Monday, 4 November 2013

Conferencing . . .

Firstly apologies for not blogging last week. I was lucky enough to attend a conference dealing with the family office (FO) sector here in Australia. Normally I find conferences a bit dry as people tend to be pushing a very specific idea and often a very specific set of products off the back of it. In the case of last weeks gathering I was happily surprised by the fact that the conference stayed away from specific  investment structures and rather just took the view that financial, legal and accounting professionals needed a bit of education in respect of FO's and how they expect to be dealt with.

The one word I came away from with respect to these institutions (and the size and age of these offices really does mean that they are institutions) was patience. If you expect a family office to react to your first suggestion or idea you'll probably be disappointed. I was speaking to one senior advisor about my frustrations in respect of my push to get some investors together to do the due diligence on the Commerzbank London / SE UK property portfolio sale earlier this year. In my usual fashion I went through my investment case, not as a pitch, but rather in an effort to work out what I'd done wrong. The truth was I hadn't done anything wrong, I just didn't have a deep enough relationship to be given the benefit of the doubt. The idea was solid and the numbers made sense, but probably needed to be part of my own personal portfolio for a longer period. Perhaps I could track a couple of buildings within the group and show how things progressed? You see it's a long term thing and without a track record in this specific field my ability to action the advice would be limited. You live and learn.

I also realise now that many investment banks and even private banks have not really worked out how to best service family offices. The main problem with IB's and PB's is that they drive their efficiencies through an economy of scale. That's very good when dealing with institutions used to combing the markets for opportunities and disparities in valuations etc.. FO's don't have desks of traders or even teams of investment bankers with the time or the inclination to look at every prospectus that they get in their email daily. They rely on a true bespoke service, not a fake one. Some of the most up-market mens retailers offer a bespoke tailoring service, but it's not bespoke in the sense that you might get from establishment that measures you for a suit and has you back 4 or 5 times before finalising your suit. Most of the fashion houses now have their staff decide a base size and then provide the variation to the computer cutting pattern. It's like the banker who has one presentation and merely changes the name of the client on the title page; it's superficial and if it's not updated and recast enough the client starts to work out that they are at the other end of a long chain. Well thats what you can't do with FO's. The cost of dealing with FO's isn't the value of the due diligence put into valuing and packaging an asset, it's in the time taken to understand that things need to be built up over many months and years.

Talking with the various professionals at the conference also told me that hard assets were still the main focus of the very wealthy. It seems that the FO's suffered along with the rest of the financial sector during the economic crisis of 08-09. Securitized structures obviously had cost many time, money and stress. Real estate seems to remain in play with many I spoke to happy to put funds into direct ownership or even slightly subordinated mortgages. This later point surprised me, though 2nd mortgages are better in terms of recoverability than some MBS type paper by virtue of being more nimble to action. A yield pick-up of a couple of hundred basis points probably makes sense where the FO knows the market in question. And that's another good example for an advisor to consider. I now know that offering a Melbourne based FO the chance to invest in second mortgages in (say) Chicago probably won't win me any kudos, whereas a direct investment by way of a property easily valued and financeable is, while still not easy, at least palatable the basis for a broader conversation on asset purchases.

Since 2008 anyone seeking finance for their ideas has had a tough time sourcing funds through the old channels of banks and finance companies. Now without a risk taking mentality at the various traditional sources the valuation gap between buyers and sellers has grown ever wider. This enables the cash rich non-traditional financiers and investors to involve themselves where formerly they would have had to participate further down the capital structure. At the moment the mining and resource sector is out of favour because of the perceived risks in the economies of the main users (i.e China). According to E&Y Consultants a total of 165 deals worth only $8bn were completed in the three months to September, down from 236 deals worth $20bn in the same period a year ago. So where does that leave investors? The gap cannot continue to stay open and I suspect that the usual suspects of private equity and FO's will step in to take up the difference. That's especially truee given the hurdle rate for returns is low and likely to stay low for some time, in fact even if the hurdle rate (ie. government interest rates) starts to tick up investors in these economically sensitive industries are likely to generate considerable positive alpha.

This blog remains of the view that equities will continue to outperform cash for one very bad reason: money is cheaper than return on equity. In my last posting I pointed out that the corporate profit season in the US had seen profits in the S&P500 up only 4.9% year on year (ex-JPM litigation charge), but of course when compared to short-end cash returns this seems like a good risk. The most likely inflexion point now seems to be in March once we've negotiated yet another series of US debt ceiling and budgetary talks.

As many readers would appreciate I have little outright love for the valuations of Australian banks. The risk of buying something on around 1.8x tangible book v. an Australian Dollar dividend yield of 200or so bps over the applicable government debt is perhaps not enough at this stage in the cycle. I will be looking at a full review of the Australian banks at the end of this week. I am still suggesting to local investors to diversify into European banks to best leverage the recovery there.

As far as cycling goes I've pretty much been taking a low key approach since the Hunter Valley expedition a couple of weeks back. Since the Cannondale has been out of service I've been relying on my old friend the Pinarello Dogma 60.1. To spice things up I've been changing around wheels at fairly short intervals. It's interesting to do this as you definitely start to get a greater sense of the strengths and weaknesses of your frame. Trey getting some different wheels and see what I mean.

I'm strictly a road cyclist these days, but occasionally I see something that amazes me from across the divide in the mountain biking world:

I'm not saying I want to start riding around Chile on a mountain bike, but after seeing this it certainly seems like a lot more fun than some of the streets around Sydney.



  1. We have to focus on everything about our Real Estate Investing Australia to ensure its success. All the things that we have in our business has to be helpful in our way to success. We have to do everything towards our success and most importantly, we must ensure how we handle our business well.

  2. Awesome mountain bike video! Are any of those guys still alive?

    I'm pretty sure none of them work at Family Offices!