Never judge a book by its cover, but rather by its table of contents. Check out the TOC here and decide for yourself..
Active Equity Management provides a comprehensive understanding of technical, fundamental, and economic signals used in equities trading. It explores in detail how such signals may be created, rigorously tested and successfully implemented. Filled with practitioner insights derived from years of experience in the hedge fund industry, and supported with academic theory, Active Equity Management provides an in-depth review of basic financial concepts, examines data sources useful for equities trading, and delves into popular seasonal effects and market indicators. It also highlights best practices in model development, portfolio construction, risk management, and execution. In combining topical thinking with the latest trends, research, and quantitative frameworks, Active Equity Management will help both the novice and the veteran practitioner understand the exciting world of equities trading.
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After examining two dozen activist and hostile bids I have devised a cheat sheet which sums up typical approaches. Most real world interactions seems to be variants of this. Sometimes a picture is worth a thousand words!
As scientific consensus on climate change has gained strength during 2010-20, dissenting views appear increasingly marginal. I am quite convinced that the Public Sector needs to be the heart of the response to climate change. Here are my quick thoughts on causes, effects, key impacts, physical manifestations and the scientific consensus that has emerged.
#ActiveAllocator Research Case Study – We successfully demonstrated to the world’s perhaps most sophisticated Government Investment Fund that our proposed changes to their strategic portfolio could increase annual returns by over 60 bps, while holding risk constant. That’s a non-trivial returns enhancement when you are speaking about hundreds of billions of dollars. Never underestimate the power of Strategic Asset Allocation done correctly. We further demonstrated concrete steps to enhance their portfolio by approximately 40 bps as described here. Here is a snapshot of one such portfolio sleeve by way of illustration (NDA prohibits us from disclosing specifics).
How time flies! I had the privilege to lead thought leadership ( inter alia) at Citi during the tumultuous 2007 Global Financial Crisis. During that period I also edited the Alternative Investments Journal for its corporate clients. I found this issue floating online – I wrote 3 out of the 5 articles here. All of them have stood the test of time, sans the piece on Asian Real Estate, which of course has come a long way since 2008. This Journal, discontinued after my departure, had some cutting edge investment pieces.
Europe is aging and becoming a greyer society. By 2050, European Union will face a significant change in age structure with higher dependent population due to increasing life expectancy. Demographics are intrinsically linked with public policy and the European growth agenda. The way a government manages national resources and exercises choices is also driven by demographics. As a result of aging populations, government budgets will come under severe strain – impacting investments in economic productivity building inputs such as education & training and infrastructure. The prospects of fiscally over-whelming pension and healthcare budgets make demographics a strategic issue. The pensions gap solution is simple – decrease liabilities and/ or increase assets. However, there is a distinction between solutions: public-policy and finance – and these we highlight in this report.
History never repeats itself but does it really rhyme? I have been reflecting on ‘those who cannot remember the past are condemned to repeat it’. I examined 10 historical financial sector restructurings across USA, Sweden, Korea, Malaysia, France, Japan – the contagion, the transmission mechanism as well as government interventions. Having had the privilege of a ringside seat, as well as participated in some of these events, this reflection has helped me connect multiple dots. I hope you find it useful too.
In this study I examine activism trends, proxy fights issues and success rates, as well as arrive at defense and poison pill analytics. Poison pills in force are declining and companies are increasingly letting pills expire naturally – and with that there are fewer plans in force, resulting in a decline in the number of shareholder proposals in favor of redeeming or removing plans.
It appears that companies have seen little impact on stock price as a result of adopting or renewing a poison pill. I also shed light on triggers and historical precedent rights plans. My study reveals that historically, only a handful of companies increased the exercise price of their poison pills and in most cases this resulted in excess abnormal returns. Counterintuitively and interestingly, a targets’ ability to fend off a hostile acquirer is not dependent on having a poison pill. I then describe with examples structural defense and takeover defense.
U.S. companies are dismantling their takeover defenses. The decrease can be attributed to companies switching to annually elected directors from staggered board terms, companies removing poison pills, and less companies providing that directors can only be removed for cause. The pace at which companies are erecting barriers against proxy contests and enacting rules to maintain tight rein over shareholder meetings has slowed significantly too. Also companies are increasingly allowing poison pills to expire.
