The Owner’s Dilemma

My partner David Esmie just coined a new phrase: The Owner’s Dilemma.

We were talking about Venezuela’s Supreme Court seizing power from the National Assembly in a continuation of the socialist movement started under Hugo Chaves and continued under his successor, the lesser-talented, ham-fisted Nicolas Maduro.

venezuela

Source: http://tinyurl.com/mawl9mr

I mentioned to David that Hugo had nationalized many industries, including the cash cow oil & gas industry and, of particular interest to me due to my past investments in a tiny gold miner Crystallex, the mining industry.  Chavez and Maduro pander to the masses that foreign corporations are raping the natural resources from the country, impoverishing the great and free citizens of Venezuela.  Money that should be lining the pockets of every Venezuelan instead are flowing to profiteering foreign capitalists.  Crystallex fought in the Venezuelan courts, and won, to have their contracts with the Venezuelan government upheld.  Crystallex had invested $2 billion developing gold mines and told the new regime, “If you nationalize, we will walk.  You do not have the expertise required to run the Los Cristinas mine”.

Hugo nationalized, Crystallex walked and Venezuela now owns 100% of a giant hole in the ground.  Not an ounce of gold has been mined.  Not only does Venezuela not have the expertise to run a $2 billion gold mine, with the crash in oil process, they no longer have the capital to even buy the expertise.  Citizens wait in long lines to buy necessities of life and there are constant marches and riots.

David commented, “That’s the owner’s dilemma – once you own it, you own it.  You get 100%.  You’ve got no one to blame if it doesn’t work out the way you want”.

So on Wednesday Venezuela’s Supreme Court dissolved the opposition-led National Assembly, consolidating near-dictator power in strongman Maduro.  He now “owns” the problems bludgeoning the Venezuelan citizenry.

Maduro continues to round up scores of opposition leaders on charges of treason.  I had lunch two years ago in Miami with the publisher of a Venezuelan newspaper who fled to the U.S. to avoid arrest and imprisonment at the hands of Chavez.  He would have been long forgotten by now had he stayed, if he even survived.

People often like to romanticize the “dreamers”, the Hugo Chavezes, the Nicolas Maduros and Che Guevaras who “fight” to give the means of production to the working man.  The problem is that unless you have a plan and the means to make those gifts productive, no one wins, everyone loses, prosperity sublimes.

The corollary in business (in the event that this is your first introduction to business principles) is that businesses with exceptional leaders, great great leadersbusiness plans and relevance in the market succeed – – they thrive.  In business you can’t survive by proclaiming your dominance and imprisoning your competition, no matter how much you may wish it to be so.

At Vertical Capital Advisors, we are most often engaged by industry leaders to be the bridge to the capital they need to fuel growth.  We start with great leaders at great companies that have compelling, profitable business plans where the only missing ingredient is capital.

 

ABOUT VERTICAL

Vertical Capital Advisors is an Atlanta-area business advisory firm built on creating tangible value for our clients, serving clients in just about every industry.  Our clients are both capital growers and capital allocators.  How can Vertical help your firm maximize value?

Joe Briner
Managing Director
Vertical Capital Advisors LLC
briner@verticalcapitaladvisors.com
866-912-9543 ext 108

 

 

Black Swan Sighting?

black swan

Today marked the first significant drop in broad market indices in the Trump era.

Since the election, the S&P 500 has climbed more than 11%, the Dow Jones Industrial Average (^DJI) has gained 14% and the Nasdaq Composite Index (^IXIC) has climbed about 13.6% during the same period and the S&P 500 and Dow had now gone 109 days without a 1% decline according to Yahoo Finance, a record not achieved since 1995.

Today, all of the broad market indices dropped by more than 1%:

markets march 2017

Source: Yahoo Finance

 

The real story is what has been happening behind the scenes.  As the markets proceeded on a three-month tear, money managers have been allocating significantly more money to protect their gains.  The price of the CBOE Skew Index, a measure of the price of out of the money put options, has soared while market volatility has decreased – a diverging trend that is not typical and a possible sign of imminent volatility in the near future.  In layman’s terms, professional investors are increasing willing to pay much more to protect against downward stock prices.  You can see the increasing cost of Skew puts (white line) compared to overall market volatility (blue line) in the Bloomberg screenshot below:

tail risk hedging

Some are calling this a precursor to a Black Swan event like the one that heralded the last recession.

