PE Investors push for more favourable fees and terms, and get them

CalPERS persuaded Apollo Global Management, a large PE firm, to scrap $125m in fees over five years reports The Economist.  Highlights from the article:

• CalPERS plans to bargain aggressively with other PE firms (known as “general partners”) to bring down fees and has urged other investors (“limited partners”) to do the same.

• Institutional Limited Partners Association (ILPA), a network of institutional investors in PE, issued a set of best practices that general partners should consider accepting if they want limited partners’ business.

• ILPA calls for greater transparency, more favourable contractual terms and more generous profit-sharing. 

• PE firms have typically charged investors a 2% management fee, which is intended to cover the basic costs of running their business. Limited partners insist that management fees shouldn’t be a source of profit for general partners, and in some cases are demanding to sit down with them to find out what their real costs are. 

Overall, it is an interesting development that is bound to strengthen the hands of the limited partners.  Some of these, like lower management fees etc have started happening in India too.   It would be better if there are some regulatory guidelines, more specially insisting on a decent level of paid-up capital for the general partner (hopefully this would avoid the temptation to make more money out of management fee) and some form a link/correlation between actual expense and management fee.  The intention should be to align the interests of the GP with the LP.  If VC/PE business aims at long term capital appreciation, then the GP should also aim to make long term money (along-with the LP) instead of higher annual management fee which is delinked from actual expenses at the ground level.

In a world of ugly currencies, the dollar is sitting pretty

Are there any beautiful currencies left, asks The Economist, even as it answers back - Australian dollar and the Canadian dollar, South Korean won and Brazil’s real. The trouble is lack of scale and liquidity which limits their role as reserve currencies. Overall an interesting article - getting the right answer is difficult.

• JOHN MAYNARD KEYNES once likened investing to judging a beauty contest. For today’s currency investor, however, none of the main contestants looks that fetching. “It’s more like an ugliness contest,” says one hedge-fund manager.
  
• The dollar, for all its blemishes, is the least hideous-looking. So far this year it has risen against the other main currencies (the yen, pound and euro) that are traded internationally and held as reserves by central banks.
  
• The pressure to tighten fiscal policy in some parts of the euro area will make it hard for the European Central Bank to even consider raising interest rates. A weaker euro also addresses the deeper cause of the present crisis: a lack of export competitiveness in the south of the currency zone.

With the American growth story not fool-proof and Euro zone going through its own difficult phase, it is difficult to state which currency will end up as reserve currency in the future, more so with China not allowing its currency to appreciate.

The Beijing consensus is to keep quiet

An interesting analysis from The Economist on The China Model.

• Scholars and officials in China itself, however, are divided over whether there is a China model (or “Beijing consensus” as it was dubbed in 2004 by Joshua Cooper Ramo, an American consultant, playing on the idea of a declining “Washington consensus”), and if so what the model is and whether it is wise to talk about it. The Communist Party is diffident about laying claim to any development model that other countries might copy.
  
• Western publishers have been no less enthused by China’s continued rapid growth. The most recent entry in the field is “The Beijing Consensus, How China’s Authoritarian Model Will Dominate the Twenty-First Century” by Stefan Halper, an American academic. Mr Halper, who has served as an official in various Republican administrations, argues that “just as globalisation is shrinking the world, China is shrinking the West” by quietly limiting the projection of its values.
  
• But despite China’s status as “the world’s largest billboard advertisement for the new alternative” of going capitalist and staying autocratic, Party leaders are, as Mr Halper describes it, gripped by a fear of losing control and of China descending into chaos. It is this fear, he says, that is a driving force behind China’s worrying external behaviour.
  
• Party rule, the argument runs, depends on economic growth, which in turn depends on resources supplied by unsavoury countries.
  
• Politicians in Africa in fact rarely talk about following a “Beijing consensus”. But they love the flow of aid from China that comes without Western lectures about governance and human rights.

