her creative decisions, and refused to put additional growth capital into the firm. She came away with a very sour taste in her mouth:

Ms Mellon says that she has no problem with “people creating wealth and entrepreneurs and building businesses. It’s just how you do it. I think the private equity model is open to people who are more vultures and parasites because it’s a chaotic business . . . it draws a different type of personality.”

But don’t feel too bad for her, O Tender and Sympathetic Readers. Notwithstanding her struggles, Ms Mellon has been well paid for her forbearance. She reportedly made £85 million liquidating her remaining ownership stake in the most recent sale to Labelux. This is in addition to any money she may have already taken off the table in two preceding buyouts by successive private equity partners.²

I highly doubt the lady is short of pin money.

* * *

I am slightly surprised, however, that so obviously clever a person as Ms Mellon seems to have emerged from ten years of close tutelage at the hands of private equity investors and partners so entirely unscathed by the most basic understanding of what they do. It does seem at first blush that her successive financial partners might be fairly accused of rather unseemly haste to divest their investment in her company, given that none of them held its position much longer than three years. This is on the quick end of the normal three- to seven-year portfolio churn in the private equity world, although it is not unheard of nor particularly uncommon. But in addition to potentially itchy trigger fingers, the short tenures of each of her sponsors may have been due to little more than the outsize success of Ms Mellon’s efforts in building Jimmy Choo into a global lifestyle brand so rapidly. After all, private equity firms are in the business of making returns on their limited partners’ investment, and if a sponsor can return 2.5 to 3 times its initial investment within two to three years, it would be crazy—and arguably derelict in its fiduciary duty—not to do so. Surely this most basic fact should have seeped into Ms Mellon’s consciousness sometime over the past ten years.

It may also be true that her particular partners were unduly meddlesome in creative decisions and reluctant to put more equity to work to help build the company, but I find this hard to believe as she so baldly states it. Financial sponsors are in the business of helping their portfolio companies’ management teams build value, if only for no more complicated reason than that is how they make money: by buying a company at X and selling it some years later for a multiple of X. Most buyout firms are eager to invest additional money into their companies on top of initial buyout amounts, where it can be justified as creating additional value. Where private equity professionals are downright parsimonious, however, is making frivolous, ego-driven, or irrelevant investments to satisfy the whim of their management partners. Ms Mellon, for example, may have felt quite put out that her partners did not buy that juicy piece of New York or London real estate she mentions as a “good long-term buy” (what was it, a fancy office mansion in Mayfair or a pricey retail townhouse on Madison Avenue?), but she gets no sympathy from me. Jimmy Choo is a shoe and clothing company, not a goddamn real estate investment trust, and any investor in his or her right mind should not be remotely interested in tying up capital in an asset which has nothing to do with whether Jimmy Choo succeeds as a shoe and clothing company. Rent the damn building, fer chrissakes.

Countermanding her creative decisions about which merchandise to offer seems less justifiable, however, and runs counter to normal private equity practice. Most financial sponsors do not pretend to have the creative or operating knowledge required to run their investment companies on a long-term or day-to-day basis. That is why they hire and partner with management. But they do expect management to explain and justify significant decisions and actions to them, especially those requiring substantial investment or having material impact on the strategic direction of the company. After all, it is their (limited partners’) money which management wants to spend. Making major changes to merchandise lines for fashion reasons fits squarely into the kind of decisions financial partners on a buyout company’s board should expect to be informed and consulted about beforehand. I suspect an imperious and egotistical entrepreneur, which Ms Mellon gives every impression of being, might find that constraining or petty, but tough cookies.

For if there is a common pattern of breakdown in relations between private equity investors and their partner management teams, it is to be found in situations like this. Hard-charging, imperious entrepreneurs often mix with financial sponsors like oil and water. Private equity professionals are smart, driven, and entirely unsentimental investors who are absolutely unafraid to say no to a company CEO who wants to do something he or she cannot convince them to support. If the loggerheads continue, they are also completely unfraid to fire the charismatic visionary who founded the company and replace him or her with someone more pliant. The only thing which saves many of these bullheaded entrepreneurs is the fact that they are, in fact, very hard to replace. It is a measure of Ms Mellon’s talent, irreplaceability, and/or pliancy while her partners held the ultimate reins of power that she survived at Jimmy Choo as long as she did.³

There is a reason why financial sponsors call majority buyouts of companies “control investments.” They acquire a controlling share of the company’s shares and a majority of Board seats. They have the controlling vote, and they are not afraid to exercise it. If prima donnas like Ms Mellon don’t like it, they are more than welcome to pound sand in private.

Or cast public aspersions at their former partners in the Financial Times once the non-disparagement clauses run out.


¹ As quoted in Daniel Kahneman, Thinking Fast and Slow. New York: Farrar, Straus and Giroux, 2011, p. 79.
² I have no idea whether she did so, but it is common practice for existing management of a company bought by a financial sponsor to sell a portion of their current holdings for cash in the deal, in addition to rolling over the remainder into a minority equity stake in the newly recapitalized business. Putting aside Phoenix Equity Partners’ initial majority purchase of Mr. Choo’s stake in 2001 (in which she may have participated as well), it is likely that Ms Mellon had at least an opportunity to take three separate bites at the apple over the course of her tenure there.
³ Or fear/greed. It is also true that managers who are fired from private equity companies often lose most or all of the unvested portion of their equity stake in the company. Ms Mellon probably had strong financial incentives to submit to the wishes of her majority owners in these squabbles.

