business model

No exit for venture capitalists

Jim Kim — Tue, 14 Oct 2008 14:10:26 -0400

It's no secret that the venture capital industry has been suffering through a bitter season of 'No Exit' signs flashing in bright neon over every deal. TheDeal.com puts some perspective on the reality: VC-backed companies generated $4.6 billion in deals (IPOs and acquisitions) in the third quarter, down 66 percent from a year earlier (Dow Jones VentureSource). This is shaping up to be among the worst years ever--which is hardly surprising. The industry is pretty much resigned to hunkering down and focusing on growing their portfolio companies. Exits really aren't on the horizon. What this does to returns is anyone's guess. Not that the only firm that managed an IPO, Rackspace, did well on its debut. In fact, it tanked. In a sense, this is really a short-term problem. Longer-term, you to wonder what the business model will be. Things are not well in VC land.

For more:
- here's the article

Related Article:
Has Sarbox really gutted the VC industry?

Lehman Brothers prime brokerage customers left high and dry

Jim Kim — Wed, 01 Oct 2008 15:01:56 -0400

We may be witnessing a historic shift in the prime brokerage industry. Morgan Stanley's prime brokerage operation has certainly been hit hard. The bank reportedly lost more than one-third of its assets in one week, back when it was perceived--rightly or not--to be on the ropes. Lehman Brothers' prime brokerage operation is now back in the news. Bloomberg reports that some hedge fund clients have had extreme difficulty in getting their funds out. One hedge fund, Oak Group, tells the news service that it will probably have to shutter operations because funds are tied up. One has to wonder how Goldman Sachs' prime brokerage operations are holding up. One also has to wonder if the business model of the big boys, built on leverage, will have to be adjusted. If so, how? It's fair to say that prime brokerage, a bright spot just a few quarters ago, may not be the earnings driver some had hoped.

For more:
- here's the Bloomberg article

More on the future of Goldman and Morgan

Jim Kim — Tue, 23 Sep 2008 12:28:09 -0400

Conventional wisdom holds that the era of big leverage has ended. For Morgan Stanley and Goldman Sachs--the lone survivors--the world ended with them becoming commercial banks. That means an end to the turbo charged profits that both posted during the boom. But Goldman Sachs officials are not giving up on their lofty expectations, notes Business Week. The firm is planning to average 20 percent returns on equity over five years. Morgan Stanley is being less bold in expectations. My take is that 20 percent is possible. They will give up a bankrupt business model that over time has really held down its PE. That may change. Mr. Market may see a better bet--and reward it appropriately as a growth stock.

For more:
- here's the article

Goldman Sachs: Should it go private?

Jim Kim — Sat, 20 Sep 2008 21:21:31 -0400

This is not the first time Goldman Sachs has faced a crisis. Recall that in 1994, a bond market meltdown forced the partners to dig deep into their own bank accounts to finance a bailout. Breakingviews brings up the issue in the context of the current crisis, raising the notion of Goldman Sachs going private. Well, it would end the stock market route, but might do less to quell the CDS uncertainty. I agree with the article in that the world is different. What Goldman Sachs needs is access to capital that can support its current business model. That would suggest some kind of merger. It could survive alone, I believe. But it would have to scale back some operations, especially in the area of proprietary trading. Which wouldn't be such a bad thing. As the lone independent, however, it may be a too-lonely road.

For more:
- here's the Breakingviews article

Related Article:
More on the Goldman Sachs bailout

Tier 1 capital becoming a big issue?

Jim Kim — Wed, 25 Jun 2008 21:13:40 -0400

Financial News Online reports that investment banks soon will start reporting Tier 1 capital ratios, something they have not done previously. (Commercial banks have been doing this for years.) That just might throw an even more intense spotlight on perceived capital deficiencies at top banks, at least according to Oppenheimer analyst Meredith Whitney. At the same time, new Basel II rules might require more capital. Furthermore, the SEC might start requiring more capital for certain types of level three assets. All of this adds up to more erosion of the business model that worked so well for so many years: leverage up like crazy to generate super high returns. Higher capital requirements will make that hard, leaving us to wonder again: what's next?

For more:
- here's the Financial News Online article

Can Lehman Brothers be saved?

