Unconcerned, but not indifferent

I discovered Man Ray today. What a portfolio!

Here are a couple of pics just to see whenever in the mood:



I'm going to try and lay my hands on his autobiography - 'Self-Portrait'. Another American absorbed by Paris dans le temps de Gertrude Stein, James Joyce, Cocteau

One of his quotes: “Of course, there will always be those who look only at technique, who ask 'how', while others of a more curious nature will ask 'why'. Personally, I have always preferred inspiration to information.”

Which makes me wonder - At what age do we kill the 'Why' in a child?

India - a fight between VC and PE; maybe not....

It’s interesting to see the VC strategies being followed in the Indian market. Till last year, I used to find the distinction between VC and PE in India a little arbitrary because of the kind of sums involved but it’s now beginning to make some sense. There is an area of overlap in terms of the amount of money invested and the stake taken, but in such cases the markets which are being targeted by the investee will vary.

Basic definitions:

A venture capitalist invests in early stage start-up or formative companies which have either not launched or have just launched their product; revenues would not be anything to write home about.

Private equity, on the other hand, invests in firms with well-established business models and significant revenues. This could be just pre-IPO. It could also be to take a publicly listed company private or perhaps just one of their divisions. (PIPE as its called – private investment in public entities)

The general expectation is that as one moves from PE to VC, returns would be higher as would the risk component.

And now we come to the VCs and the PEs entering the Indian market. And that is the quirky element. VCs don’t necessarily seem to have a focus on technology growth – as in the US or more relevantly, Israeli markets. The risk component they are incorporating seems to be associated with geography i.e. emerging countries, and the evolutionary nature of the markets as a whole.

One interesting example from yesterday; Norwest Venture Partners, a VC firm from the US has picked up a less than 5% equity stake in On Mobile from the open market. So, now you have

- A very active early stage VC

- picking up a minority stake

- in a publicly listed,

- mid-market company

None of these are the tenets of a western venture capitalist. On Mobile’s current investors include the likes of Infosys, Deutsche Bank, Goldman Sachs and Polygon Investment Partners – none of them being the VC space players. But then Norwest themselves elaborated on their strategy for the Indian markets – growth and late stage investing as well as PIPEs i.e. minority investments in large companies who are leaders in their space. Some of their other investments – Adventity, the KPO, Suvidhaa (that’s an old name – service commerce), Yatra etc.

But then at the other end of the spectrum you have VCs like Accel Partners – their website talks of seed and early stage investing. They are investing with an already active group of people – Erasmic Venture Fund – which should certainly give then a better idea of the market. Another interesting one is Helion Ventures. A lovely aspect of all these VCs is that it gives a whole new set of entrepreneurs a chance. In India you never had a chance to think of starting a ‘business’ unless your dad had the money. But it’s now completely about what you have done with your life – not where you are coming from.

So, where does that leave the poor PE guys? It will take them a while to recoup the losses they will end up making on their investments made at the peak of the market. After all, at that point in time the fight was for the Escorts, Ranbaxys and DLFs. Those were interesting times – for the family entrepreneur, it was far cheaper to raise money from the public markets. But then you had these PE firms, strong believers in the Indian growth story and huge piles of money waiting to be invested. End result – sky high valuations. It remains to be seen the kind of IRRs the funds raised in 2007 will earn on their investments. The clear winners will be the new funds investing today.

Where's the money going?

I have been wondering recently about the drivers of VC investment. What tilts the scale between a term sheet and a ‘thanks but no thanks’. At a recent talk, I asked that of someone from a large UK based VC but the answer I got was about the light shining in the entrepreneurs eyes etc – well……So it was a welcome surprise to read a blog entry by Fred Destin from Atlas. It elaborated on the strategies being followed by VCs in the current environment and served to explained some of the recent investments and discussions I have seen and had respectively. Also, it was an interesting comparison of fixed income yield curve strategies to the VC investment focus.

First and foremost, what is a fixed income yield curve? – Its essentially the movement of short term interest rates expected over time. Hence, a downward sloping yield curve would mean that the market is expecting interest rates to fall. Corollaries to that are, of course, that the market is expecting growth to slow down, inflation to fall, the central bank to initiate supportive measures – one of which will be reduction of interest rates. As an investment manager, if you believe in the accuracy of the trend, you will start to increase your fund allocation in bonds and start moving away from stocks.

It’s completely the reverse for an upward sloping yield curve which would imply that in the medium to long term interest rates are expected to be higher than they are currently. Hence, it would mean that markets are going to expand, there will be restrictive monetary policies followed and interest rates will rise; further, prices of bonds will fall and hence the smart investment manager will move away from bonds to stock investments.

Disclaimer: For simplification purposes, we are considering only the impact of monetary policies and not fiscal policies etc on the shape of the yield curve.

Anyway, the next step is figuring out the investment strategies based on yield curves. The manager needs to decide the percentage allocation of funds across bonds of different maturities. There are various theories around the preferred allocation strategy and broadly they lead to the bullet, barbell and ladder strategies of investing – all funds in a single maturity, funds divided between early and late maturities – nothing in the middle, and funds maturing periodically, respectively. When would one go for the barbell – when the interim curve is anticipated to be flat and hence one hedges the risk between early and late stage. I can elaborate on this later. It could be an entry on its own.

