Wednesday, February 03, 2010

Second wind for renewables financing

The current edition of Envirotech & Clean Energy Investor magazine has a cover feature by myself on renewables project finance:
Renewable energy project finance gets a second wind
Long-term financing for renewable energy projects was all but halted by the credit crunch, but stimulus measures and state-backed investors are helping the market move again.

As part of the research for the feature, I carried out a very informative interview with Christopher Knowles, head of energy, environment and investment funds at the European Investment Bank, which has become a key lender to renewable energy projects following the general financial crash. There was only space for a fraction of the interview in the magazine feature so, as I thought it was of sufficient interest to anyone interested in clean energy development and investment (or, indeed, in European policy), I've put up a full transcript at my Clean Ventures news blog.

Also due to appear shortly is a feature looking at financing and support for innovative businesses spinning out of UK universities, in the ICAEW's Corporate Financier magazine.

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Friday, January 29, 2010

VC and employment

New research from Dr Horst Feldmann at the University of Bath on relations between the availability of venture capital in various industrial countries, and employment statistics:
The study estimates that if venture capital availability in Italy, where it was most difficult to obtain during the sample period, had matched the United States, where it was in best supply, Italy’s unemployment rate might have been 1.8 percentage points lower; its long-term unemployment share 9.0 percentage points lower; and its employment rate 2.7 percentage points higher.
On average over the sample period, venture capital availability was rated 3.1 in Italy and 5.8 in the United States on a scale of 1 to 7. The United Kingdom was rated at 5.3.


The exact methodology may be questionable - data on the availability of VC is taken from surveys of business executives (the World Economic Forum’s annual ExecutiveOpinion Surveys), so seems likely to have some subjective element. Feldmann does say, in the full paper (published in Kyklos) that the survey data can 'permit better coverage of the various facets of venture capital financing than hard data'. But, when tested against data on 'venture capital investment as per mil of average GDP', the correlation coefficient is just 0.29.

That aside, it's an interesting paper that will doubtless be welcomed by BVCA, EVCA, et al, as they argue against extra regulation.

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Wednesday, April 30, 2008

Phantastic phinance

It's hardly a secret that the rational agent hypothesis of neoclassical economics is, at best, an idealisation; and, at worst, a dangerous myth. It's much the same for the rational investor of finance theory, as backed up by a host of behavioural studies.

You don't need to have experienced many investment bubbles, crazes and panics to appreciate that. Some diehards have claimed that bubbles can be understood as rational phenomena, but that always seems like stretching the definition a little too far.

It's interesting then to get the psychoanalytic point of view on a question that has been dominated by economists. David Tuckett of UCL and Richard Taffler of Edinburgh Uni have a paper in the new International Journal of Psychoanalysis with the delectable title Phantastic objects and the financial market’s sense of reality: A psychoanalytic contribution to the understanding of stock market instability.

Tuckett lays it out in the UCL press briefing:
“Feelings and unconscious ‘phantasies’ are important; it is not simply a question of being rational when trading. The market is dominated by rational and intelligent professionals, but the most attractive investments involve guesses about an uncertain future and uncertainty creates feelings. When there are exciting new investments whose outcome is unsure, the most professional investors can get caught up in the ‘everybody else is doing it, so should I’ wave which leads first to underestimating, and then after panic and the burst of a bubble, to overestimating the risks of an investment.

“Market investors’ relationships to their assets and shares are akin to love-hate relationships with our partners. Just as in a relationship where the future is unexpected, as the market fluctuates you have to be prepared to suffer uncertainty and anxiety and go through good times and bad times with your shares. You can adopt one of two frames of mind. In one, the depressive, individuals can be aware of their love and hate and gradually learn to trust and bear anxiety. In the other, the paranoid schizoid, the anxiety is not tolerated and has to be detached, so the object of love is idealised while its potential for disappointment is ‘split’ off and made unconscious.

“What happens in a bubble is that investors detach themselves from anxiety and lose touch with being cautious. More or less rationalised wishful thinking then allows them to take on much more risk than they actually realise, something about which they feel ashamed and persecuted, but rarely genuinely guilty, when a bubble bursts. Again, like falling in idealised love, at first you notice only the best qualities of your beloved, but when everything becomes real you become deflated and it is the flaws and problems that persecute you and which you blame.

“Lack of understanding of the vital role of emotion in decision-making, and the typical practices of financial institutions, make it difficult to contain emotional inflation and excessive risk-taking, particularly if it is innovative. Those who join a new and growing venture are rewarded and those who stay out are punished. Institutions and individuals don’t want to miss out and regulators are wary of stifling innovation. If other investors are doing it, clients might say ‘why aren’t you doing it too, because they’re making more money than we are’.”


That last point seems to bring us into the realm of situational psychology. I've recently been reading Phil Zimbardo's The Lucifer Effect on that area - an interesting and disturbing read. Most of the behavioural finance studies I've read (or, at least, read about) concentrate on the personal biases and heuristics that affect individual decisions - the effects of peer pressure and groupthink on economic decision-making seems a fruitful area for further study.

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Wednesday, February 27, 2008

PE prognosis

Many private equity players are (quite rightly) criticised for doing all they can to avoid publicity. That's not a complaint you could make about Alchemy Partners' John Moulton - I fondly remember his Ali G impersonation, back in the Venturedome days ('Ali G' was a popular TV comedy character of the time), while interviewing himself about his much-reviled bid for MG Rover.

Anyway, he's back in the news, raising hackles with a gloomy speech at the more usually bullish 'Super Return' conference in Munich. As the FT reports:
"The industry needs to prepare for bad news," warned John Moulton, founder of Alchemy Partners, in his opening address as a handful of trade unionists waved "locust" placards and distributed anti-buy-out leaflets outside Munich's MOC centre.
"Parts of our industry were behaving just like the US subprime mortgage lenders," said Mr Moulton, a renowned industry doomsday forecaster.
"The quality of what we were doing went down, there was no checking and we used false numbers," he said [...]
"We really ought to expect returns of the industry to tumble," said Mr Moulton.