What does this mean to you?  Bond prices will likely rise and foreign stock markets will likely take a bigger percentage dive because when America sneezes, Asia often gets a typhoon and the rest of the world catches a cold.  Asia reacts first because their markets are the first to open, followed by Australia, the Middle East then Europe and South America.  (Absent any buying signals of which there are none at present).

What should you do?  As an investor, nothing.  You did an excellent job of creating a well-diversified and down-side protected portfolio with you investment adviser so if we do have a setback in the market, wait it out and look for buying opportunities when the dust settles.

As a business owner, the answers are more complex.  If this is truly a black swan, a repeat of 2008-2012 or worse, there are few safe havens.  If you have kept up with the Vertical Capital Advisors blog posts over the past year, you have been steadily building your cash hoard and your war chest will enable you to secure a dominant position in the markets you serve.

baron rothschild

As we published on August 3, 2016, you can channel Baron Rothschild and “Buy when there’s blood in the streets, even if the blood is your own”.

 

 

 

 

ABOUT VERTICAL

Vertical Capital Advisors is an Atlanta-area business advisory firm built on creating tangible value for our clients, serving clients in just about every industry.  Our clients are both capital growers and capital allocators.  How can Vertical help your firm maximize value?

 

Joe Briner
Managing Director
Vertical Capital Advisors LLC
briner@verticalcapitaladvisors.com
866-912-9543 ext 108

ACG CapConn – You had To Be There Live

Yesterday was the final day of the annual pilgrimage to Atlanta for over a thousand finance professionals from across the country, all converging for the pinnacle event for professionals focused on helping businesses grow and thrive – the Association for Corporate Growth Capital Connection or ACG CapConn.

#ACGATL
#CapConn2017
https://www.facebook.com/atlantaacg

atl

With over 200 exhibitors plus over 500 other capital providers in attendance, all hungry for equity, mezz and debt deals, David Esmie and I were in heaven for the past three days, starting with the private gatherings on Tuesday followed by two days of intensive networking and working sessions on Wednesday and Thursday.  Here’s a picture of me with long-time friend Gibby Thrift after he won a major award at the Chatham Capital soiree on Tuesday night at Ventana’s:

 

CapComm

 

Our feet were exhausted after three days of non-stop networking but the investment of time and energy was richly rewarded with numerous new relationships with new funding partners eager to see the client projects we are currently working on.

 

 

ABOUT VERTICAL

Vertical Capital Advisors is an Atlanta-area business advisory firm built on creating tangible value for our clients, serving clients in just about every industry.  Our clients are both capital growers and capital allocators.  How can Vertical help your firm maximize value?

 

Joe Briner
Managing Director
Vertical Capital Advisors LLC
briner@verticalcapitaladvisors.com
866-912-9543 ext 108

 

 

 

Mark Your Calendar: The United States of COW coming soon!

Yes California #Calexit

Mark your calendar for July 25.  If 585,407 or more Californians sign the Yes California petition by July 27, there will be a statewide vote in November which would establish an independence plebiscite on March 5, 2019.

How far behind can Oregon and Washington possibly be?  And why not form a new

United States of COW – California, Oregon and Washington?

The Yes California organization has enumerated their reasons for independence on their website: http://www.yescalifornia.org/.  Their points are quite compelling:

  1. PEACE AND SECURITY
  2. ELECTIONS AND GOVERNMENT
  3. TRADE AND REGULATION
  4. DEBT AND TAXES
  5. IMMIGRATION
  6. NATURAL RESOURCES
  7. THE ENVIRONMENT
  8. HEALTH AND MEDICINE
  9. EDUCATION

They state: Yes California is the nonviolent campaign to establish the country of California using any and all legal and constitutional means to do so. We advocate for peaceful secession from the United States by use of an independence referendum to establish a mandate, followed by a nationwide campaign to advocate in support of a constitutional exit from the Union.