© 2012 The Epicurean Dealmaker. All rights reserved.

What Immortal Hand or Eye...

It is when we try to grapple with another man’s intimate need that we perceive how incomprehensible, wavering, and misty are the beings that share with us the sight of the stars and the warmth of the sun. It is as if loneliness were a hard and absolute condition of existence; the envelope of flesh and blood on which our eyes are fixed melts before the outstretched hand, and there remains only the capricious, unconsolable, and elusive spirit that no eye can follow, no hand can grasp.

— Joseph Conrad, Lord Jim

© 2012 The Epicurean Dealmaker. All rights reserved.

Altar of a Minor God

I break out into this declaration not because of a lurking tendency to megalomania, but, on the contrary, as a man who has no very notable illusions about himself. I follow the instincts of vain-glory and humility natural to all mankind. For it can hardly be denied that it is not their own deserts that men are most proud of, but rather of their prodigious luck, of their marvellous fortune: of that in their lives for which thanks and sacrifices must be offered on the altars of the inscrutable gods.

— Joseph Conrad, Heart of Darkness ¹

Hubris has always been an essential crutch humanity has relied on in a hostile and indifferent world, a compensation and outgrowth of the fundamental attribution error which places each of us at the meaningful center of our own individual, disconnected universes. In the past, however, before the Committee on Right Thinking for Western Culture decreed that God was dead, many of us at least paid obeisance to the notion that there are powers and forces in the world greater than ourselves, and that our triumphs and defeats might be laid—at least in part—at the feet of some person or thing beyond our understanding or control.

Now, of course, we suffer no such restraint, and our metaphysics has regressed to a selectively primitive state. We attribute our successes to our own skills, perserverance, and attitude alone, and our failures to the malevolent workings of enemies or a malign fate. I suppose this is natural and unavoidable, but it seems to me that something has been lost.

For I have to say I am unimpressed—and unconvinced—by a god who only has bad luck in his gift. Even if we only call it Chance.


¹ Joseph Conrad, Heart of Darkness. New York: Penguin Books, 1995, p. 10.

© 2012 The Epicurean Dealmaker. All rights reserved.

Size Matters

“It’s not the meat, it’s the motion.”

— Possibly apocryphal motto ascribed to certain Ivy League Lightweight Rowing Programs¹

Felix Salmon and Pascal-Emmanuel Gobry have commenced an interesting tennis match with dueling blog posts recently. At stake is what is allegedly wrong with the market for initial public offerings in this country and what should be done to fix it. Apparently the whole brouhaha was triggered by some ludicrously-entitled piece of bipartisan bullshit evacuated by Congress known as the JOBS Act, the fundamental purpose of which seems to be to lower the barriers for smaller companies to access capital in the financial markets. Felix offered up the opening serve, Pascal returned serve here, and Felix has pelted the ball back over the net this evening.

Now I—as a mercenary intermediary in the capital markets whose livelihood and enjoyment of exotic delights unknown to ordinary humans depends in part on the introduction of persons in need of filthy lucre to those in uneasy possession of too much of the same—clearly have a dog in this fight. Interestingly enough, however, I freely admit that I couldn’t give a rat’s ass whether this piece of campaign-finance-inspired legislative pandering passes or not. Number one, it won’t affect my business in the least, and number two, it won’t really make a damn bit of difference to increasing the availability of financing for businesses which can contribute meaningfully to the economic growth of this economy. I mean, if you want to pretend that Kickstarter—that crowdsourced cesspit of Mickey-Rooney-like “Hey, fellows, let’s put on a show!” garage band nonsense—can make a material difference to the unemployment figures or economic growth trajectory of a thirteen trillion dollar domestic economy, be my guest. And after you’re through playing with yourself, I have an attractive bridge of historical significance to sell you.

Having witnessed the evolution of the equity capital markets over a two-decade period (longer than the conscious lifespan of most of the callow strivers populating the crowdsourced finance ecosystem), I do have a perspective and opinion which some might find illuminating. It boils down to this: neither Felix nor Pascal addresses the root source of the current dilemma. Public financial markets—and the institutional investors who dominate them²—have become too large to be an effective source of late-stage growth equity capital for most companies. The “round lot” (sorry, minimum size) for an effective IPO nowadays is at least $75 million dollars. But very few fast-growing companies ever need that much money to grow their business. Let’s face it: most startup companies with indisputably fabulous business models have no opportunity or intention of becoming the colossal world-beaters which Pascal identifies in his post. Furthermore, few insiders (management and original equity backers, whether VCs or otherwise) want to sell all of their holdings in these companies on an IPO, even if the underwriters allow them. After all, they usually believe in the story, and they want to continue their ride on the rocket ship. If the company doesn’t have a good use for the money, and pre-IPO shareholders don’t want to sell any meaningful portion of their stake, where the hell are the shares for the IPO going to come from? Exactly: they’re not.