Gloomy, but hardly unrealistic. It'd be hard to argue that the top end of the private equity market hasn't been building itself a bubble in recent years, fuelled by cheap debt and the weight of new money pouring into the class. The cheap debt's gone now, slamming the brakes on new deals and leaving many over-leveraged existing investments in deep lumber.

The weight of money coming in is still there, though, and it's still looking for a home. I've recently been writing a couple of articles on the European mid-market for Private Equity International, and the folk in that market are a lot more optimistic. There's some problems from the credit crunch, but not nearly as bad as at the big LBO end. And everyone's claiming they were aware of the risks of the recent debt bubble, of course - the head of buyouts at 3i described the generous conditions as "beyond the levels of common sense... a dangerous place for a banking market to be". Many partners are seeing potentially rich pickings in the more troubled economic times ahead, and those out raising new funds over the crunch period say there was no loss of appetite from their own investors.

At the venture end, things are looking shakier. 3i's announcement that it's pulling out of earlyish deals (reported here at Real Business) is hardly unexpected, but might be symptomatic of a wider shift. The rate of new deals in the very-recently-hot areas of clean technology, which I've been tracking over on my Clean Ventures blog, certainly seem to be slowing.

Interesting times ahead...

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Tuesday, October 30, 2007

A Stern response to the bubble question

One year ago, the UK Treasury published the Stern Review on the Economics of Climate Change to intense media interest. Unlike previous surveys or popular accounts of climate change, Stern put a financial cost on both action and inaction in cutting emissions of greenhouse gases and moving to a low-carbon economy.

The work was of obvious relevance to the clean energy industry, which can't always convince potential customers that its products and services make economic sense, and generally hailed as good news. Specialist financial information provider New Energy Finance welcomed the Review as "good news for investors in the renewable energy and low carbon technologies sectors", highlighting Stern's calls for a stronger price signal for carbon emissions, greater international cooperation, and increased funding for low carbon R&D, "all of which will boost clean technology companies". Stock tippers on personal investment websites also saw the Review as positive news, posting 'Buy' recommendations on selected clean energy stocks.

At the time, there were concerns about a speculative investment bubble in the sector, manifest in both venture capital activity and in the valuations of publicly listed companies. Such concerns continue to date. While some bubble-like behaviour is hardly unexpected in an emerging and potentially revolutionary sector, a bubble and burst would be likely to cause medium-term financial problems that could seriously damage the prospects of clean energy companies.

From an economics point of view, it's virtually impossible to say whether a market is actually in a bubble situation until some time after it's burst - not a very useful situation for current investors. Previous bubbles have however demonstrated the role played by the media in feeding 'irrational exuberance' and inflating bubbles, with stock prices moving in an irrational fashion in response to high-strength but low-weight news events.

The release of Stern Review can be considered as such an event. The Review did not contain any new information about the nature of the climate change problem or related policy or technological issues. Despite the NEF's comments, it also contained nothing that could meaningfully affect the prospects of individual companies or the clean energy sector as a whole.

So could the stock price response of listed clean energy companies to the Stern Review and its accompanying media hype shed any light on the much-debated clean energy bubble?

That's the question I addressed in some recent research (completed as my dissertation for a Master's degree in Economics & Finance), using event study methodology to test the reaction of a portfolio of AIM-listed clean energy companies.

The findings were largely negative, which is fairly encouraging. A small minority of clean energy firms (notably those dealing in carbon trading) did show abnormal returns around the release of the Stern Review, but there was no significant portfolio-wide response that would indicate irrational exuberance among investors. There is no indication of a runaway bubble of the kind seen in the dotcom era, a period to which the current cleantech boom is sometimes compared.

Although the research methodology can't claim to be conclusive (and is relatively untested in its application to a non-company-specific event such as this), its conclusions are encouraging for the sector. Investor interest in clean energy, and the broader cleantech sector, appears to be rational and reasonable. That can only be good for its longer-term prospects.

The dissertation, 'Evidence for a speculative bubble in the clean energy sector: an event study', is available as a 1.2Mb PDF here.

For the latest news on clean energy and cleantech VC, see my Clean Ventures blog.

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Monday, October 08, 2007

Bubble, bubble

Further speculation and comment on possible bubbles in a couple of tech areas -
The Guardian worries about another dotcom bubble with VCs searching for the next Facebook or Myspace. There's particularly tutting over the apparent focus on very young entrepreneurs:
With millions of pounds once again being poured into companies run by young entrepreneurs, some experts are warning that too much emphasis on youth could help reinflate the dotcom bubble.
"People like Mark Zuckerberg [of Facebook] show that there is great talent out there ... but there's a world of difference between a teenager and a young entrepreneur," said Sayula Kirby of Index Ventures, which has backed a large number of European internet startups. "I wouldn't say we are in a bubble yet, but we are getting closer to the point where the froth begins."


Meanwhile, in the specialist media, Rob Day of the Cleantech Investing blog meanwhile revisits the continuing concern about a cleantech bubble, this time focusing on solar:
As for the verdict, solar VC bubble or not, it’s too tough to say. That’s a different answer than I would have given just a few months ago, when a “no” would have been the simple answer, but the crowded marketplace and rising valuations and deal sizes is worrisome. Also worrisome is seeing VCs get out of their tech-focused comfort zones to invest in unfamiliar business models. And when you hear stories about unworried investors and entrepreneurs who haven’t done their homework, that’s got to raise some eyebrows.
Are there a lot of reasons to be very optimistic about solar markets and the prospects for solar investments long-term these days? Absolutely. But could we be due for a bit of a break in the hyper-activity? Quite possibly, but maybe not quite yet.