And now we come to VC investment strategies. With recent discussions, the thought has been that VCs are shying away from high risk investments towards those where the revenue stream is validated and stabilised, there is a high visibility on the sales pipeline, and break-even is in sight i.e. a high growth firm where the VC is willing to pay a price to join the gang for a quick, lucrative exit. This would be the quintessential growth investing. High price, small equity share, good (nothing spectacular in terms of the multiple) exit. In fact, the most oft repeated VC words these days seem to be – ‘this is still too early for us’.

However, from the aforementioned article it seemed as if the tilt is more towards the barbell strategy of investing which includes the other half of the VC story i.e. extremely risky early stage investments – they may be very highly disruptive, with a high upside but with low capital intensity and a low burn rate i.e. value investing. The VC focus in this case is in identifying that unrecognized break-through player and getting a large equity share at extremely low prices. There wouldn't be too much competition but the exit, when it happens, will be a high multiple.

However, frankly, I would be interested in seeing what a VC LP memorandum looks like – how wide is the stage of investment. After all, we are moving from very early stage to perhaps even growth stage.

And a very interesting, albeit old blog: http://earlystagevc.typepad.com/earlystagevc/2006/09/vc_20_not_so_se.html

Quantitative easing for dummies

I went for a very interesting session yesterday –the effects of quantitative easing and a zero interest rate policy on the currency markets. Before I get to my key take-ways from the session, here are a few basic inputs.

What is quantitative easing?

Yes, it is the creation of new money. However the manner in which the exercise is undertaken is interesting. It is essentially the open market operations of the central bank i.e. the central bank buying back government bonds from the holders such as banks etc, thus, creating a flow of money in the system. It could also be lending more money to deposit taking institutions or buying assets from banks etc but for the moment we will stick with the first. After all, that is what we are seeing in UK at the moment.

Why does a central bank need to undertake quantitative easing?

When there is a slow down in the economy or even a recession, the first step of an efficient monetary policy would be the reduction of interest rates. This would be aimed at reducing savings and increasing investment and demand. However, in severe cases, the government would reach close to zero interest rates, in which case, interest rate manipulation to ease recessionary impacts in the economy is no longer a tool - which is when QE comes into play.

And now for the some of the highlights from yesterday:

On QE:

· Increasing the supply of money isn’t necessarily a bad thing if inflation is under control and in fact, the central bank is anticipating deflation i.e. evaluate the motivation of the central bank

· To measure the impact on currency, the credibility of the central bank will come into play. With lack of credibility, the money generated will tend to be invested abroad in safer havens and currency will depreciate. However, when central banks are buying gilts, bunds, t-bills in an uncertain environment and there is repatriation of money i.e. banks, FI’s continue to bring their investments home, the government still has credibility and currency will appreciate i.e. monitor the perceived credibility of the central bank

· The impact of QE needs to be considered with a broader macroeconomic perspective - a measure is the CDS spread. If QE makes default seem less likely, CDS spreads will reduce which is a positive for the currency i.e. assess the context in which the central bank is undertaking QE

On ZIRP:

ZIRP may not be a bad policy; it is the anticipated change in the interest rate policy which has an impact on currency movements.

And finally a few examples with some of the interesting points made. I still need to absorb all of this but as I understand it: QE is undertaken not just to stimulate growth and inflation but also to weaken a currency.

New Zealand was quoted as an example of a country which will not undertake QE so as not to weaken the currency any further. Why - because they are a net debtor and not a net creditor. Since they need to fund their current account deficit, the will need to buy fixed income securities of other governments and hence they already have a weakening currency.

The US, on the other hand, has a huge debt deficit but has surplus equity investment. Hence when they undertake quantitative easing, the dollar strengthens.

Japan was another example of a country which has next to zero interest rates and then undertook QE to weaken their currency and stimulate exports.

And finally Switzerland: the best recent example http://www.snb.ch/en/mmr/reference/pre_20090312/source/pre_20090312.en.pdf - an excellent explanation

Multivac

I was about to add to the technocrat's mail yesterday that when talking about virtualization, there has to be a mention of cloud computing - the service driving the adoption of the technology. But then I stopped myself short thinking that perhaps CC is just one small element of the adoption drivers of virtualisation.

And then today morning, I came across an interesting tit-bit of trivia. According to Microsoft (their research chief Rick Rashid), over 20% of the servers sold 'each' year (I guess a trend over the past few years) have been to Yahoo, Microsoft, Google and Amazon. And this is without the widespread adoption of cloud computing. Well, then I wouldn't have been way of the mark in saying that these giants and the trends as we see them developing in CC will drive the technologies and adoption of virtualisation - at a software and a chip level.

As for Multivac, that just may be the final destination. So long as it isn't the Douglas Adam's version of the Supercomputer - Deep thought. I'd like my research results to lead in better directions than a forty-two.