Merry Christmas! With more updates


A few updates in the run-up to Christmas:

  • Dividends & buybacks
    • Following issues with its latest Galaxy Note, Samsung decided to support its share price by boosting its dividends to 50% of its free cash flow. Samsung is also facing pressure from activist fund Elliott.
  • Unicorns & valuations
    • Stripe joined the unicorn club last month after being valued at $9bn despite raising less than 2% of this amount.
    • Unicorns in need to add liquidity to their shares but not meeting (yet) public market requirements have increasingly relied on secondary markets to trade shares, despite the lack of transparency associated with these semi-private markets. $1.2bn worth of transactions are expected to take place in 2016 at a time where tech company IPOs are expected to reach their lowest level since 2009 and investors are becoming increasingly cautious about overvalued sectors, including on-demand delivery.
    • Uber reported a $800m third-quarter loss although it states it is now cash-flow positive in some mature markets. Consolidated profitability seems far away still.
    • The mayor of Barcelona fined Uber and HomeAway €600k each last month for not complying with local licensing requirements. In France, Airbnb committed to send tax data to French authorities automatically rather than leaving it up to individuals to declare as it used to be the case. Registration will be made compulsory for landlords willing to let their property more than 120 days a year.
  • Cybersecurity
    • Yahoo revealed that 1bn users were stolen personal data in 2013 in an attack dwarfing the one reported in 2014. Compromised datasets may include names, email addresses, telephone numbers, birth dates as well as poorly encrypted passwords. This security issue may thus create vulnerabilities for other websites, as users tend to recycle the same password for multiple websites, according to Lisa Pollack from the Financial Times.
    • Hackers targeted the SWIFT messaging network with the help of Bangladesh central bank officials, highlighting the vulnerability of IT systems to insider fraud.
    • A couple of weeks ago France unveiled its cybersecurity policy. The country aims to build defensive capabilities as well as an offensive arsenal, which could include traditional weapons.
    • Several hedge funds investors warned big data sellers that they were failing to properly hide personal information. Cross-referencing information enables recipients to waive the anonymity of the data.
  • Active & passive investing, bonds & equity
    • The passive investing frenzy seized bond markets, which now ‘host’ more than $600bn of fixed income ETFs, threatening the stability of the financial system, according to experts. The bubble around fixed income is expected to weaken in the coming months given the Fed’s willingness to raise interest rates three times next year – subprime borrowers have already started to feel the heat.
  • Blackberry, LinkedIn, Twitter, Apple
    • Blackberry raised its full-year profit outlook as its software & services business generated more than 50% of its sales over the last quarter. Management expects to bring the company back to profitability on an adjusted basis in the full year.
    • Russian authorities blocked access to LinkedIn for its 6 million users in the country as Russian legislation requires personal data of Russian citizens to be stored on Russian territory.
    • LinkedIn added a robot tool to its chat interface in order to trigger more numerous conversations between individuals and ultimately gathering more data on its users.
    • For its part Twitter suffered another executive departure as its chief technology officer Adam Messinger resigned after 3 years in the job.
    • Apple is the latest investor to express interest in Softbank’s $100bn planned tech fund.

I unfortunately doubt that I will have the time to publish another post before the end of the week, so I wish all readers a Merry Christmas and I look forward to publishing again in the New Year at the latest.

Press review – A few updates

Recent economic news have provided further substance to some of the topics we covered earlier this year. Selected examples include:

  • Apple revealed earlier this week declining yoy iPhone sales. The decline was however in the higher end of analysts’ expectations and resulted in a share price appreciation. Furthermore the company unveiled a strong increase in R&D spending (now reaching 6% of turnover), highlighting the hunt for the ‘next big thing’ to alleviate the still heavy reliance on iPhone which represents 2/3 of revenues.
  • Twitter’s results, on the other hand, disappointed investors which let the share price drop by 11% after the announcement. User base seems to have reached a plateau and the company has not found a way to profitability yet.
  • ‘Active’ investing is still haemorrhaging money while investors favour low-cost passive strategies.

Hedge funds: wounded but not sunk

Hedge funds have been under the spotlight recently and I believe there are consequently a few lessons for asset managers to be learnt from this turbulent period.

First, the facts. The first quarter of 2016, dominated by volatile and hesitant markets (Brexit, commodity prices, US elections etc. you know the story), has made many casualties, including flagship funds: Blackstone’s Senfina lost 15% of its value, a relatively good performance compared with Odey European Fund’s 31% loss. Add on top of that a high-flying regulatory investigation on a $11bn revenues company (Valeant) many hedge funds had bet on and you understand why investors have been fleeing, withdrawing $15bn from hedge funds over the period. This comes after a year (2015) that has seen the second-worst year in terms of investment performance (-1.1% on average over the year) and logically the worst in terms of number of closures since the financial crisis in 2008 – despite the fact that the 25 best paid hedge fund managers pocketed more than Namibia’s GDP.