As noted below, last week I handed in the final draft of my dissertation on evidence for a bubble in the AIM-listed clean energy sector. The event study methodology I used didn't provide any significant evidence of speculative bubble-like behaviour, but some of the data is certainly suggestive. I should be submitting the finalised paper later this week, subject to my supervisor's comments, and will put up a PDF of it here.

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Wednesday, September 19, 2007

A herd of VCs

Interesting research from Ward van den Berg at Erasmus University Rotterdam, on herding behaviour among private equity and venture capital investors. Cyclical behaviour and investment waves are well known among such investors, a phenomenon that van den Berg ascribes to incomplete information between rival firms.

According to the university's press release:
Van den Berg uses three models to describe how acquisitions seem to prompt each other. The announcement of a takeover and the initial bid awake the interest of a second party, and this already can drive the price up to a point that stops this second party from taking part in a bidding war. An investment in a buyout can also unveil information that other financiers use in their own investment decisions. This attentiveness to the behaviour of others can lead to a wave of private equity investments. Finally in the consolidation of a branch of business the value of every successive takeover candidate increases, to the extent that more companies have been bought up. This too leads to a new wave of investments.

In short, VCs see other investors chasing a new technology or market opportunity, look harder for companies in the same area, and valuations spiral. That certainly seems to fit some observed behaviour - arguably, we've been seeing something similar in the clean energy sector in the past couple of years.

There's more information on van den Berg's work at his university site.

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Thursday, July 26, 2007

Touched by an angel

New research on business angel investment from Stephanie Macht of Newcastle Business School seems to confirm what the angels themselves always say - the biggest benefit isn't so much the money itself as the post-investment strategic assistance.

According to the school's press release, the survey of active angel investors found that:
activities such as formulating strategies impact most positively upon investees' success. The study also concluded that becoming an employee or a member of the company's management team had the least positive effect.
Despite the widely acknowledged importance of business angels to UK small firms, little was previously known about their involvement and impact after they have invested. Miss Macht said she hoped her study would shed light on how growing companies can best work with their angels.


The release doesn't make clear whether the findings are based on the actual performance of the investee companies or the angels' perceptions of their performance - obviously the former would make more rigourous findings.

For a feature I wrote for Real Business last year on how to work with business angels, see here.

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Thursday, June 07, 2007

Clean Ventures blog

I've just launched a new blog, Clean Ventures, focusing specifically on clean technologies and cleantech venture capital. There's a number of US blogs on a similar theme of course, but I'll be doing it from a UK and European perspective. I'll be documenting VC deals in cleantech companies, new research and analysis on the sector, and policy news of interest; pointing to emerging technologies, companies and services; and exploring issues such as the possible investment bubble in listed cleantech businesses, and what that might mean for companies and investors. It's starting out quite modestly, but I'm aiming to introduce new services and content as things develop.

Regular readers of this blog may have noticed an increasing number of posts on cleantech and related concerns in recent months. If you've found these interesting, I hope you find the new blog to be a welcome addition to your personal blogosphere - and if you've not been that interested, it's also good news as there'll be less of that here.

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Friday, May 25, 2007

Cleantech bubbles again

Following the recent cleantech report from US analysts Lux Research (as mentioned below), Rob Day of the excellent Cleantech Investing blog sits down with Lux's Matthew Nordan to talk about possible bubbles:

It’s certainly true that the press loves downside stories. We’ve tried to be pretty specific about the two subsegments where we see an excessively high ratio of money and enthusiasm to opportunity: solar and biofuels. It’s hard to look at, for example, New Enterprise Associates’ pursuit of SolFocus and not see flashbacks to the Internet in the late 1990s[...]
Solar and biofuels get outsized attention because they are easy to understand (everyone’s seen a solar cell and everybody’s pumped gas), they’re both experiencing big technology shifts (crystalline silicon to thin-film and corn/cane to cellulosic), they both have government incentives and news flow working in their favor, they both have established valuation comparables (you’re not creating a new category), and they both have enormous headroom for growth – solar was 0.02% of U.S. energy last year! There aren’t many other subsegments where all of these factors line up.


A very good point. Not that this particular corner of the press is overly fond on 'downside stories', of course...

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Tuesday, May 15, 2007

Cleantech bubbles on

Couple of weeks late on this one, but the Guardian only picked it up yesterday - further warnings about a developing cleantech investment bubble:
According to Lux Research, which has just completed a comprehensive report on the sector, "the warning signs of a bubble are flashing in the energy technology segment, where initial public offering values and venture capital deployments more than doubled last year – setting the stage for a boom and bust".
Lux reported around 930 startups in global solar energy and biofuels arena and that some 200 of them have received some venture capital money[...]
Says Michael Holman, a senior analyst at Lux: "I think from looking at the sheer amount of money that is being invested right now we have to think that a lot of that money is now chasing after some opportunities it wouldn't be in a more sober climate."
Later stage institutional investors have also been caught up in the hype. Lux reported that in the energy segment where IPO value rose from $1.6bn in 2005 to $4.1bn in 2006.

Lux press release here, and further info here.

As I mentioned below, I'll shortly be working on a dissertation examining share price characteristics in the UK listed cleantech sector. The worry isn't that the companies winning too much investment are actually crap, as was the case in the dotcom bubble, but that when the bubble bursts, some decent companies developing much-needed technologies will be taken down with it. The costs of the bubble bursting will be high - what it needs is just to have a some (clean) air taking out of it.

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Tuesday, April 24, 2007

Tech buyouts and bubbles

Here's a feature I wrote recently for Corporate Financier (the magazine of the Corporate Finance Faculty of the ICAEW), as a handy downloadable PDF. It's looking at M&A activity in the tech sector, examining what's driving the current high level of deals, and asking whether there's any risk of another tech bubble. There's also some nice pictures of balloons.

The feature also ties in with a couple of bits of original research I'm currently working on as part of my Master's in Economics & Finance. The first is an event study for the Industrial Organisation module, which is focusing on a deal mentioned in the feature - Sage Group's acquisition bid for Norway's Visma, which was trumped by a rival bid from HgCapital. The main question is whether the market saw the failure of Sage's bid as damaging its prospects, as potentially reflected in the group's share price.

