Private Options for Going Public

The buzz about the emergence of specialist exchanges for private company stock is getting louder. There are many views about how to soften or even resolve the current credit crisis by creating an alternative to the public markets for small, private companies. As an example in US, SharesPost ( https://www.sharespost.com/comingsoon ) exchange is about to start operations and scheduled to start trading in September is Xchange ( http://www.xchanged.com/ ), which will rival other, similar models backed by VC’s. One of the issues I struggle with here is how much information these private companies, will be willing to share and present through these public electronic exchanges?
The idea behind private stock exchanges is to allow private companies to raise capital and create a way for their owners and stock holders to cash out, without the additional burden, expense, delay or scrutiny of the publicly traded stocks by registering company shares or taking on reporting and other compliance responsibilities. In the past these type of private exchange was limited to a handful of players like The Goldman Sachs exchange which is private and not available to individual investors. The TGS exchange is available only to institutional and other qualified ‘sophisticated’ investors.
Regardless of what the future holds for these relatively new business models, my hope remains that availability of many new private trading platforms will improve investment liquidity and support improved business valuations for the many less transparent, privately held companies.

by: Andrew Ochudzawa

Central Banks to the rescue! – Practice or theory? –European perspective

In a classic classroom theory on banking industry, when commercial banks experience difficulties, they can always refer to the central bank for assistance. This is why the central bank is often called on as the lender of the “last resort”

It is therefore conceivable, that the current world economic crisis present an ideal platform for the central banks to fulfill their theoretical banking obligations. However, many commentators, economists and analysts are against such bail outs.. and perhaps for a good reason.

Taking both sides into account, how can we make sense of the “Pulson’s Plan” with a 700 billion dollar injection into the US banking system in order to rescue various institutions from their financial woes.?

The basic problem for the current banking system is the fact that they have lost the trust of their clients. Clients distrust banks and other financial institutions in fear of discovering more “skeletons in their closets” (bad credits) or other financial instruments based on (among others) real estate debt.

The whole process which led to this financial crisis was based on financial institution ‘A’, giving real estate loan/credit to family B, taking real estate as collateral and security for their loan. The financial institutions were less interested in financial ability of B to service such credit facilities. When B (and millions of others) suddenly became unable to repay the credit, the effect was one of a chain reaction, which pulled in larger and larger victims.

The fore-mentioned “Pulson’s Plan” and injection of the $700+ billion dollars into US financial system actually causes more chaos, which is stirred up by the very same recipients of the funds which have initially been responsible for the current state of affairs. The ‘plan’, did not cater for assistance for the basic level credit recipient, who is the primary spark of this global chaos.

The financial crisis is well and truly here. Europe was not immune either. The news is full of European banks that are in financial trouble and are being rescued by individual governments or their affiliated central banks. E.g. Hypo, Fortis, etc.

A new question is borne: Is the European Union able to combat this latest financial crisis as a union, or will all of the individual countries, deal with their own problems? Well, Europe isn’t able to act as a single body; therefore it is more susceptible to be effected by various problems of a global nature. At the same time, it is the very lack of European single-mindedness which underpins the power of the European Union. The example of such is Fortis Bank, where three of the European countries (Belgium, Holland and Luxemburg) injected over 11 Billion Euro for its rescue.

Its becoming apparent, that the role of the central bank, will not therefore be the role of the lender of the “last resort” as it is in the case in EU, it will continue to be a loose union between several countries with common monetary policy, leaving national issues to be dealt with on a national level as it is the case with policies of migration, financial crashes, global warming/green issues as well as international trade and politics.

by: Andrew Ochudzawa

Perspective on Australian Import/Export Business

Having our firm recently co-invest in a new venture (a Sydney based exclusive importer of European, automotive performance and enhancement products for BMW, Mercedes, Porsche, VW, Audi etc), it was interesting to discover the fact that many firms, especially German – despite of huge distances between the parties and costs of transport, still can to do competitive business with antipodes.

Australia is doomed to trade with distant partners. In the past, this distance greatly influenced just about every aspect of everyday life here (and not favourably). The phrase “tyranny of distance” was probably invented here.

Australia’s larges economic partners include such superpowers as Japan, US, China and Korea, it’s no wonder that European trade is also very lively. However, in discussions with a number of CEO’s managing large, privately held companies, in Germany, Poland and other EU countries, it became very apparent that the EU trade with many suitable Australian businesses is not suppressed by the geographical distance, it is suppressed by a psychological distance.

For many European businesses, Australia is seen as a distant, exotic trade partner, with small population and unknown cultural compatibility. Many of the common objections, when dealing with local companies wishing to expand their products to foreign markets, revolve around that fundamental need for a mind shift.

With recent drops in the value of Australian dollar and the movements against stronger currency like the Euro, Australian exports are well positioned for EU markets, right now, more so than ever.

There are no shortages of good export opportunities for Australian products, there are however few contacts and traditions which can position many other Australian made products on a world trading stage.

by: Andrew Ochudzawa

PEG's & US Toxic Debt

Just like many times before, private equity firms are picking up pieces of ‘profits’ in the otherwise rotten, (or as referred be some, toxic) bank assets. Will this help the new US Government in its somehow confused search for a way to do away with bad debt off the financial markets?

Possibly, but there are some limitations as to what PEG’s can do by themselves.
A number of private equity groups such as Black Rock are regarded as a potential white knights in their quest for turnaround of a bad debt into something more…profitable?.

Many are hopeful that PEG’s can scoop up what’s left and buy up so much bad debt that the burden will be removed from the Government and assist its hopeless search for a solutions to the current, and now global, financial crisis. There are huge issues with this proposition.

Firstly, the new US Government had been toying with the idea of creating a ‘bad debt’ bank that would aggregate debts (buy up bad debt) The US treasury announcement of a rescue plans (details) on the 10th of February have been extremely sketchy. So far, the consensus seems to be that a private/public investment fund, not a distressed/bad debt bank, would handle this.

Secondly, the idea of such a debt vehicle could give large leverage to private equity groups. There are significant conflict of interest considerations.

Lastly, while interest in bad debts restructuring seems appealing, without a larger investment vehicle to steer the process, there is just not enough that can be done by a small number of private equity firms who act alone.

The costs of bad/toxic debt are so enormous; it is surely delusional to think that PEG’s alone can make any significant impact.

by: Andrew Ochudzawa