Value stripping at the finance auctions – Introduction

My wife takes me for walks every weekend to collect my favourite treats, the Weekend FT plus the Saturday and Sunday Times newspapers. Then it’s back home for drinks.  This is strong drink since thirst quenching is secondary to mind numbing which is necessary to plough through the usual diet of fund managers hidden charges, new pension and savings legislation and the obligatory expert commentary from career journalists, failed politicians turned asset managers and high-charging execution brokers doubling as the investors friend.  The one enduring feature of these journalist is their ability to dump old theories once disproved and quickly adopt another theme until their new analysis also proves useless.  Take gold for example, for weeks I was reading this columnist preaching the virtues of being a gold bug.  As soon as gold crashed, there I was hoping every week to read some mitigating piece only to find that the now amnesic journalist has quickly moved on to more topical issues like fund managers charges, the benefits of buy-to-let property or some other fairy tale for the amateur investor. So why do I continue to read this weekly pulp of stuff that I don’t like? I dunno!

I have been debating with myself over the past few months on how to fill the time between identifying an investment, acquisition and value stripping.  Then, as I was watching the television with my wife on Wednesday, 11 June 2014, the perfect idea struck me.  I was watching Danny from Lancashire in a BBC episode of Del Boy and Dealers.  Danny fancied himself as an auctioneer and after ten years wheeling and dealing in the most eclectic assortment of antiques and collectables, he decided now was the time to realise his dream and hold a house auction.  Basically, Danny’s antique buying was now outstripping his selling and his late mum’s house was overflowing with his stuff.  Danny is definitely someone that I would like to meet and have a beer with.  He’s a true English eccentric dreaming all the way to banking a million pounds just like Del Boy did in Only Fools and Horses.  So, how can I leverage Danny’s wheeler-dealer cum auctioneering skills to write about my own value stripping experience in the financial markets?

I could use this blog to take readers through the value stripping process from identification to value stripping just like Danny did on the TV.  But Danny has a decade of wheeling and dealing so I need to convince readers to keep the faith with me by proving that I’ve done time and there’s depth to my leadership in this one year journey.  Yes, the journey is one year long and hopefully, I could emulate Danny and dream myself into being a millionaire. And as Danny said to Radio Lancashire when asked whether he’ll be taking on the likes of Christies and Sotheby’s, I don’t see why not!

Well, my own journey in the financial markets started in 1992 after I resigned from Logica UK and started out as an independent consultant in the City of London.  My first decade through the financial jungle was enjoyable and I delivered the first colour-coded quantity balance (QB) card for metals and bullion ever used on the London Metal Exchange (LME) ring for Rudolf Wolff & Co., a founder member of the LME and with my reputation at an all time high delivered the same for Deutsche Bank who had just acquired Sharps Pixley, a metals and bullion founder member of the LME.  Then it was off to Prebon Yamane, an open-outcry money broker in Bishopsgate, to develop their Cash and FRA arbitrage trading analytics.  This was a remarkable assignment since I successfully backed myself to migrate Prebon Yamane brokers from the old video-switching keypad that flicked between financial information pages provided by Reuters, Telerate and Knight Ridder to a fully integrated BT Syntegra product called OTSView and redevelop all the analytics using new object oriented routines.  Having blasted through this assignment in 6 months flat and having met memorable characters like Goldie, I moved to NatWest Markets (now RBS) for a 4-year stint in the same Bishopsgate building as Prebon.  Then in 1999, off I went to South Africa for a year on Merrill Lynch’s tab to ensure that their research analysts were Y2K compliant. I reckon from about 2002, the enjoyment of being in the City started to wane as I became more aware of a new generation of chancers and spivs in Canary Wharf streaming in from Essex and Tower Hamlets.  I have to admit that, even though I’m hardworking, the Canary Wharf environment was an unpleasant 10-year stretch for me.  Too much of the good life in the City had left me with an over-refined attitude and low tolerance for the new breed of tossers.