Chinese don't talk. Their actions speak. No wonder China has grown unimaginably over the past 3 decades. But this has come at the cost of democracy, freedom of speech, liberty etc. We too had our share of emergency/dictatorship in the 1970s but we have realised that it can't succeed in a liberal/free country like India.

The Indian spirit can never be shackled. It loves freedom and we have sacrificed growth so that we can hold on to values which we cherish, even if we have imperfections in our model, which we are trying to rectify. We are slow, but we will grow. Our steps will be sure, without the fear of sudden collapse which is normally associated with dictatorial regimes. Being a democratic country, we are a open society - we learn and we are not afraid to share our learnings with the world. In other words, our consensus is to share and not have a secretive / security obsessed culture.

China is governed by real politik while India is even today a believer in idealism. I am not belitting the achievement of China and the Chinese people - it is remarkable by any standard - but it has come at a cost which free countries like India can ill-afford. Today, if the Beijing consensus is to keep quiet, it is out of fear - a sense of insecurity - what if other countries try to do what China has done or is currently doing and what will be its effect on China and its growth path.

French companies get serious about putting women in the boardroom

MOST French bosses have little time for a new law, now going through parliament, which would compel listed companies to lift the proportion of women on their boards to 40% by 2016, says this interesting article from The Economist. With the French government determined to make France the second country with a compulsory quota for women in the boardroom, I was reminded of the Women's Reservation Bill in India and how Indian politicians "manage" such reservations.

• In private, chief executives say they will look for female board members of a particular type: those who will look decorative and not rock the boat.
  
• One boss asked a headhunter for photographs of candidates and said he would treat looks as his first criterion, ahead of industry experience.
  
• A board member of a multinational company who opposes the 40% quota said that bosses could simply appoint their wives or—more subtly—their girlfriends.
  
• In March Dassault Aviation, a manufacturer of fighter planes and corporate jets, said it would nominate Nicole Dassault, the 79-year-old wife of Serge Dassault, its controlling shareholder, to its board. Mrs Dassault has little hands-on business experience.
  
• LVMH has nominated Bernadette Chirac, the 76-year-old wife of the former French president. Mrs Chirac’s qualifications, explained the company, were that she was female and that as first lady she supported fashion and regularly attended catwalk shows.
  

Enacting law is the first step. But how to ensure it is not abused? In India, we have wife(s)/mother etc who hold the fort (for the family!). In France we have a (a) 79 year old woman appointed with no business experience (b) a 76 year old woman appointed because she was a female and she attended "catwalk shows". One boss says "looks would be the first criteria" while another board member says bosses could simply appoint their wives or—more subtly—their girlfriends!

Did any Indian politician go to France to educate the developed world?

What has Apple got against eastern Europe?

Why doesn’t Apple, a company so irritatingly up to date in its products and marketing, update its worldview when it comes to sales, asks The Economist in this interesting article "Cupertino's cold warrior"

Clearly the size of the market is not the determinant. China and Russia don’t appear, but Luxembourg does. It is not about prosperity: Iceland—which, believe it or not, is still one of the richer countries in the world—is out, whereas Vietnam is in. Political freedom or the rule of law are not the binding factors. The Philippines and Thailand are on the list, whereas impeccable democracies such as Slovenia are not. ... the list comes from a company that prides itself on being an icon of über-cool internationalism, with a post-modern disdain for clunky convention and tiresome rules. It is from the Apple Store, ... But some are more equal than others. Visitors from Finland, for example, are presented with a full array of music. But register with an address in Estonia, just half an hour away by plane, and you get only a list, admittedly rich, of games, gimmicks and lectures. Films and music are out of bounds. ... Why doesn’t Apple, a company so irritatingly up to date in its products and marketing, update its worldview when it comes to sales? Apple’s global headquarters did not respond to a request for comment. A spokeswoman in Britain promised to investigate. When we get an answer, we’ll post it here.

Let us await Apple's response.

It doesn't add up...