The second is my dissertation, which I'll be working on over this summer. My proposal (yet to be formally accepted, and subject to modification) is an analysis of recent market behaviour in the clean energy sector, with an eye to identifying behaviour characteristic of a speculative bubble. As I briefly mention in the CF feature, the public markets are currently showing a strong appetite for clean energy and related businesses, and there has been some talk that there's a bubble developing (for instance, see this report from Forum for the Future). I'll be doing a little number-crunching on that question. More as it happens.

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Tuesday, March 13, 2007

Option on an option on an option

John Kay weighs into the current private equity debate (or to be precise, the large leveraged buyout debate) in his Financial Times column. Rather than following the union criticisms on asset stripping and job losses, he goes for the financial engineering aspect:

Sitting on my desk is a prospectus for a fund of private equity funds. It offers me some of the best names – Blackstone, Permira etc. I have just received a large cheque for my holding in Equity Office Properties and, if a similar bidding war for Sainsbury’s takes place, I will have a lot of cash to reinvest.
But wait a moment. Was it not Blackstone that just bought Equity Office and are not the names in the frame at J Sainsbury almost exactly those in my fund of funds? The prospectus invites me to buy Equity Office Properties and Sainsbury from myself, at prices around twice what I recently paid.
...
If management and business operations remain much the same, as does the underlying ownership structure once you drill down through the layers of fee-collecting intermediaries, it is hard to see where value is being added. If financial engineering of the business is not the explanation, can the answer lie in financial engineering among investors?
The private equity promoters propose layer upon layer of debt, leveraged by non-recourse finance. What I get is an option on an option on an option. But the same finance theory also tells us that you do not increase the value of an investment portfolio by increasing gearing: once again the greater risk exactly matches the greater prospect of return.
...
Perhaps the sophistication of modern financial structures means that the distribution of risks and the design of governance structures can be finely tuned to the needs of individual investors and the businesses they fund. Or perhaps there is a miasma of complexity and confusion in which everyone persuades themselves that the uncertainties of business have been landed on someone else. Make up your own mind: but I have decided to keep my cheque book in my pocket.


Given the recent research suggesting that LBO fund performance is no better, allowing for gearing and cheap borrowing, than the public markets, it's a valid question.

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Thursday, March 08, 2007

Cleantech feature

I've just received the latest copy of 3i's iSight magazine, which focuses on various technology areas which 3i sees as interesting. This one is the first to focus on the emerging area of clean technology. From the blurb:
Clean technology is poised to become one of the biggest creators of wealth and employment in the 21st century. Encompassing energy, air and water treatment, industrial efficiency improvements, new materials and waste management, the products and services which fall under the 'cleantech' banner are playing an increasingly large part in the global economy - with corresponding opportunities and rewards for venture capital investors.
According to one widely-quoted study, the cleantech market is predicted to grow from $25 billion in 2000 to $186 billion by 2012. At the halfway mark, it's certainly entered the mainstream of venture capital investment. In 2006, total venture investment in North American and European cleantech topped $1 billion per quarter for the first time, according to figures compiled by Cleantech Venture Network (CVN)


I wrote the lead article, introducing the cleantech sector and looking at the opportunities and strategy for venture investment (and, inevitably for such a contract publication, explaining why 3i are ideally positioned to back the best companies). The mag is available as a PDF download from here.

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Monday, February 26, 2007

Green investment, dirty money

A big day for the cleantech investment sector, with news (reported here in the Guardian) that the (new) world's biggest buyout will be of a deep green hue -
A proposed $44bn (£22bn) buyout of Texas energy firm TXU, which is tipped to be the world's largest private equity takeover, will include an environmental commitment to scale back coal power stations and limit greenhouse gas emissions.
Kohlberg Kravis Roberts and Texas Pacific are putting the finishing touches to a purchase of TXU - a power generator which has been described as "public enemy number one" by US green lobbyists because of its aggressive programme of building coal plants.
It emerged yesterday that the two private equity buyers have held talks with environmental groups to win support for the takeover. To the delight of green organisations, the buyers have offered a radical change in direction - including scrapping seven of 11 new coal power stations and implementing clean air initiatives.
...
It was also hailed by green campaigners yesterday as a sign that powerful Wall Street and private equity financiers are taking environmental issues more seriously and that they recognise that polluting projects have become a significant business risk.
Tony Juniper of Friends of the Earth said the proposed deal made it clear that going low carbon would be one of the big business drivers of the next decade.

(later reports suggest the deal is pretty much sewn up).

The Guardian's headline - Private equity plays the green card in US - reflects the tone of the current row in the papers about private equity and its role in asset-stripping and anti-worker practices. While there's certainly questions about the activities of some of the big highly-leveraged deals, it's a shame to tar the whole industry which does provide some economically and socially desirable services in supporting innovative businesses or rescuing failing ones.

The current complaint about some VC grandees providing donations to the Labour party seems particularly daft. Of the names accused, I don't know Nigel Doughty or Jonathan Aisbitt, but Ronald Cohen is definitely one of the good guys - for a feature about socially-focused VC, including an interview with Cohen, I wrote back in 2003, see here.

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Monday, February 19, 2007

Simmering, if not bubbling

Provocative piece from John Naughton in yesterday's Observer on the evidence for TechBubble 2.0 (see previous posts).