Nest-Egg-Retirement-Money-FinancialOn top of difficult market conditions, alternative investment has become a victim of its own success, with too much money chasing too few deals. In private equity markets this translates into exceptionally high valuation multiples by historical standards. In public markets, not only have some stock indexes (notably the S&P500) reached all-time highs over the last 12-18 months, but hedge fund managers’ risk-adverse bias has led some ‘beauty stocks’ to concentrate an abnormally high demand which may fly away at the earliest warning signal, creating significant instability – especially given the fact that volume of assets under hedge fund management has been multiplied by 6 since 2000. The shock would impact highly-levered hedge funds but portfolio managers as well, who wrongly believe that by putting their eggs into different baskets they have managed to create a ‘hedge’.

Private equity funds tend to be relatively more protected for now given that the capital they manage is committed for years and possibly by the fact that their added value is perceived to be higher than the one delivered by hedge funds. This, however, has not prevented listed private equity firms to see their share price drop – and none of the private ones has been boasting about its recent performance. I remain more reserved with regards to that asset class and I refuse to be alarmed for instance by Blackstone’s or Carlyle’s disappointing economic net income performance in Q1 this year, knowing how much this figure depends on exits performed over the period – and there were many across the industry in 2015.

Evolution of share price since IPO (rebased at 100) and since year start. Source: Yahoo Finance.
Evolution of share price since IPO (rebased at 100) and since year start. Source: Yahoo Finance.

Pressure also comes from the UK Government, which has targeted financiers in its latest budget. Although Mr. Osborne proved generous with many capital holders, private equity executives will still be taxed at 28% on their carried interest gains and possibly even more in the case of ‘quick flips’ – i.e. sale after less than 3 years of detention.

What does it tell us? Despite the rise of passive investment strategies (see my earlier post on the topic), alternative investment is definitely not dead, far from it. The $15bn outflow mentioned earlier in this article only accounts for 0.5% of hedge funds’ assets under management ($2.86tn as of April 2016) and, although it may seem paradoxical, private equity investing rose by 14% in Europe in 2015.

Divided on the attitude to adopt
Divided on the attitude to adopt

Moreover, the challenges faced by the alternative investment industry over the last 18 months should not occult the strong performance the same industry generated in the years before. Although some LPs, such as the New York City Employees’ Retirement System have decided to terminate its hedge fund investment programme as a whole, following the example set by Calpers, many, such as Metlife, have just decided to reduce their exposure in a move that could prove temporary.

Pierre-Lavallee-pic-e1432679343807-180x180“Hedge funds have added value to the total fund over the past several years.”

(Pierre Lavallée, Senior Managing Director at CPPIB)

Furthermore, markets are still desperate for investments with even barely positive net risk-adjusted returns, and so far the surprisingly high demand for negative-interest sovereign bonds proves that they have been largely unsuccessful in their quest. As a consequence, as soon as structural changes to the fee structure are made and the market tide turns, liquidity will flock back to alternative asset (including private equity and hedge) funds that have managed to through this crisis of confidence. Confident of the fact that this will happen, KKR bought back $388m of its own stock in April.

What it means, however, is that hedge fund managers will need to adjust their pricing to the value they really provide to their customers. Otherwise, an increasing number of LPs will be tempted to in-source their trading operations or move away from the asset class as a whole. The historical ‘2 & 20‘ model with limited GP liability – i.e. GPs get carried interest if they make good investments but do not lose anything if they make bad ones -, initially designed for hands-on private equity investments, has become the norm in hedge fund investing, which arguably requires less effort and can be more easily substituted – even by computer systems. A few ‘long’ or ‘long-short’ hedge funds have thus decided to switch to lower management fees and/or to scrap the carried share of their compensation – although this latter fee structure could incentivise fund managers to maximise assets under management at the expense of performance.

Finally, it brings us back to the purpose of private equity and hedge funds. The former should benefit from the relative freedom of the private ownership structure to boost the development of companies – not just the level of debt on their balance sheet – while the latter should provide an effective market ‘hedge’ especially in downturns – something they failed to do earlier this year.


Hedge funds will adapt and rise again as they have already done in the past. What may have happened in the meantime, though, is a (welcome) clean-up of the ‘battlefield’ and the subsequent extinction of under-performing entities. Getting rid of the wounds in order to stay afloat.