I tackle these and other issues in our M&A series. Here I explain the general idea behind poison pills; in the event of a hostile takeover attempt, poison pills give shareholders (except for the would-be acquirer) the right to buy stock in their own company or in the acquiring company at a deep discount, if the bidder acquires a certain percentage of the outstanding shares. With other shareholders then able to buy shares at discounted price, the target company would become financially unattractive and the voting power of the potential acquirer would be diluted -i.e., acquiring the company under those terms would be like swallowing a poison pill.
United States Postal Service (USPS) is in dire financial straits and in desperate need of reform. Privatization is not an option. Monetization of its real estate portfolio offers significant potential strategic, financial and operating advantages. I examine its portfolio of asset holdings and show how asset monetization can still support its strategic, financial, operational and execution objectives. I also show how this can be done – given political will.
As the Covid-19 induced crisis progresses, we expect companies to separate portions of business. Such actions will be driven by strategic decisions to divest businesses and/or valuation creation opportunities. These may take form of spin-offs, carve-outs or sales.
Primary reasons for spin-off include (i) Value creation – both for parent company and new separate public company; (ii) Certainty of execution; (iii) Tax free to parent and its shareholders; (iv) Can be run parallel with other divestiture alternative. These are typically a 6-12-month process that involves carving out a business from the parent (e.g. financials, management). It involves various documentation and filing requirements (e.g. SEC filings, IRS private letter ruling) and may or may not be preceded by an IPO. We provide an overview here.
I took a long hard look at the confusing HealthCare sector, replete with acrimonious public debate in the U.S. To arrive at inter-sector allocation we leaned heavily on the System Dynamics discipline conceived at MIT – one that ” can help us better understand complex challenges, shape policy, influence decision-making, and yield lasting benefits for businesses and society.” I present a preview of how we transcend traditional thinking to arriving at an understanding of what HealthCare investing is really all about. Schematic representation of elements, processes and pathways can be further developed in a comprehensive system dynamics model.
Sovereign spreads sometimes overstate and sometimes understate the actual extent of an investment’s “political risk”, for example. We suggest an alternative to spreads between Sovereign Bonds of the country and US Treasury as proxy for country risk premium. The Political Risk Premium (PRP) can be arrived at from Residual Income Value (RIV) implied cost of equity for the companies in EM and then compared to the weighted average cost of equity of global peers.
The Fed now allows the nation’s big banks to resume share buybacks in the first quarter of 2021 though dividends will continue to be capped. Banks have healthy key capital ratios and augmented loss absorption capacity. Meanwhile to preserve cash during the pandemic many S&P 500 companies suspended buybacks.
I examined 6045 Company announcements over the years and was positively pleased to see a direct relation between share repurchase size and excess returns at announcement. Both self-tender offers and open market repurchase programs have historically generated lasting excess returns. Also I found that multiple repurchasers benefit from large repurchase announcements. And share repurchase can enhance EPS growth, inter alia. When tax rates on dividends and capital gains are equivalent, share buybacks give investors the option to benefit from continued appreciation and defer taxes by selling shares at later date.
Contents : Distribution Decision, Dividends vs. Share Repurchases, Positive Effects of Distributions, Positive Reaction to Share Buybacks, Special Dividends for S&P 1500 Companies, Open Market vs. Tender Offers , Share Repurchase Can Enhance EPS Growth, Formulating a Repurchase Strategy, Tender Offer Program Overview
In public market M&A transactions, where at least part of the consideration is stock of the acquiror public company, the value offered is subject to market risk as the acquiror’s stock price changes. Collars – long underlying, long put options, financed with short call options- provide some degree of price protection to acquiror and target between signing (announcement) and closing. Valuing the hedge correctly is key to making profitable M&A arbitrage trades.
Protectionism includes foreign investment restrictions, antitrust regimes and takeover rules that regulators use to block or influence deal outcomes. Protectionism and trade barriers and inward-looking sentiment is seeping into policy and regulation. There have been many changes in discussions between Congress and Committee on Foreign Investment in the United States (CFIUS). Opposition is no longer just vocal; a lot of activity is taking place behind the scenes in Washington. Constituency interests, too are crowding out traditional policy interests. I describe what’s happening:
M&A Activity Especially Inbound Drastically Reduces
Protectionism Norms: Evolving
Protectionism in Foreign M&A Deals: U.S. Actors
Protectionism in Foreign M&A Deals: Rising
Foreign M&A Deals: Typical Post-Announcement Timeline Delay
Reaction to Japanese Investment: Exon-Florio Amendment
CFIUS Reform: FINSA and FIRRMA
Due Diligence Check List Questions: Acquirer
Post CFIUS >SEC Review Process
Share Purchase Considerations
In the movie “Pretty Woman” hostile corporate raider/black knight Edward Lewis (played by Richard Gere) buys, ransacks, breaks up and sells off the pieces of acquired companies. What defense do his Target companies have to thwart hostile M&A?