Naughton notes two phenomena. First, the almighty Google:
On 31 January, for example, the company announced fourth-quarter profits that had nearly tripled ($1.03bn profit on a 67 percent jump in revenues to $3.2bn) This indicates a year-on-year growth rate of 70 per cent. And yet the main consequence of the announcement was a 2 per cent drop in the share price to $494, which suggests that investors had expected even better results. If this isn't bubble thinking then I don't know what is.
Second, the massive multiples being paid for social networking and user-generated content tech:
Colossally inflated valuations are an infallible indicator of a bubble. In the late 1990s, dotcom start-ups with 50 employees and zero profits were briefly valued at more than the market cap of Fortune 500 companies. In 2005, Rupert Murdoch paid $649m for MySpace and eBay paid $2.6bn for Skype, a VoIP [internet telephony] company. Last year, Google forked out $1.65bn for YouTube. Such valuations provide terrific incentives for ambitious geeks because the new web services require less upfront investment than the original dotcoms. What is YouTube, after all, other than some smart software for converting every uploaded video clip into a Flash movie, plus server capacity and bandwidth? Skype adds 150,000 subscribers a day and buys almost no hardware because it uses its subscribers' computers to do the heavy lifting.

All fair points, and I certainly agree there's plenty of bubble-like behaviour going on. Opinions do vary though. I'm writing a piece on the tech M&A market for Corporate Financier at the moment, so talking to a lot of sector advisors. Some acknowledge that there are some 'headscratching valuations' being paid at the moment, but note that these aren't feeding through into the mainstream of deals. Most are all-paper deals (as many of deals were in the dotcom bubble, of course). Others take the opposite view, with one saying: "There's absolutely no evidence of any bubble at the present time. It could be argued if it's erring anywhere, it's on the side of caution... There's absolutely no evidence of a bubble and I can't see anything happening to dramatically upset the balance in 2007."

It'll be fun seeing how it all pans out again.

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Tuesday, February 06, 2007

Kenyan bubble

Good report from the Guardian on the new and booming stock market in Kenya, which is showing all the symptoms of a bubble:

Kenya has gone share crazy. The incredible performance of the Nairobi Stock Exchange (NSE) - which is next to the public auditorium and provides the live share-price feed - is the talk of the country. From 2002 to 2007, the main NSE index rose 787% in dollar terms, according to Standard & Poor's, the investment research firm, making it one of the world's best-performing markets[...]
Stories of overnight wealth creation have created a huge frenzy for shares from people who have never invested in the stock market before. When KenGen, the state's biggest electricity company, listed its shares last year, there were queues at brokerages all over the country. Local media reported how small-scale farmers were selling their cattle to buy the shares. Banks suddenly offered "share loans" to people who had been considered unworthy of credit[...]
The Kenya Association of Stockbrokers said the success of the new listings meant that close to a million Kenyans now owned shares. Amish Gupta, chairman of the association, said: "Suddenly we have got the mass market buying stocks, not just the elite." Most new investors today are aged between 22 and 40, he added. "Savvy men and women looking for quick returns."


The bubble seems to be driven not so much by a loosening of credit, as is often the case, but by the abandonment of traditional saving methods, as well as remittances by expats:
vast sums of money have poured in from the diaspora; not just to sustain families, as before, but also to invest, helping the NSE index burst through 6,000 points for the first time.[...]
Historically, most people with spare cash kept it under the mattress. Wealthier individuals bought livestock, opened a stall selling clothes or mobile phones, bought a matatu minivan taxi or, most popular of all, purchased property.


When the bubble bursts, as it will, it'll hit hard, with the potential for serious political upset.

On a vageuly related note of investment trends and political worries (and not worth a post of its own), the Guardian also has a vaguely handwringing full-page feature on 'The rise and rise of private equity', something it takes as synonymous with big take-private deals. Take-privates have come in and out of fashion for many years now, and I've lost count of the number of times I've been told all the low-hanging fruit on the public markets have already been picked off. The current trend for big deals just reflects the weight of money held by the PE houses - whether the economic effects are good or bad remains to be seen.

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Monday, December 04, 2006

Betts off for urban economies

The Star also reports on Sheffield MP Clive Betts' response to a new report from the government's Communities and Local Government quango:
Academics say despite massive amounts of public funding to improve business, productivity and earnings in the north, it has only managed to make things worse.
They said no city north of Derby has an economy that is performing better than the national average, according to the report which was commissioned by the Government.
And Sheffield is in the bottom five places when it comes to recording new patents - a measure of inventions and breakthroughs in industry.
But Sheffield Attercliffe MP Clive Betts rejected the report and said business was booming.
"Go around Sheffield and look at the new private sector investment going on. There's new businesses in the Lower Don Valley, new residential accommodation in the city centre and the New Retail Quarter which are massive private investments.
"Look at companies in my constituency such as Forge Masters, which has taken on 42 new apprentices and expansions at the business park at the airport," he added.


Can't help feeling that Betts is being a wee bit daft. Wonder if he's actually read the report, 'The Competitive Economic Performance of English Cities' (downloadable here)?

(Actually, I doubt the Star journalist read it, as all the factoids are recycled from a typically idiosyncratic story in Daily Mail. By 'idiosyncratic', I mean either massively dishonest or stupid. The Mail says:
The damning report - commissioned by the Government - suggests public spending at levels once associated with the Soviet bloc have done more harm than good. It told ministers: "The overt policies followed so far and the unintended consequences of others have either failed to close this gap or actually made it worse"
which omits the crucial qualifier from the report for many decades - ie, the problem long predates the current Labour government, contrary to the Mail's implication. The problem is lack of investment, particularly from the private sector, not too much public investment. Utter bullshit from the Mail, and sloppy idle journalism from the Star.)

The report itself is a solid investigation into various aspects of city and regional economic development, with a wealth of info and ideas for anyone interested in such (which we all are, right?), and touching on a lot of issues I've written about previously. The report takes Sheffield as a case study alongside Cambridge, Derby and London. While it's not beyond criticism, the stats which Betts objects to are fairly unarguable, even if the brief summaries given in the Star story are less than entirely helpful (the report said 31 out of 56 cities lagged behind the rest, apparently. What?)