As a management consulting firm, if California were to hire us to advise them on this endeavor, this would be the simplest engagement ever.  We are based in Atlanta.  Sherman did some pretty horrible things that leave an open scar to this day.  The census of 1860 put the US population at 31 million.  About 620,000 soldiers died in the Civil War.  Census.gov/popclock says we have 324,456,571 people as of this writing.  If an equivalent number of soldiers perish in the Second Civil War triggered by a Calexit, that translates to 6,397,641 lives.  Though you may wish a non-violent exit, guess what, that book is written and you will not like the ending.

Our advice: work within the system California, heed the words of our last president: “If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business – you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.  The point is, is that when we succeed, we succeed because of our individual initiative, but also because we do things together.”

 

 

ABOUT VERTICAL

Vertical Capital Advisors is an Atlanta-area business advisory firm built on creating tangible value for our clients, serving clients in just about every industry.  Our clients are both capital growers and capital allocators.  How can Vertical help your firm maximize value?

Joe Briner
Managing Director
Vertical Capital Advisors LLC
briner@verticalcapitaladvisors.com
866-912-9543 ext 108

Jimmy Buffett sings “Ringling, Ringling, fading away.” Who’s next?

As we watched an episode of House Hunters International about the town of Gangi on the Italian island of Sicily, the song Ringling, Ringling from Jimmy Buffett’s 1974 album Living and Dying in ¾ Time kept playing in my head:

Ringling, Ringling, fading away, only 40 people living there today, the streets are dusty and the bank has been torn down, it’s just a dying little town… I wonder how many people will be there a year from today

Since 1970 the population of Gangi has shrunk from 17,000 to 8,000.  Gangi, too, is fading away.  The 1,100 year old town is selling homes for €1.  Gangi exists at the convergence of a falling birth rate and the human migration pattern from rural, agrarian economies to urban, centralized economies.  In fact, only 105 countries out of the 224 tracked in the CIA World Factbook[i] exceed the 2.1 “population replacement” birth rate required to maintain a population.  The global birth rate map is fascinating – take a look:

global birth rate

If your country is blue, it is shrinking.  In the short-run, the only thing that can change that fact is migration from one of the more brightly-colored countries on the map.  What this means for the established, shrinking western economies is we had better be prepared for a large influx of people who don’t look or talk like the majority of the current population to become our neighbors and, for the baby boomers, caregivers as we age.

In the Atlanta area where Vertical Capital Advisors is based, we are again experiencing a building boom.  At business gatherings the question is often asked where are all the people coming from to occupy all of these new homes and offices?  While it is true that our national economy is not growing through natural births, we do continue to see urbanization of the population as younger, more mobile people opt for jobs and homes in the urban-centric service economy where one can readily buy Chik-fil-A or Krispy Kreme donuts on the way to work.  And when people immigrate to the U.S., they too tend to live and work in the population centers.

Small, rural towns like Ringling and Gangi are likely to continue fading away throughout the developed world, even if countries adopt open immigration policies.

Gangi – one has to wonder how many people will be living there one year from today.

 

ABOUT VERTICAL

Vertical Capital Advisors is an Atlanta-area business advisory firm built on creating tangible value for our clients, serving clients in just about every industry.  Our clients are both capital growers and capital allocators.  How can Vertical help your firm maximize value?

Joe Briner
Managing Director
Vertical Capital Advisors LLC
briner@verticalcapitaladvisors.com
866-912-9543 ext 108

[i] Source: CIA World Factbook https://www.cia.gov/library/publications/the-world-factbook/rankorder/2127rank.html

How Vibrant is Atlanta’s VC Ecosystem? $1 gets you $7.48

We often hear that Atlanta does not have the vibrant venture capital ecosystem that the Bay Area or Boston or even Austin have.  So how vibrant is Atlanta’s VC ecosystem?

PitchBook just released research[i] that reveals exactly where the major VC regions in the U.S. measure up.  There are only 12 cities/regions that had more than 30 VC deals that experienced successful exits in the last 10 years, a successful exit being defined as 1x or greater return of invested capital at exit.  Atlanta had 35 deals which ranks Atlanta #8 nationally, ahead of Chicago, Raleigh/Durham and Austin.

The most vibrant market is the Bay Area where the 613 successful exits exceed the rest of the markets combined.