Jim Kim — Tue, 17 Jun 2008 07:46:07 -0400

Richard Fuld, CEO of Lehman Brothers, remains convinced that the firm is on a track to recovery. More specifically, he's convinced the bank has the right business model to regain its former luster. But few people share such a rosy view. In the aftermath of its second quarter earnings announcement, you really have to wonder what the bank can do at this point. In some ways, this is an issue for all top global banks. We've noted before that there doesn't appear to be any obvious ways for banks to grow out of this. A lot of the mortgage-driven bond business isn't coming back. Add to that rising competition from commercial banks in core bond businesses and the reduced ability to leverage greater profits. The result is some epochal issues for the Lehman board. Do not surprised to see some huge changes at the top of Lehman, or an outright merger, which some say is the only way out.

For more:
- here's a MarketWatch item
- CEO Richard Fuld faces the analysts. Article

Merrill Lynch now grades stocks on a curve

Wed, 21 May 2008 06:59:59 -0400

Following the ground-breaking 2003 "global settlement" of tainted research charges, top banks with large retail units tinkered with their stock rating systems. Merrill Lynch became the latest to adopt a new plan that it calls an "an absolute system with a relative twist." This plan will enforce a grading system, as well as a grading curve--the net result of which, as the New York Times noted, will be an increase in the number of stocks with the lowest rating.

"Buy" recommendations, by definition, will sport a total return of at least 10 percent, and are the most attractive stocks among peers. "Neutral" ratings will be given to stocks that are expected to remain flat or increase, but be less than buys. "Underperform" stocks are expected to have a negative total return, or are the least attractive within the peer group. The transparency is nice.

The really interesting part is that stocks will be graded on a curve. In the universe of covered stocks, buys cannot exceed 70 percent, neutrals may not exceed 30 percent, and underperforms must be at least 20 percent of each coverage cluster. Twenty percent! That's significantly higher than the industry average the last time I checked. It looks as if Merrill Lynch aims to end the ratings-creep that has plagued the sell-side research industry for years, even after the settlement.

Retail investors should appreciate the changes. All in all, despite the business model woes, research that carries a brand name like Merrill Lynch still carries a lot of weight. These guys can still move markets. I'd like to see some research about the ROI to research units at big firms. - Jim

All hedge funds are not created equal

Mon, 19 May 2008 06:59:56 -0400

You would think decent performance would guarantee a long life in the hedge fund industry. But the dynamic has changed a bit. Does this Darwinian environment now require more than mediocrity? That's one way to frame the issue surrounding Martello Investment Management, a $1 billion fund of hedge funds, that has decided to return money to investors because it simply couldn't raise enough money to operate at the level it desired. FINalternatives notes that performance this year had been decent, with fund returns ranging from a loss of 3.2 percent to a gain of 5.6 percent. So it is tempting to call this a failure of marketing. Then again, you would think that they could come up with a business model that could work with a $1 billion hedge fund. That's $20 million in management fees alone.

For more:
- here's the article

More on private equity and banks

Fri, 11 Apr 2008 06:59:56 -0400

Private equity funds traditionally have not had a lot of time for public investments (not enough control for them) and financial service firms (not the right business model). But the Washington Mutual deal, as we've noted, may change that. Fortune weighs in with an article that notes other private equity firms may take the plunge. National City is reportedly in talks for a deal with KeyCorp, which might involved some cash put up by Kohlberg Kravis Roberts. There are risks of course. Fortune notes that Warburg Pincus took a bath on its investment in MBIA. But the numbers may be too tempting, especially given a lack of other opportunities, and the big funds have got to put their money to work.

For more:
- here's the article

Hedge funds turn away from sell-side research

Fri, 07 Mar 2008 06:59:57 -0500

Financial News Online reports that the buy side, in general, is buying much less research these days. The trend likely will continue as hedge funds work to develop their own research. This is bad news for the sell side and for independent shops; hedge funds account for the majority of their equity commissions. Top hedge funds are continuing to invest in their internal research capabilities. At the same time, they are bent on reducing costs via cheaper execution venues. All that seems to be squeezing research a bit. Sell-side research will never wither, but the concerns about the sell-side business model persist.

For more:
- here's the Financial News Online article

Related Articles:
Sellside analysts redux? Article
Buy side monitoring effectiveness of sell-side ideas. Article
Sell-side research abuse charges coming. Article