The report's introduction notes:
Sheffield provides an example of a traditional manufacturing based economy that has suffered from de-industrialisation. Although there have been some improvements over the last ten years, the city’s economy is still locked into past economic forms that can be seen as hindering its competitive advantage.
The local economy has traditionally been dominated by manufacturing industry, specialised in a restricted number of sectors, primarily related to the steel industry. [...] there is still a dominance of manufacturing industry, and some local opposition to diversification, identified as a force for continuity. Other barriers identified include few entrepreneurs to take forward ideas, the limited markets served by the city, and a lack of willingness on the part of the private sector to push for diversification.
[...] there are still concerns over the predominance of a risk-averse culture within Sheffield, and a lack of entrepreneurial skills which may hamper the development of this competitiveness driver and so prevent upgrading of the urban economy in the future.
As a result of these issues the data for Sheffield’s key economic indicators paint a difficult picture in terms of competitiveness and economic performance. Sheffield’s industrial heritage has left deep scars in terms of the economic structure of the city, which has been slow to adjust to new economic and technological forms. Local strategic decision-makers are keen to encourage new institutional and economic forms. Despite this the history of the pathdependent nature of the local economy cannot be ignored, and the fortunes of the city cannot be turned around overnight.

which seems fair to me.

The section specifically looking at Sheffield, as a case study of a 'de-industrialised' city, introduces a number of initiatives I've written at length about before, such as AMP, Finningley and the city centre redevelopment. A comment about the fine line between Sheffield's much-praised 'villagey' feel and a parochial susceptibility to negativity sounds about right, as does this about the city's manufacturing elders:
It should also be noted that in a city such as Sheffield, where manufacturing industry has traditionally been strong, the industrial elites associated with traditional manufacturing sectors are perceived as having a powerful role and considerable influence, particularly through the Cutler’s Company. Respondents suggested that their culture and background do not always sit harmoniously with the innovating new sectors that are contributing to drive the city’s economy; this can be a constraining factor for innovation in the city, as a force making for continuity, and not embracing change.

Overall, it's realistic and pretty positive about Sheff and its prospects. There's still plenty to be done, but the report is in no way as negative as Betts' soundbites would suggest.

More generally, the report points to the lopsided distribution of venture capital firm head offices (243 in London, 42 in Manc, 36 in Leeds and 35 in Brum, apparently) as an indicator of the failings of the knowledge-based economy outside the South East: There is therefore a distinct regional and urban dimension to the equity gap, in those small and new firms in the regions and cities outside the [South East] that find it difficult to access finance for investment, including venture capital. However, as I've written previously, there's mounting evidence that the equity gap no longer persists. (As I explore in a recent article in Corporate Financier, the gap may now be in corporate finance advice rather than funding per se.)

There's also some interesting findings re economic health and general quality of life, which run counter to some claims:
The concept of quality of life is a much abused idea. It has often been used for political purposes with scant regard to its clear and consistent definition or the available empirical research that seeks to clarify what it means to citizens. All too often it has become one of the promotional tools employed by city agencies with the main aim of making their particular location attractive to global capital [...but] there is no necessary connection between the standard of living enjoyed by residents of a city and the economic performance of its economy.

Cambridge, meanwhile, is generally seen as an exemplar of a knowledge-based cluster, but it faces some of the same problems (which I wrote about a few years ago here) as Sheffield -
Tough containment policies are seen to limit potential investment and economic growth in both Cambridge and Sheffield. In both cases restrictions on the land and building available for high-tech and other forms of knowledge intensive industries has hampered their development. This has restricted rates of change.

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Sunday, November 05, 2006

Market environmentalism

The Observer has an interesting interview with James Cameron of specialist investor Climate Change Capital. This comes in the wake of the Stern report on the economics of climate change which, even if it didn't exactly tell us anything new, seems more likely to get the message across to those who are more susceptible to economic than scientific argument -

If [Cameron] and his team at CCC, which invests in building green energy facilities to reduce greenhouse gas emissions, succeed they will, he says, 'show we can reduce emissions, and prove that money can be made from doing that'.
It sounds very grand, and this tall 44-year-old sometimes says things that sound overblown. But who doesn't when they're talking about the environment? At least he's honest. On the one hand, he says that he could change the world. On the other, he says: 'I have no interest in putting on a hair shirt. I don't want to be told I can't live well.'
Cameron's insight is that environmental damage is behavioural and the best way of changing behaviour is not by regulating people but by offering individuals the chance to win and lose through their own decisions.
...
'Stern is absolutely critical in terms of the necessary shift in consciousness in the upper echelons of political and business decision-making,' he says.
Excuses for inaction from politicians and businessmen exasperate him, as do those who say the UK produces only 2 per cent of global emissions, and that the developing world, particularly India and China, is not listening to Stern or anyone else. 'One persistent lie is that China and India are not part of Kyoto. They are, but their response is differentiated. They have hundreds of millions of people living on less than a dollar a day.'
...
He is haunted by the possibility of failure, but the fact that big money has arrived has given him confidence that he is no longer in the wilderness. He is not a boastful man, but does have an air of vindication about the compromises he has made to bring environmentalism and capitalism together.
As he puts it: 'The tree-huggers were right. We have to tip our hats to them and get on with the solution, which frankly we would not trust them to implement.'

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Monday, October 16, 2006

Hype 2.0 in the UK

There's more blowing and poking of the emerging Bubble 2.0 in the Guardian today, with a YouTube-referencing feature on "British web entrepreneurs [who] are trying to catch the wave, while avoiding another dotcom disaster".

It's a fair general-interest article, though focusing on the "potential for deals worth millions, or billions, of pounds" rather than creating much of actual economic value. A lot of these 'Web 2.0' businesses are just enabling forums for fickle consumers, who could abandon them in an instant if they're subjected to conspicuous efforts to monetise them (a large part of the reason why YouTube proved more successful than Google's own video-sharing offering).