OK.  How does this experience as a financial engineer equip me for life as a value stripper?  Well, I will share a few quips of my experience with you.  The best one was while working for Credit Suisse in Canary Wharf.  I received a letter from Fidelity, the administrator of my defined contribution pension, complaining that I was not playing fair and my switching technique was detrimental to other scheme members!  What brought this on was the fact that I was arbitraging the range of 20-21 index and other funds provided by Fidelity to members so that they can take control of their retirement pot and eventual pension.  I was increasing my pension fund by an average of 25% per annum. So I decided to tone down my arbitrage operations by taking great care not to excite Fidelity but still averaging 20-25% annual return.  When I left the company after almost a decade, I made sure that Fidelity couldn’t get back at me with dodgy deferred members charges.  I immediately transferred my pension pot to a private SIPP.  You may have noticed that my intensive experience at Prebon had equipped me with the terrible habit of arbitraging – i.e. making a risk free profit whenever the opportunity presented itself.  It was here that I met the lead arbitrage dealer who asked me how much I was making developing analytical models.  I was so embarrassed that I replied with the half-question: I’m sure it’s not as much as you. To which he replied he was on £250k basic plus bonus, in addition to his part-time lectureship at the LSE.  Never mind, he taught me a few secrets of the trade which enriched my knowledge.

So, I will kick off the next phase of my journey from now, the 13th June 2014 and end on 12th June 2015 with the key objective of demonstrating my barefoot techniques of value stripping at finance auctions.  This concept will be made clear as I select one target at a time and systematically process all relevant data and information available in the public domain to strip value at each stage of the journey.  I will also be highlighting some of the hazards and red flags which can seriously upset one’s planning.

Enough said, let’s go value stripping!

Oodutty

Hazards of publicly quoted venture capital and private equity operations

Wouldn’t it be great if you were an early investor in technology start-ups that are now the new internet titans, such as, Google and Facebook.

Maybe, the new generation of crowd funding platforms will provide the ordinary investor with a chance to bag a few millions!

Have you ever wondered why the only multi-millionaires and billionaires that are created from IPO’s are the entrepreneurs and the Venture Capital (VC) or Private Equity (PE) groups?

And what about those small investors in early start-ups like family, friends and small angel investors? How have they done?  Are they still working 9 – 5 to earn a living?

With the incursion of crowd funding operations into the venture capital and commercial lending space, this may be an opportune time to examine the hazards and rewards to the small investor from participating in such high risk investments.

Business angels and private venture capital platforms typically screen investors so that only verified high- net-worth (HNW) investors – with over a million dollars in assets not including their residential property – are allowed to participate in venture capital funding rounds.  This model ensures that only those who can afford financial loss are allowed to engage in high risk ventures.

The main hazards to small investors stem from the publicly quoted VC and PE operations.  These organisations normally involve a non-quoted or private limited partnership, acting as an investment manager for the listed VC and PE company.  The investment management company is typically connected to the listed VC and PE vehicle.  The connection is established through board directors on the listed vehicle also being partners of the investment management company.

Admittedly, there are the usual advantages of being listed on a public exchange, such as the ability to raise debt and equity capital from institutional and ordinary investors alike and the liquidity of the shares traded on such public exchanges.

Hazards and red flags

The high degree of leverage (debt/equity ratio) used during the early stage of the VC and PE  operations and start-up failures mean that the publicly traded share price is likely to be at a premium to the reported net asset value.  This front-end loading of risk is necessary since the VC and PE vehicles are scouting for start-ups with the greatest exit potential.  The high risk of the VC and PE firms collapsing under the weight of debt and non-performing start-ups is borne totally by the shareholders and debt financiers.

The ‘heads I win tails I win’ partners of the connected investment management company operate on lucrative fees for arranging finance and managing the portfolio whatever the financial and operating environments.  Also, built into the investment management agreement is an eye-watering 20% or more fee for successfully exiting an investee company – imagine the spoils from Facebook and Twitter!

You wouldn’t be surprised to know that the majority of quoted VC and PE vehicles from 1999/2000 with their core skills of arranging finance from institutions and obtaining favourable exits in the form of IPO’s, trade sales and MBO’s have survived the recent downturn intact. The prize for survival has been a mature portfolio of late-stage investee companies nurtured through the recent financial downturn of 2007-2011.

After, steering their investee companies through the financial downturn and with a maturing portfolio of global giants primed for exits and rocking the stable doors of the quoted VC and PE vehicles, this is where the private investor/shareholders main hazards and red flags are likely to be revealed.

