Five things I've been doing this week

1. Hedge fund due diligence

I was lucky enough to get a lunch meeting with UK based volatility fund 36 South Capital Advisors on Tuesday. Fund CIO Jerry Howarth was in town and gave me 90mins or so over lunch at Tattersalls Club in Sydney. I have to be honest and say that 36 South was not on my radar until a client of IBCyclist Consulting mentioned them to me. It's strange given Jerry's history in the volatility space in New Zealand and Australia that we never crossed in the early 90's when I was a market maker on the floor of the Australian options market (92 - 97). Perhaps he was on the other side of some of the positions I had in New Zealand conglomerate Flecther Challenge when it demerged into smaller units at that time? That was a lot of fun and I have a great story about one particular fund manager who thought he was a genius and instead got that one very wrong.

36 South are presenting at the Volatility and Tail Risk Hedging Educational Breakfast being held at Deutsche Bank's HQ in Sydney on Friday. It should be interesting given the difficult environment that the last few years have been for long biased volatility players. There seems to be a bit of light at the end of the tunnel, and I'd expect tail risk and volatility, in general, to throw up some interesting opportunities this year. Chief catalysts for volatility events that I see are:

• The US Federal Reserve Bank returning to a more normal monetary policy in Q3 - 4
• The Eurozone reaching a long-term resolution of the Greek crisis, good or bad (end of summer)
• A solution in respect of the current Ukrainian problems

I expect most of these topics to be covered at the breakfast along with various strategies aimed at either protecting or enhancing portfolio performance.

My write up of 36 South will be available to clients next Wednesday. Prima facie it looked to me that they passed the eye test of delivering what they say they will. If any investors would like me to provide a complete DDQ, please contact me directly to discuss the format and terms. Obviously I always suggest an onsite visit before investing in any hedge fund.

2. Bike Wheels

Believe it or not it is possible to wear out the rims on your bike's wheels. My Fulcrum Racing Zeroes have seen their fair share of kilometers over the last two and half years, and the brake track on the front rim was "cactus". The result was reduced stopping power and a nasty squealing noise when under medium braking conditions.

The answer is either new wheels or a new rim. Luckily for me Fulcrum does offer replacement rims. My local bike shop cheeky monkey is unfortunately at the end of the usual anti-Aussie supply chain economics. That means I had to go to eBay or wait for the Aussie distributor to come up with the goods.

What happened to the spokes?

Seven days later I had the rim from a US bike shop and had delivered it to Cheeky for change over. I pick up the wheel tomorrow. Total cost about AUD400. A new set would have been AUD1100 locally. I think that's a good deal given the hubs (both front and back) are still buttery smooth.

3. Leaky central banks 

The Reserve Bank of Australia is asking local regulator ASIC to look into irregularities in the currency and rates markets ahead of recent policy decisions.

Leaky ship or central bank?

Most of the questions being asked are in respect of the way the AUD traded in its various pairs this week when the RBA chose to keep rates on hold. That is only the tip of the iceberg. Last month the RBA chose to alter a well-inked policy of steady policy and lower rates. At the time, there were concerns that insiders were leaking the change ahead to experienced local commentator Terry McCrann. I don't know the truth of it, just that for years my favourite brokers in Sydney, when asked about policy at the RBA, used to say (I kid you not), just read Terry McCrann's column. Whatever the truth I'd say good luck to ASIC in trying to piece together the why's and why nots of what happened. The winners will be at the bar sipping Krug, and the losers will be whining to whoever will listen.

4. Residential property

Do people who invest in residential property really know what they're doing? Honestly, when was the last time you sat down at a dinner party and heard someone who's just bought an investment property tell you how great the rent yield was? In Sydney, I'd say 65% of them don't even know that they have to pay annual state property tax. So what? Well, if you've ever had to analyze property companies or REITs you'd know that the serious end of town takes cap rate calculations very seriously. A tiny move in gross rent or maintenance costs can put companies in play.

That's why when I met Josh Masters of Sydney based buying agent Buy/Side that I realised I'd finally meet someone who was trying to put investment banking type models into the hands of retail investors. Buy/Side's Suburb Investor app will be available soon in the iTunes and Android shops, and I bet when the dinner party Donald Trump's get a look they might go a little quiet.

5. You know you're a cycling nerd when . . . 

I was accused of being a nerd for tweeting out my latest bike maintenance achievement. For my birthday, I was given the uber-expense Campagnolo chain tool.

That gave me the ability to change my bike chain as per this video:

What a nerd. Guilty. Just to add to this level of nerdiness I've also become a black-belt in headset maintenance. None of this is rocket-science, and my go-to bike mechanic, Mark at Cheeky Monkey, admits there's a lot of trials, errors and broken parts in reaching my level of "nerdiness".

It makes me happy to strip down and rebuild parts of my bikes. Clients of IBCyclist should know I feel the same way about producing appropriate spreadsheet models. When you get the right tools and have clear instructions and some quiet time anything is possible. 

Ciao!

Under promise and over deliver. #BBYltd Disruptive Tech Lunch: PocketBook & Singtel Innov8

There wasn't much hype surrounding the first BBY Disruptive Technology Lunch of 2015. I took along the CEO of a real estate buying agency as he's about to launch an app aimed at residential buyers. I thought it might give him an idea of some of the tweaks other innovators had taken with their tech offerings. These lunches also toss-up a nice cross section of investor questions that entrepreneurs are going to face as they get their message out to the capital markets. Forewarned is forearmed.