The 2.0 market is also throwing up a familiar complaint about the behaviour of VCs -
Sam Sethi, editor of technology news website Techcrunch UK, says the atmosphere has changed markedly. "We have seen in the last 12 months the big venture capitalists coming over to the UK to invest." Mr Sethi, a veteran of the first dotcom bubble, believes investors could endanger potential success stories by pushing for too much profit. "The trouble is that it's a bit like Dragon's Den. The minute there's a half-decent idea the venture capitalists want 100% of the company for very little money."

Compare with the sentiments in this Venturedome piece I wrote in the dying days of the dotcom bubble six years ago -
The most enthusiastic reception was reserved for Atari founder and serial entrepreneur Nolan Bushnell, who declared that a deal with a VC was a deal with the devil - and a particularly dumb devil at that.
Many of the entrepreneurial attendees shared Bushnell's lack of faith in venture capitalists - although some were also complaining that there weren't as many VCs available for pitching to as they expected.


The Guardian piece again notes how This Time It's Different -
The crazy days when heavy spending was not allied to profits are gone. "We're not at the level of 1999 or 2000, there's a lot more rationality," says Paul Lee, director of research in Deloitte's technology, media and telecoms team. "But there is quite a bit of money around at the moment. At times like this you get bigger winners but also more losers."

For an entrepreneur's introduction to tech VC, see the recent article I wrote for Real Business earlier this year.

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Friday, September 15, 2006

Angels and upstarts

Good piece in the Economist on business angel investment on both sides of the Atlantic, playing up the friction that can occur between angels and professional VCs -
Typically, a business angel is willing to invest between $25,000 and $250,000 in each of between five and ten new ventures. They expect to make money from the spread of investments, but [Jeffrey Sohl, director of the Centre for Venture Research at the University of New Hampshire] believes they also seek “psychic income”. Angels want the satisfaction of putting their commercial acumen, contacts and practical knowledge to work on behalf of talented people whom they like.
Such sentiment may explain why professional venture capitalists can often be critical of business angels. “Angels usually overvalue businesses. This makes it difficult for us to come in later on,” says one. Another adds: “Angels interfere in businesses, particularly in Britain where they have less experience.”
Mr Sohl agrees that there can be problems, cautioning would-be entrepreneurs to make careful inquiries into any prospective investors. “Finding out about your investors before you sign them up is critical,” he says. “And you have to understand what everybody wants from the business. It's a marriage without the possibility of divorce. If you can't make it work, bankruptcy is the only alternative.”


The article also takes for granted the existence of the 'equity gap'. Recent research from Library House (also discussed in the new Real Business) suggests there's no such gap in the UK. I'm not convinced by their analysis, but it is a question that demands further examination.

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Wednesday, September 06, 2006

Clean tech, big money (and the JAMBOG trap)

Interesting news feature in the new Real Deals on VC funds specialising in clean technology, centred on a round table discussion involving three managers of such funds. As well as specialist funds, big players like 3i and Apax Partners are also increasing their exposure to the sector. As James Cameron of Climate Change Capital notes:
"Wind energy, solar energy and biofuels are each bigger markets globally, at $13bn, than e-commerce, at $11bn."
That's an eye-opening statistic, given the hype given to the likes of Amazon, and the continued disdain from some quarters for anything smacking of environmentalism or that dread word 'sustainability'.

There's also a piece by Real Deals editor Ross Butler on the importance (or otherwise) of regional offices for private equity firms. As I've noted in countless previous features, there's been a general retrenchment away from the regions, with a few firms such as Isis as notable counter-examples. Ross did ask me to write a side-piece for this article on the Leeds market, which unfortunately I couldn't fit into the schedule - mainly because I was deep into another long deals piece for the sister mag, Real Business, this time looking at expansion or development capital. That's a market that's been largely ignored in recent years, but many of the advisors and VCs I spoke to reckon that there's more money moving back in. In large part, that's because the VCs need to secure themselves a niche in a crowded market and not just be seen as JAMBOG - an acronym, we also learn from this RD, for 'just another mid-market buy-out group'.

Seems slightly odd that something as innovative as the latest clean technologies, and something as traditional as mid-market minority-stake development capital, are both seen as niches. Maybe it says more about the state of the mainstream.

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Thursday, August 31, 2006

The Accidentals

There's a big write-up in the business pages of today's Guardian for a new insider look at the investment banking game - The Accidental Investment Banker by Jonathan Knee, a former swinging dick at Goldman Sachs and Morgan Stanley, now with his own boutique -
Investment banks promote themselves as sources of wise, experienced and loyal counsel for longstanding clients. Disillusioned with the profession's culture, Knee argues that large banks have moved away from the tradition of building long-term relationships of trust. He says they have become "financial supermarkets", riddled with conflicts of interest.
Bankers, with an eye on bonuses, tout deals to every company prepared to listen. At the same time, he says, banks invest heavily on their own account - which can put them at cross purposes with their clients. "The line between how much relationship and how much transactional work you have has been crossed," Knee told the Guardian.
...
Explaining the top-of-the-head approach to deal-making that he ended up despising, Knee points to one of his earliest pitches to a food company from his days at Bankers Trust in London. He says he was given a few days to read up on the poultry industry and choose a chicken company suitable for acquisition. "I might not know anything about valuation or accounting or, if truth be told, chickens," he recalls, "but I had been a maths major." He constructed a line graph of the lowest-valued chicken processing firms and Bankers Trust presented it as "very innovative thinking".
Tricks of the trade within banks include league tables engineered to inflate their track record. Knee says banks can pick any time period, measure by volume or by financial size, exclude large or small transactions and separate stand-out deals. "Many an analyst has spent many a sleepless night cutting and re-cutting the data to come up with the least ridiculous ways to demonstrate number one market share."
Staff are rewarded with extraordinarily generous pay which, at Goldman Sachs, typically goes up by $100,000 a year, says Knee. "It is hard, with a straight face, to conclude, in the best of all possible worlds, that bankers should be making so much money."


Sounds like an entertaining companion to Philip Augar's The Greed Merchants (discusssed below).

