An interesting phenomenon is when investors agree on valuation but incorrectly attribute the source of the valuation. The result is that incoming investors or buyers of the firm end up paying the sellers for value that the buyers create.
A common occurrence is when a start-up sells out to a major player, especially in the services industry. Imagine that there is a local start-up, which we will call Triangle, sells a particular service offering into the market.
Valuation techniques and methodologies are usually taught within the context of developing a financial model or using comparative ratios. In real life the actual decision makers might use the output of these models but will not be the ones who develop the models. Decision makers will also be influenced by other factors, not all of which are rational.
I have seen many examples of this and there are certain repeating patterns that are worth examining. In this post I will concentrate on how equity dilution leads to misperceptions and mistakes.
In the second of a two part series, this column outlines a vision for the future of asset management in the GCC.
The asset management industry in the GCC has blindly followed developed market dictates. The main focus is listed equities. But the GCC markets have neither the depth or breadth to allow an active strategy to flourish. A passive strategy does not need asset managers.
The only other truly active asset class in the region is private equity (PE). PE managers have focussed predominantly on what they call late stage investing: buying shares of companies shortly before they list. This strategy has performed well on a few now famous deals. However, fund performance has been abysmal.
The problem here is where is the value creation? A firm that buys a company and quickly IPOs it is not an asset management firm but rather an investment bank that is providing underwriting and equity capital market services.
In the first of a two part series, this column will investigate the current state of affairs of the asset management industry. In part two, this column maps out the way forward.
The asset management business in the GCC has followed a puzzling evolutionary path focussed predominantly on listed equities with a smattering of funds investing in private equity (PE) and bonds whilst seeming to ignore other asset classes such as real estate (RE) which not only has exhibited good performance across the region, it also provides for strong cash flow income and appears to have the greatest demand from investors as exhibited by their direct investment demographics.
The perennially favourite discussion topic is trading versus investing. What’s the difference? Is it short time horizon versus long time horizon? Is it growth versus value? Is it Soros versus Buffet?
This post is a continuation of my 2007 article in The National. Reading the previous article is not necessary to benefit from this post, but looking at the ideas across an eight year period might be helpful.
The thing about the rational investor hypothesis is that it assumes that investors wish to maximise a financial risk/reward function. They don’t. Investors have a utility function that includes economic considerations, but also includes many other goals important to the investor.
Some investors may refuse to invest in defense companies, especially those that produce offensive weapons. Others may avoid investing in companies based in countries who have policies that they don’t approve of. Still others may reject gambling or alcohol related companies. The list goes on.
Whilst economists discuss such issues ad nauseam, traders make money off it. A non-financially motivated seller nearly always provides an opportunity for the astute, and differently motivated, investor to make money.
Many of the ideas used by the investment community are adopted from the horse track and casino betting communities. Much of the failure that has dogged the investment community is due to rocket scientist PhDs misunderstanding the successful models of plebeian punters. The use of betting as an example is not an endorsement, just history.
To understand how the securities markets work you have to look no further than the horse bookies. Bookies take the bets from the bettors. This is the first point that the public begins to misunderstand how betting, and therefore investing, works.
There are two potential misunderstandings: The first misunderstanding is assuming that each horse has a uniform probability of winning, i.e. they are all just as likely to win. The second misunderstanding is assuming that the bookie offers one to one payout odds, i.e. pays $1 for each $1 that is bet. Grasping the significance of these statements is the key to successful investing.
The bookie, equivalent to the investment bank or broker, will always make money. Always. They do this because they do not set payout odds depending on which horse they think will win, they set payout odds based on how people bet.
In the first of an occasional series titled Executive Insight I will write together with a regional business leader who shares the benefits of their experience.
Anthony Mallis, the chief executive of Securities & Investment Company (SICO) of Bahrain between 2001 to 2014, grew a boutique brokerage company into a regional asset management powerhouse. (Tony is humble in his accomplishments and all promotion of his accomplishments is attributable solely to his co-author.)
Mr Mallis was hired to a challenging assignment; turn around or close a money-losing entity that was caught short by the GCC market malaise of the late ‘90s. In 2001 the GCC and Mena capital markets were still nascent, with the Gulf still affected by low oil prices and mid-’90s collapsed share prices. Locally, commercial banks had little interest in the domestic capital markets, focusing on deposit-gathering, the local retail markets and pushing third-party foreign investment products to their clients. The small number of local investment banks had a largely real estate focus, or were parochial when it came to regional investments – focusing on their domestic markets for both clients and proprietary activities. Continue reading
Shareholder activism has acquired a bad name being associated more with corporate raiding than it is with concepts of introducing corporate governance by the shareholders. This is a shame as shareholder activism is the best way to ensure effective corporate governance of a company. The current model gives shareholders the semblance of control at annual general meetings when they get to ask questions about the financials and vote in directors of the board. The reason that this is not real control is that any disparate body of people that does not communicate and internally discuss matters in advance of a group decision will invariably make a bad decision.