* * *

Part of the problem lies with the current structure of the investment banking industry. Too many potential underwriters are just too large to consider run-of-the-mill, pissant IPOs to be worth their time and attention. To paraphrase 1980s supermodel Linda Evangelista, bulge bracket banks like Goldman Sachs, JP Morgan, and Bank of America Merrill Lynch just won’t get out of bed in the morning for less than a $300 million offering. They can’t even pay their defense counsels’ retainers with the commissions earned from such business. And for various reasons, smaller investment banks which could make a decent living off such fare are relatively few and far between.

But the real problem lies with the primary audience for IPOs, institutional equity investors themselves. Over the past few decades, the public equity markets have evolved from a relatively staid and selective backwater, a playground for pension funds, insurance companies, and the idiot sons of wealthy men, into a gigantic global pool of capital, driven and supported by huge amounts of money from literally everybody. Equity markets have become tremendously democratized, both directly with the individual participation of non-wealthy punters and indirectly with the huge reallocation of pension fund and pooled institutional capital into publicly traded stocks. I will leave it to an enterprising PhD student to research the data, but I suspect the aggregate amount of equity market capitalization as a percentage of GDP has swelled tremendously over the past three decades. Equities have gone mainstream, and as they did, the size of equity markets ballooned.

As they have done, the minimum size investment which your average institutional investor in public equities can entertain has ballooned, too. I remember a senior equity capital markets banker (IPO shill, to you) telling me a story years ago about how a friend of his had joined one of these institutional behemoths as a portfolio manager at the same time he joined the sell side. His friend explained that when he started managing equities in the 1980s, he had a total portfolio of around $100 million dollars. To devote sufficient time and attention to each of his positions, this PM limited his portfolio to no more than 100 individual companies (which, frankly, was pretty energetic and ambitious). By the 1990s, good luck, skill, and a rising tide had swollen his portfolio to $10 billion in size, but he still adhered to his limit of no more than 100 portfolio company investments. In other words, his average investment in an individual company’s shares had grown from $1 million to $100 million. Each. And he was neither unusually successful nor particularly large.

You can quickly see, Dear Readers, that such a portfolio manager must think long and hard whether he wants to spend the time and energy investing in, following, and adding to a position in a company in which he will be limited to no more than a 10% portion of the initial public offering.³ Especially if his initial investment in a $75 or $100 million IPO is 10% or less of his ideal average size portfolio holding. This also explains, indirectly, why investment banks have grown to a size where it is not economically efficient or profitable for them to underwrite IPOs of less than $75 million in size: as middlemen, we have followed the money, and our buy side clients, after bigger game.

* * *

Now whether this so-called JOBS Act is a sensible alternative to the current jury rigged system of angel investors, venture capitalists, and private investors in late stage growth equity capital which has grown up to fill this widening structural gap in the capital markets is above my pay grade. As I said above, I suspect it will have very little effect on mainstream, Wall Street underwritten IPO business at all. But I must agree with Matt Levine of Dealbreaker when he observes that

either the SEC registration process is necessary to protect investors, in which case it’s especially necessary for smaller newer companies, or it’s not, in which case it’s no more necessary for large companies than for small ones.

It is a little disconcerting to me that bipartisan knuckleheads in Congress seem intent on reducing regulation, protection, and oversight in retail finance at the same time they are putting other parts of my industry into testicle clamps. But I suppose political campaigns just don’t pay for themselves.

In any event, you may rest assured that one perennial truth about entrepreneurial business funding markets will never change, no matter what changes to the legislative and regulatory environment may occur:

The retail investor will always get screwed.


¹ Quibble, cavil, and plead all you want, Gentlemen, I am here to tell you—after decades of personal experience—that size does indeed matter. Any woman who tells you otherwise is protecting your feelings. And probably looking for her next boyfriend/husband, besides.
² Yes, yes, retail investors make up a portion of the public equity markets too. But hear this: no-one in my business ever asks the opinion of Aunt Millie or Uncle Joe about the proper price of an initial public offering. No underwriter in my industry, now or ever, has relied upon the retail demand of a bunch of ignorant, emotion-addled, staggeringly poor (relatively) individual investors to drive the size, pricing, and ultimate success of an IPO in the US markets. At best, retail investors are fleas on the asses of lumbering institutional investors like Fidelity, Vanguard, and myriad public pension funds which put in orders for hundreds of millions of dollars of stock. At best, retail investors comprise 15 to 20 % of the total demand of an IPO. Frankly, my dears, you could all simultaneously get hit by buses crossing the street the day before the offering, and it wouldn’t make a damn bit of difference to us or the issuer. Sorry to break it to you like this, but when it comes to initial public offerings, retail investors are irrelevant.
³ IPO underwriters like to limit “anchor” or lead investors to no more than 10% of the initial offering size. The hope is that they will want to add to their position in aftermarket trading, thereby providing ongoing buy-side support to the shares. IPO offering books are usually anchored by no more than 3 to 5 such 10% holders.

© 2012 The Epicurean Dealmaker. All rights reserved.