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Monday, July 31, 2006

Creed, greed and hubris

I've recently been reading Philip Augar's The Greed Merchants. Augar, previously a top name at NatWest and Schroders, gives an inside view of the investment banking game. Despite the rather sensationalist title, it's a solid, sober look at how the 'bulge bracket' banks work, where they make their money, and why they generally don't do what they're supposed to.

The main problem, Augar argues, is that the integration of the big firms means that the Chinese walls between activities that should be mutually incompatible - most notably, equity research and corporate finance advisory work - have been gradually eroded. It's hardly an original complaint, most especially after the inquest on the excesses of the dotcom boom, but it's well explained and analysed.

The end effect is that the big banks are able to put their own interests - both the interests of the bank as an entity, and the interests of the individual bankers - and those of their pet corporate clients (in the hope of winning further lucrative commissions) well above the interests of smaller clients. The bottom line is an estimated $180 billion of value transferred from shareholders (including pension funds, of course) to the bankers.

Unlike some critics, Augar doesn't claim that the bankers are necessarily fully conscious evildoers (not even the ones that enabled Enron's misdeeds, necessarily). Instead, he blames a combination of creed, greed and narcissism for creating an insitutional bentness: an ideological commitment to the supremacy of capitalism and the 'free market'; the aggressively competitive mindset required to pursue a career on Wall Street; and the sense of power fed by the banks' own internal and external rhetoric (where there's very small difference between bullish and bullshit).

Augar's proposal is a separation of powers - basically, a reversal of many of the changes bemoaned in his previous book, The Death of Gentlemanly Capitalism. That would probably be a sensible move but, as another sceptical insider, Edmond Warner, noted in the Guardian last year, one that's highly unlikely to happen.

In investment banking, as in many other areas of endeavour, expect no decline in creed, greed and hubris.

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Wednesday, April 19, 2006

An entrepreneur's guide to exits

Now up at the Real Business site (and, of course, in the printed edition) is a lengthy feature I wrote for them on how to sell your business.

While there's no shortage of advice (of varying quality) on how to start a business, there's rather less advice on how to sell it. For many people who start businesses, it's because it's something they want to do and stay with for a long time. But an increasing number, especially those fuelled by VC money, are starting businesses with the aim of rapidly building value, selling them, taking the bulk of the money out and then doing it all over again. Selling out is both the route to riches and a badge of honour.

The feature was written as sponsored by business sale specialists Cavendish Corporate Finance, who necessarily feature heavily in the piece.

Direct [updated] link here, but use the link above to go to the main page. There's plenty of other good stuff there, including another look at the progress of the Regional Venture Capital Funds. I've written another Doing Deals feature for the next edition of the mag, exploring the wider dearth of early stage VC in the UK.

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Friday, March 10, 2006

Angels, dragons and other beasts

Just up at Real Business's site is selected content from the March issue, including a feature I wrote for them on business angel investment. It's a look at the UK angel market, how entrepreneurs can access this valuable source of funding, and what they should expect when they line up to make their presentations. One of the main messages I got from the angels themselves is that it really doesn't bear much resemblance to the BBC's Dragons' Den programme (which, I must confess, I've never managed to watch). It's not that scary, honest.

This should be the first in a regular string of features for the mag's Doing Deals section. I'm currently working on a similar piece on early stage venture capital - the top line being that there really ain't a great deal of it available in the UK at present. I'm finding a few examples that show that it isn't all that bleak if your business is good enough, but it is an area where there's a definite gap of provision, especially if you're not a hardcore tech business (again, though, there are a few interesting exceptions). That'll be in the April issue of Real Business, along with a supplement on selling your business I worked on alongside the chaps at Cavendish Corporate Finance.

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Friday, November 11, 2005

At the Bevvies

Ventured down to London this week for the annual backslapping of the BVCA Private Equity & Venture Capital Journalist of the Year Awards (and they really need to find a snappier name than that - I suggest 'the Bevvies'). I was shortlisted again in the Specialist category, for the piece on the government-backed RVCFs for Corporate Financier. Didn't win this time, but enjoyed a small degree of reflected glory as the Specialist award went to Grant Murgatroyd for a piece in the same title, and the Outstanding Contribution gong went to Ross Butler of Real Deals (for whom I've written many features over the past five years, and am currently putting together a particurly exciting piece on trends in transaction insurance). Trebles all round! Or, to be accurate, an uncertain number of pints at a local hostelry afterwards.

It might however be a sign of a continuing depression in the PE market that the winners just took home a chunky perspex trophy for their efforts. When the awards began at the turn of the century, winners were heaped with DVD players and digital cameras. By 2002, when I did win, they were onto the perspex doorstoppers. No bad thing, really - when the BVCA and the other sponsoring VCs start dishing out the consumer electronics again, it'll probably be time to start muttering about irrational exuberance.

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Wednesday, July 20, 2005

Mind the gap

The UK government this week officially launched its Enterprise Capital Funds, the latest in a string of initiatives intended to promote venture capital investment at the levels that commercial VCs disdain - the oft-discussed 'equity gap'. This one offers up to £2million equity finance, with government match funding for commercial VCs and business angel networks.

Inevitably, this will nibble at other established schemes, such as the Regional Venture Capital Funds launched with much fanfare three years ago. I've been speaking to the managers of various RVCFs recently for an upcoming feature in 'Corporate Financier', and the feeling so far is that the government would be better relaxing the limits on existing funds rather than launching new schemes. The RVCFs are limited to investing £250,000 in a round, which really doesn't go that far. And in that range, they're competing with business angel syndicates as well as other DTI projects like the Early Growth Funds. There's also questions about how the demands of the government investor for more deals can be balanced with the demands of its private sector partners for a half-decent return and a relatively secure risk profile. Meanwhile, as the commercial boys look for ever-larger deals on the basis that it's no more work to do a big deal as a little one, that equity gap keeps growing.

For more on government-backed VC, see this feature from 2003.

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