In addition to the lack of transparency, below is a list of some of the signs that shareholders of publicly quoted VC and PE vehicles should monitor:

• Low key reporting of investee companies previously deemed strategic now downgraded to the status of  ‘non-material’ investments
• Sale of controlling interest in the investment management company back to the partners as part consideration for outstanding management fees.
• Sale of ‘non-material’ investments in investee companies to the investment management company
• Sale of ‘non-material’ investee companies with leading edge intellectual property (IP) to other ‘darling’ investee companies destined for high IPO or trade sale exits
• Sheltering substantial holdings in ‘darling’ investee companies destined for high IPO or trade sales exits in ‘non-material’ investee companies
• Increased award and take up of directors’ share options
• Large share buy backs just before the exit of key investee companies
• De-listing of the VC and PE vehicle after a capital distribution following the sale of key investee companies but with the ‘non-material’ investments still on the balance sheet

The key message here is that investors with shares in publicly quoted VC and PE companies should conduct thorough due diligence to ensure that with maturing portfolios of investee companies the board of these listed entities along with the connected investment management companies are not manoeuvring to remove value away from shareholders who have borne the brunt of the risk in the journey from early stage operations to lucrative capital realisations.

In particular, pay close attention to those investee companies that are reported as ‘non-material’ by obtaining their annual reports to verify shareholders, directors, loans and mortgages to and from officers and browsing the investee companies website.  Then write to the company secretaries to obtains answers and signal to the board that they’re being watched.

Oodutty

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Chinese walls separating credit from savings and investments

Is it just me or are there others who feel they are being legged-over by retail banks and financial institutions that offer both credit facilities and saving and investment products?

Don’t get me wrong, I have a soft spot for the big investment banks since they’ve provided me with an above-average income for over two decades.  However, I’ve recently been chatting with Frank, an old friend of mine, who is now running an ethical peer-to-peer lending business and he has helped to open my eyes to what goes on in retail banking.

After questioning Frank about the type of clients that his business is attracting, I was not surprised to learn that in reaching their decisions to refuse credit to some of Frank’s clients, the major high street banks and lending institutions had employed the services of the UK credit reference agencies – Experian, Equifax and Callcredit.  These credit reference agencies are now basically licenced to print money since they’re protected by statute to access the national electoral register, customer credit records at banks, credit and store card companies, public utilities and other enterprises.

What I found interesting was the fact that some of Frank’s clients were not hand-to-mouth borrowers at all.  Some merely wanted the flexibility to keep their current savings and investment portfolios intact while borrowing to satisfy a specific medium term requirement whether it be buying a car, holiday or upgrading their home.  One can argue that this is the same principle that UK high street banks use when they go to the Bank of England or the ECB with their begging bowls for short term loans.  Not to mention the global credit crunch of 2007-2011 when they were begging to use the taxpayers money – yes, the same people from the national electoral register. The moral of the story so far is that any one of us from the humble shop floor worker to the mighty ‘masters of the universe’ can fall on hard times.

So what’s the big deal? No one (i.e. the man in the street) is entitled to credit from banks and lending institutions (i.e. the same folks that almost bankrupted the nation’s pensioners after their collapse).  This is the government’s and the credit reference agencies standpoint.

Moral hazard

This one-dimensional view of the electorate as being high risk borrowers irks me a lot. What about the electorate’s other assets: property, premium bonds, government bonds, stocks and shares, index and tracker and esoteric funds, ISA’s, ETF’s, ETP’s, SIPP’s and all that other toxic stuff that the gets blasted at us with impunity in the daily and weekly mass media so that the government, banks and financial institutions can borrow from the electorate mostly with the cursory risk warning that ‘investments can go up or down and you may lose your original capital’.

Which clever snake oil pedlar sold the idea that borrowing from the electorate should be considered as risky investments rather than as loans to banks and other financial institutions so they can generate revenue while, on the other hand, loans and mortgages from these institutions to the electorate have to repaid in full with interest. Further, if the electorate don’t pay then they’re blacklisted and or bankrupted by the banks and financial institutions with the help of credit reference agencies, but when these banks and financial institutions go bust they are rescued by the state using the tax payers funds and let off to prey on the electorate like count Dracula.