The most impressive data from this study was that that the average multiple of invested capital at exit is 8x.  In dollar terms, $1,000,000 of VC cash invested returned $8,000,000 at exit.  The figure for Atlanta is 7.48x.  What was most impressive about Atlanta’s VC exits is that 97% yielded a return greater than 2x, the highest of all 12 regions.
multiple-on-invested-capital

We have honestly been a little bashful about projecting exit multiples in the double digits.  We walk that fine line between being credible and incredible.  Even VC firms frequently look askance at projections that show 10x or 20x multiples at exit.  We have a pharma opportunity that should generate 25x to over 50x in three to five years.  So guess what?  Vertical Capital Advisors is going to set the curve going forward.  We are going to work with the VC community to move the needle.  We are located in a wonderfully creative, talented and resource-rich region and VCA will be an agent for transformative growth in our region.

 

 

ABOUT VERTICAL

Vertical Capital Advisors is an Atlanta-area business advisory firm built on creating tangible value for our clients, serving clients in just about every industry.  Our clients are both capital growers and capital allocators.  How can Vertical help your firm maximize value?

 

Joe Briner
Managing Director
Vertical Capital Advisors LLC
briner@verticalcapitaladvisors.com
866-912-9543 ext 108

 

[i] http://pitchbook.com/news/articles/which-us-cites-generate-the-best-vc-returns

The Trump Factors (there are 3)

 

trump

A close business associate asked me if my view on the U.S. economy changed in light of the actions taken by President-elect Trump since the election.  The question caused three points to crystallize in the answer I gave.  It went something like this:

There are three Trump factors that combined do have the potential to change the trajectory of the U.S. economy: his focus on growing businesses, his plan to reduce corporate taxes and his plan to reduce regulation.

#1 – Trump’s focus on growing business.  It has been eight years since we had a President who understands and encourages business, small business in particular.  There is enormous pent-up energy that is about to be released by businesses of every size.  We could see a wave of business innovation and transformation akin to the revitalization and creativity of the Renaissance.  Massive business investment could be unleashed by changes in the tax code.

#2 – Trump’s plans to reduce corporate and other taxes.  There is no question that the Kennedy and Reagan tax reductions opened eras of incredible business growth and investment.  Did you know that Apple, by itself, has over $230 billion of cash on its balance sheet OUTSIDE OF THE U.S.?  To put that in perspective, the FDIC[i] reports that there are 5,980 insured banks in the U.S. and Apple’s cash held outside of the U.S. is greater than the combined capital of over 2,000 banks.   That’s just one company!  CNBC[ii] reports that there is $2.5 TRILLION held by U.S. corporations overseas!  That is more capital than all but the top 50 banks.  Imagine nearly 6,000 new banks eager to make loans.  It would be transformative.  (You can tell I am a recovering banker, yes?)  If the corporate tax rate is reduced and Trump’s 10% repatriation tax is implemented, the U.S. economy could see a wave of investment unlike anything in history.

#3 – Trump’s plan to reduce regulation lifts a huge psychological weight off the shoulders of business owners.  The current administration has issued over 560,000 pages of regulations[iii] and this year isn’t over yet; “we’ll add 11,190 pages over the next 44 days, to end 2016 at around 92,830 pages” notes Clyde Wayne Crews of the Competitive Enterprise Institute.

federal-register-page-counts

Source: Townhall.com

You and I must comply with every one of those half-million pages of regulations, lest we face fines and imprisonment.  It’s a staggering concept, a sobering reality.  A wet blanket that dampens the entrepreneurial spirit.

Businesses power our economy.  Relieved of the crushing regulatory overburden and freed of confiscatory taxes, entrepreneurs will flourish under an administration that values American ingenuity.

The question is whether the renewed fires fueling a new wave of growth can escape the gravity of massive debt and spending and a population that is no longer growing but is stable to shrinking and rapidly aging.  It’s a coin flip from where we are today.  We have to catch a series of breaks and President Trump’s plans all have to come to full fruition quickly to avoid a meltdown that will reveal the 2008-2010 crisis to be just the opening act.