Long time readers of this blog will know that normally I like to come to these lunches with at least a modicum of background on the businesses presenting. On this occasion, I hadn't adhered to my routine. I had no idea what PocketBook was, save for the function implied by the name. Co-Founder Bosco Tan immediately came off as self-effacing by apologising for not wearing a suit. Nice touch from a man who's parlayed his position as a security engineer at BAE Systems Australia into a highly touted financial organiser app with 130,000 downloads.

So what is PocketBook? Pocketbook automatically organises your spending into categories like clothes, groceries and fuel, based on your transaction history.

It does this by you taking the "leap of faith" and linking it to your bank account. The algorithms go to work looking for patterns in your history. The result is that it quickly enables you to see incoming and outgoing cash, enabling you to take appropriate action. In addition, you'll get messages through various portals (email, pop-ups, etc.) prompting you of the fact. I think my guest had downloaded it before Bosco got to mid-presentation. Personally I'm a little slower at doing anything that entails me giving my bank account information to a smart app, but that's just me. Bosco himself said that the security aspect of the business is a game of trust. When they first launched, the active user numbers were closer to 30% than the 60% they have today. That's the trust capital being built up, but it also shows how important it is for this business to stay focused on security. One slip-up and users would just shut down their participation, and with it any potential revenue stream.

This blog is a fan of big data, and PocketBook is a great entree into that sphere. As part of their algorithmic scrapings, PocketBook has been doing case studies on various businesses and events in Australia. Bosco presented 4 of these, just to give us an idea of what's possible:

1. Uber

A fairly obvious study into the growth of Uber's market share in Australia. I say obvious because Uber users are smart device-centric and, therefore, the cash flow from electronic transactions is a very accurate measure of Uber's market penetration.

2. Sephora

Geographically based study of the impact of cosmetics retailer Sephora's impact on the main retail shopping strip when it opened pre-Christmas last year. The presentation showed the impact versus a number of retail categories, including the big department stores and smaller discounters of cosmetic products.

3. Apple sales cycle

This case study confirmed what we all know, that the hardware cycle drives Apples Australian earnings and significantly impacts non-Apple sellers in the smart device space. Apple doesn't split out it's Australian earnings for the group, but this presentation study showed what was possible with PocketBook's data scraping.

4. Netflix

If you're an Aussie "tech-head", you've been playing with VPN's and geographical masking for years in order to get the latest media. The time lag between US or European release of a book, movie or TV show and it's Australian release used to be infuriating. One media mogul used to buy up all the best police themed shows in the 60's and 70's and lock them down for years, only broadcasting them when reruns of previous shows had exhausted themselves. That's, not the case now thanks to tech. Netflix is an obvious example. PocketBook was able to extract the actual spend on Netflix and interpolate it to a number that that showed just how big the business was without a "real" offering in the country. The reaction to the recently announced roll-out of Netflix in Australia and the PocketBook study has seen multiple new offerings in the download space spring up virtually overnight. The panic is palpable.

So what do these studies tell us about PocketBook? Well, primarily PocketBook may be a chameleon. On one hand, it's a nifty tool for the budget concerned though it's unclear how that translates to revenue from this presentation. On the other hand the business, as it exists, might change radically in line with its use of data scraping. Additionally I wonder if ultimately the data side might create so much value that PocketBook should pay users to take the app? Whatever the long term eventuality PocketBook's future looks assured in some form and investors looking for multi-faceted opportunity could do worse than read through the current offering documents if they're lucky enough to be invited to participate. Of course, if you're concerned with privacy you might be more likely to get upset than to invest.

Singtel is the owner of local telco number two Optus. As part of this they've rolled out some capacity of their VC fund Innov8 (not a spelling error or typo). Alfred Lo is the "Lead Principal" here in Australia responsible for implementing the broader strategy that comes out of Singapore, San Francisco and Tel Aviv. The usual themes in terms of investment targets were all there:

Innov8 partners with the Fishburners project, I detailed at the end of last year. They also have spaces at Inspire9 in Melbourne. I got the sense that Innov8 was focusing on the rapid growth of connected devices beyond the usual smartphone / tablet sector. A good example of this is smart home controller Ninjablocks.

If I understand it correctly, Ninjablocks  is a communications facilitator that allows developers to connect devices within home or work environment without having to worry about embedded programming, electronics, & networking protocols. I love this type of thing in the same way I've always gravitated to the picks and shovels suppliers in every boom. Levi Strauss might not have discovered gold in California, but he did clothe generations in his denim trousers.

On wider business themes, Alfred offered some pithy insights into the current state of the VC space in Australia. I wasn't surprised when he said that Australia in general was underweight. It seems onshore investment in the local tech is about 38%, compared with 64% in Berlin and 59% in London. That's a none too subtle plea to the government to support the sector. This blog is never a big fan of tax-incentivised industries. Solar cells, wind turbines and alike are all very well when they meet real ongoing demand. Where's the value in providing tax breaks to offshore companies unless you get something more than a couple of thousand installation and maintenance jobs?.  If you disagree, I've got a friend who can sell you a solar farm in Spain or better still a bond that enhances its coupon through stripped German solar tax credits.

Finally for readers wondering why VC funds have doubled since 2009 just think about this: There are 80 pre-IPO billion dollar companies just waiting to come to market. Entrepreneurs no longer look to exit publically in the short term; rather they're content to feed out small amounts of equity to diligent investors. If that's you please contact me through my web page IBCyclist Consulting.

Ciao!