I must now refocus my attention to the cosy relationship between credit reference agencies, government and lending institutions with the following questions:

1. Is it right for me to keep my hard-earned savings and investments with a bank or financial institution that refuses to give me credit based wholly or partially on the three monopolistic UK credit reference agencies?

2. Is it right for a bank or financial institution that transacts daily current account, savings and investments business with existing customers to use a third party credit reference agency for lending decisions regarding those same customers?

3. Is it right for a bank or lending institution having performed the requisite due diligence checks including KYC – Know Your Client – during account opening to later employ a credit reference agency to rate the same customers with whom they regularly transact savings and investment business?

4. Is it right for a bank or lending institution to continue in a borrowing relationship through savings and investment products with clients subsequent to their decision to refuse credit to those same clients?

5. Is it right for a bank or lending institution to borrow money from consumers using savings and investment products without these institutions themselves being credit assessed on individual transaction prior to accepting customers’ money?

If the majority of readers answer ‘No’ to these questions, then banks and financial institutions present a moral hazard to society by:

• borrowing the electorate’s savings and investments to generate revenue and profits without themselves being credit assessed on every such transaction,  while simultaneously, using credit reference agencies to assess the same electorate with whom they are transacting and peddling borrowing products

My personal recommendations are:

1. If a bank or lending institution, credit assess existing customers who they transact savings and investment business with, then on refusal of customers’ credit applications, the banks or lending institution should also:

a) include in their refusal notice all savings and investment products, including insurance policies, that they hold on behalf of the customers impacted by the credit refusal;

b) recommend a list of independent financial institutions that the customers impacted by the credit refusal can switch their savings and investment products to;

c) stipulate clearly that the financial institutions’ refusal to offer credit whilst borrowing from the impacted customer represents a conflict of interest and a moral hazard and therefore, it’s in the interest of the customer to research the market for another financial institution that may better serve their interest for both savings and investments and credit facilities.

2. In particular, internet peer-to-peer lending and crowd-funding enterprises should NOT use credit reference agencies since this will constrain the scalability of their business model to the same population of customers available to banks i.e. ‘the credit reference agencies say Yes’ cohort.  Instead, peer-to-peer and crowd-funding business should leverage the titans of the internet to disrupt the cosy trio of credit reference agencies and scale their business model to capture the population of ‘the credit reference agencies say No’ cohort. How? Simple: use the internet titans- eBay, PayPal, Amazon etc. to perform preliminary ID and Verification (ID&V) checks by:

a) requesting applicants to send a refundable payment of £1 – from their main current account and/or credit cards – using PayPal since payment notification will included verified address and location.  This can be refunded after successful application

b) use text messaging to verify applicant’s telephone numbers and social network links to verify other attributes

c) additional ID&V for date of birth etc. – passport, driver’s licence etc. – can be sent via registered post along with evidence to confirm ownership of assets including mortgage accounts for property, savings and investments and confirmation of employment / self employment data capture on initial application

d) always post written confirmations to the address supplied by eBay, PayPal, Amazon etc. and create Red flags for post returned as ‘Move away’ and ‘Not known at this address’

A new pension model for the 21st century

I will take up the subject of pensions in another article. However, my question is: shouldn’t pension savings be the mirror image of a residential mortgage? Pension savings are no different to mortgages on residential property – the pension saver should be granted a charge on the pension provider’s property for every penny he contributes until retirement, plus the addition of annual compound interest.  Thus, every penny saved in a pension, plus compound interest should be handed back to retirees and if this cannot happened then the defaulting financial institutions assets should be repossessed and sold off to repay the debt in full.

This blog is intended to disrupt the cosy status quo of retail banking and other financial institutions that use monopolistic credit reference agencies in the UK to discredit lives while establishing Chinese walls to profit from the tax payers hard earned income and savings.

If you feel strongly about empowerment through data intelligence for next generation living then please take a few minutes to complete the form below.   Your feedback will be used to analyse the extent to which banks and financial institution along with credit reference agencies are operating Chinese walls between savings and investment and lending products.

Oodutty

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