A quality book for quality investing

51l9-qyDT1L._SX332_BO1,204,203,200_This blog has never been designed to be an online literary salon, but I believe exceptional pieces of work are worth mentioning, especially in the area of finance & investing where mediocre quality and fuzzy ideas are too often the norm. I would be lying if I wrote that I spontaneously came up with this find; in reality a fellow investor highly recommended it to me. Let us end the suspense here: the book is called Quality Investing: Owning the Best Companies for the Long Term, was written by a trio (Lawrence A. Cunningham, Torkell T. Eide and Patrick Hargreaves) and has been available for purchase since January this year.

logo“Lawrence A. Cunningham has written a dozen books, including the Essays of Warren Buffett: Lessons for Corporate America”. The very first few words set the tone for the rest of the reading: quality investing is “a way to pinpoint the specific traits, aptitudes and patterns that increase the probability of a particular company prospering over time – as well as those that decrease such chances”. To anchor the concepts into reality the book contains more than 20 recent case studies), Cunningham partnered with two investment managers from AKO, a London-base hedge fund created in 2005.

Books dedicated to investing and corporate performance improvement invariably tackle the investment process from a narrow angle. A large number of those address financial statement analysis and intend to limit the corporate performance assessment process to the analysis of CAGRs and ratios. And yet, as rightly pointed by Cunningham and his co-authors, “growth forecasts and valuation measures […] are riddled with innumerable obscure and subjective judgements, ranging from accounting line items to appropriate discount rates“. Other books have conversely tried to holistically describe the various parameters of corporate strategy and business operations, an unreachable target that ultimately produce cumbersome and confused compendium of more or less interesting ideas. The fact that Cunningham & al. managed to summarise a range of aspects into a well-structure and digest (less than 200 pages) book should be regarded as a major achievement in that respect.

To be more specific, their work is structured in four parts, from the basic ‘building blocks’ of quality investing (part 1 which includes a word on my favourite vice, aka dividends and share buybacks) to typical ‘patterns’ that distinguish quality companies from their competitors (part 2) to common ‘pitfalls’ which may mislead the investor (part 3) and to the ‘implementation’ of such quality investment decisions (part 4).

The style is succinct, direct and easy to understand. No word seems redundant and the alchemy between the three authors (one professor, one former strategy consultant and one former investment banker) is unquestionable. The book will not provide you with a ‘plug-and-play’ process to successful investment – all books trying to do so have failed – but instead lists a series of considerations that you should include in your thinking before betting on a business.

Actually, for less than £25 purchasing this book is probably an easy ‘quality investment’ decision to be made.

My next post will partly relate to this notion of ‘quality investing’. In the meantime, you can watch Cunningham discuss his passion for Berkshire and investment strategies in the video below.

Warren hopes there are seeds in the Apple

6a00d83473f9dc69e20148c6ac7b95970cAfter decades of cautious suspicion towards technology-related stocks (with the notable exception of IBM), Warren Buffett has crossed the Rubicon and is now an Apple shareholder. The news clearly took the financial community by surprise: Apple’s stock jumped by 2% in pre-market trading after the announcement (indicated by a green arrow in the chart below) and is now up 4% compared with last week.

Sans titre

Mr. Buffett cannot be described as a 'geek'. Credits: CNN.
Mr. Buffett cannot be described as a ‘geek’. Credits: CNN.

Not only does the move surprise given Mr. Buffett’s historical ‘tech-adverse’ inclination  but this move also contradicts a statement he made no earlier than 4 years ago, saying that he would “not be able to value [Apple’s] stocks“. Last but not least, Berkshire is investing at a time when another famous investor, Carl Icahn, has taken the opposite direction by offloading his $4bn stake last month.

Why has Warren turned round? We cannot accuse Berkshire of trying to benefit from the recent air pocket Apple went through which we discussed on this blog three weeks ago, since the stake was built throughout the first quarter. Nor can we assume that Mr. Buffett will be able to impose his views on Apple’s management: his stake is important in nominal terms ($1bn), but only represents 0.2% of the total shareholder structure.


In my view, the reason lies in another factor we have underlined. According to our EV/EBITDA benchmarks (reproduced below) the market is primarily viewing Apple as a hardware company at present, which is understandable given the share of revenues generated by devices such as the iPhone and, to a lesser extent, the iPad and the iPod.

EV/EBITDA benchmarks.
EV/EBITDA benchmarks as of 28 April 2016. Sources: CapitalIQ, author analysis

And yet, Apple is trying hard to get out of the generally slow-growing, low-margin hardware trap where it can be considered as an alien – but for how long? – by investing part of its massive war chest into promising ventures, both internally – iTunes and, more recently, iCloud – and externally – the $1bn stake taken in Chinese ride-hailing app Didi Chuxing is the most significant to date.

Warren-Buffett-laughingIf Apple manages to grow the seeds it has been planting over the last few years and to convince Wall Street that it has now become a credible player in the ‘virtual’ space alongside other tech behemoths such as Google, Amazon or Microsoft, it will be able to command a higher valuation multiple which will ultimately lift its stock price. And the ‘Oracle of Omaha’ will have won his bet (once more).