Neither Labour or Libdems want big deficit cuts now and indeed tend to favour tax rises on the wealthy, something the markets won't like. The anti-austerity parties will have around 344 seats while the Tories, the only party which might try to slash the deficit immediately, will have just 306. The UK election outcome is not stable, will probably lead to another election and is unlikely to deliver the kind of fiscal package the markets want, says Buttonwood in "Just do the maths" (The Economist). While deficit reduction might be welcome news for the market, I guess the common fear may be as to how the reduction is going to be achieved? Is it by way of higher taxes or reduced expenditure or both? I guess reaction of people would at the end depend upon how they are going to be impacted by government's decision.

The risk-free rate and corporate finance

In corporate finance theory, the risk-free rate (that paid by governments) is the basis for pricing other assets, which must pay a risk premium on top of that. But what happens when the government, like Greece, has little hope of repaying its debts at market rates, asks Buttonwood in this interesting blog post.

Goodbye, Passwords. You Aren’t a Good Defense.

Came across this interesting article on passwords in NT Times (August 9, 2008) by Randall Stross. Passwords won’t keep us safe from identity theft, no matter how clever we are in choosing them argues Randoll Stross. Some highlights -

THE best password is a long, nonsensical string of letters and numbers and punctuation marks, a combination never put together before. Some admirable people actually do memorize random strings of characters for their passwords — and replace them with other random strings every couple of months.

Then there’s the rest of us, selecting the short, the familiar and the easiest to remember. And holding onto it forever.

I once felt ashamed about failing to follow best practices for password selection — but no more. Computer security experts say that choosing hard-to-guess passwords ultimately brings little security protection. Passwords won’t keep us safe from identity theft, no matter how clever we are in choosing them.

The solution urged by the experts is to abandon passwords — and to move to a fundamentally different model, one in which humans play little or no part in logging on. Instead, machines have a cryptographically encoded conversation to establish both parties’ authenticity, using digital keys that we, as users, have no need to see.

Culture Shift: Eliminating Employee Cynicism for Good

Read this interesting article on employee cynicism. Understanding the real cause of employee cynicism is the all-important first step toward permanent eradication argues Paul Levesque in this article. Some highlights from the article -

"... There are some "constant battles" that just inevitably come with the territory. Th e fight against germs, for example, affects every aspect of life in a hospital. Those who prefer outdoor recreation will have a mosquito problem to deal with anywhere there's standing water. Similarly, employee cynicism is an existing or potential problem in virtually every business setting. But solutions do exist to keep these constants at bay. As hospitals learn how germs spread, they can more effectively prevent infection. When we understand how mosquitoes breed, we're better equipped to bring their numbers under control.

Think of five successful corporations you personally admire. Do all five provide products and services that have made—and continue to make—our society and our world better in some way? The more unequivocally you can answer "yes," the more confidently I can predict that the companies you're thinking about do not have a problem with employee cynicism. More likely, theirs are cultures characterized by high levels of employee pride, right alongside the impressive profits.

The difference is that in these cultures, prosperity is perceived to be the means, rather than the end. It's the crucial and fundamental difference between "we exist to make a lot of money" and "we exist to do a lot of good in the world, and that requires a lot of money." It's eliminating cynicism for good, so to speak.

The great paradox is that businesses driven by self-interest cultivate employees who learn to similarly put their own self-interest first—to the ultimate detriment of the business. A management obsession with profit creates a workforce disinterested in profit, and obsessed instead with working conditions, wages, and other issues of interest to the workers themselves.

Management's day-to-day actions and priorities must make it difficult, if not impossible, for even the most cynical observers to argue it's all being driven purely by self-interest. The more readily employees can point to benefits experienced by customers or by the community at large, the more the cultural scales are likely to tip toward the "employee pride" side of the balance, and away from the "cynicism" side.... "

My experience suggests that those who work, will continue to work and those who don't, really won't, whatever we do or don't do. Article appears a bit idealistic to me. May be I am wrong.