I have spent the bulk of my career in wealth management, asset management, investment banking and more recently in entrepreneurial FinTech. To develop domain expertise and bridge the gap between theory and practice I’ve published extensively over the years – though never around investment banking. The investment banking practitioner space doesn’t have much literature and one learns on the job. It is an incestuous world, with high entry barriers, much like the guilds in the medieval age to preserve high rents and transaction fees. I bring sunlight to this space here by explaining the typical process of buying a company.
Contents: Buy-Side Process, Assessment, Bidding Strategy, Negotiation and Execution, Transaction Considerations, Structure, Regulatory Issues, Financing, Accounting Treatment, Takeover Defenses, Valuation Methodologies, Tender and Closing, Timeline, Role of Advisor
October 2020 has 290 SPACs with $86.5 billion in cash that have either filed for IPOs, are searching for targets, or have announced proposed mergers. I put on my investment banker hat and describe how a Special Purpose Acquisition Corporation can be set up. I then put on my investor hat and describe by modelling a hypothetical deal how sponsors and IPO pre-merger investors stand to make money and post-merger investors loose.
Takeaways: (i) SPAC is not a poor man’s private equity, much as Alternative Mutual Fund is not a poor man’s hedge fund; (ii)SPAC structure results in severe dilution of the value of SPAC shares : post-merger share prices fall and price drops are highly correlated with dilution or cash shortfall ; (iii) SPAC investors bear structural cost of the dilution band pay for companies they bring public; (iv) SPAC creates substantial costs, misaligned incentives, and losses for investors who own shares at the time of SPAC mergers: SPAC shares tend to drop by one third of their value or more within a year following a merger (iv) Only those who buy shares in SPAC IPOs and either sell or redeem their shares prior to the merger do very well ( typically 10-13% historical annual return): IPO investors who are pre-merger shareholders should exit at the time of the merger, either by redeeming their shares or selling them on the market; (v) Investors that buy later and hold shares through SPAC mergers bear the costs of the generous deal given to IPO-stage investors (vi) Sponsor’s promote, underwriting fees, and dilution of post-merger shares caused by SPAC warrants and rights transfer value from SPAC investors to pre-merger investors; (vii)Sponsor has an incentive to enter into a losing deal for SPAC investors if its alternative is to liquidate.
Bankruptcy- What exactly is it ?
I’ve been studying bankruptcy as part of a wider project around distressed and event driven investing. I came across a lot of jargon and had to Google extensively. To clarify concepts for myself I took it upon me to write a simple primer that I am sharing here. (Nothing very original here as it’s stuff I found in different places on the internet).
Development banks have done precious little to bring about meaningful development for their member states. Their members remain mired in poverty, their efforts have spurred little economic growth, and for the most part have done little to attract private capital or catalyze strides. These institutions have been parking places for bureaucrats, served as jobs programs for mediocre but well connected civil servants pursuing careers with cushy benefits, low expectations and job security with precious little accountability. To be relevant they need to do more than lend. They need to catalyze financial flows, beef up on new products, as well as mobilize newer resources. And U.S. tax payer should stop funding such agencies.
I have some recommendations here.
History never repeats itself but does it really rhyme? As one who lived through the 2008 global financial crisis I have been reflecting on ‘those who cannot remember the past are condemned to repeat it’. To seek lessons, I recreate the broad building blocks of the ’08 crisis. The contagion, the transmission mechanism as well as government interventions. The financial crisis was a lot more complex than the coronacrisis. This visual built off my research, that I hope to expatiate on forthcoming, speaks a thousand words.
We examined multiple likely causal reasons that in combination exacerbated the 2008 crisis in the United States. Our analysis removed the “least important” variables and left us with four variables with high explanatory power – decline in home prices, a doubling in oil and higher energy prices, wealth destruction in equity markets and large reduction in credit availability. We do not see this combination of factors during 2020.
The sub-prime crisis was the catalyst for the broader crisis which followed. It led to a breakdown of confidence in the banking system, and a subsequent lack of liquidity, with bank balance sheets placed under severe stress and deleveraging rapidly while government intervention was uncoordinated. In 2020 the banking system remains intact.