At Vertical Capital Advisors, we are seeing a renewed spirit in many of the new clients we are working with.  In the last month we have seen a very strong interest in securing growth capital.  Business owners feel more confident about the future.  They are willing to take calculated risks.  They are willing to invest in people, plant and equipment.  This is a marked change from the previous eight years of cautious, tentative growth where only the most certain of business investments were funded.

 

 

ABOUT VERTICAL

Vertical Capital Advisors is an Atlanta-area business advisory firm built on creating tangible value for our clients, serving clients in just about every industry.  Our clients are both capital growers and capital allocators.  How can Vertical help your firm maximize value?

 

Joe Briner
Managing Director
Vertical Capital Advisors LLC
briner@verticalcapitaladvisors.com
866-912-9543 ext 108

___________________________________________

[i] https://www.fdic.gov/bank/statistical/stats/2016sep/industry.pdf

[ii] http://www.cnbc.com/2016/09/20/us-companies-are-hoarding-2-and-a-half-trillion-dollars-in-cash-overseas.html

[iii] http://townhall.com/tipsheet/leahbarkoukis/2016/11/17/obamas-new-regulations-n2247287

Leadership

The day after the most tumultuous presidential election in a lifetime, Americans and citizens of every country are redefining what leadership means.  It matters now more than ever who you have in your corner advising you.  It is easy to slip into the crowd, to go with the flow but that path rarely creates significant sustainable value in the long run.  In fact, it can be very detrimental to your enterprise.  Take a look at the screenshot below.  We hope that you were not one of the panicked hordes who drove the broad market indexes down substantially early this morning:

post-election-marketSource: Bloomberg

Because if you were, your panic was rewarded by missing the 1,000 point swing in the Dow from -800 at 2:00AM to +200 at 2:00PM.

If you have read more than one of our blog posts you know that we are focused on creating long-term sustainable value.  We acknowledge that there will be ups and downs – that is part of business life.  We will help you keep a firm hand on the wheel as you navigate the transformative events that lie ahead.  And there will be many more market gyrations in the immediate future and they probably will not be flash-crashes with immediate recoveries like the one today.

Be a leader.  Set the course for the long-term.  Don’t be distracted by temporary anomalies.  Now is a great time to be building capital reserves.  We can help you build the war chest so you can act decisively when opportunities arise – and they will arise.

 

 

_________________________

ABOUT VERTICAL

Vertical Capital Advisors is an Atlanta-area business advisory firm built on creating tangible value for our clients, serving clients in just about every industry.  Our clients are both capital growers and capital allocators.  How can Vertical help your firm maximize value?

 

Joe Briner
Managing Director
Vertical Capital Advisors LLC

Red Dragon Snowflakes

We found it!  The snowflake that will start the avalanche.  The Red Dragon Snowflake.  Here’s a picture of it falling right outside our window:

red-dragon-snowflake

In fact, the first sign of the avalanche has already happened.  There is a very good chance that it will start in China and that it will start with rapidly falling real estate prices.

Take a look at China’s money printing binge since 2000.  It dwarfs ours here in the U.S.

money-supply

Source: WSJ 11-1-16

At the same time Chinese debt has nearly doubled:

debt-as-gdp

And now, the Chinese, who by and large are incipient investors, preferring the hard asset class of real estate as their preferred investment of choice, started to pull back from real estate this year:

shenzhen

Kind of looks like a snowflake falling.  Certainly resembles a mountain peak.  Definitely represents a bubble bursting.

The Politburo centrally-controlled Chinese economy will likely be patient zero for the next correction/recession.  Look for phrases like “Asian Contagion” to ripple through media reports in the coming weeks.  The decrease in asset values in China will not have much of an impact on the rest of the world because China’s capital account is largely closed, it has enormous reserves and nearly all of its debt is held domestically and all of it is denominated in yuan.  But because markets tend to react psychologically as much as they do to economic data, when the panic starts, because of the sheer size of the Chinese market, there will be panic selling globally.  The Politburo can continue offering cheap credit and forcing Chinese citizens to invest in financial assets for a time but even the Chinese do not like to see their net worth drop, especially when it is heavily leveraged.

All bubbles burst.  We know we are in one now.  China knows it too. what-should-i

What should you do about it?

Bolster cash reserves.  Very soon, you may be able to buy good, income-generating assets like you could have at the bottom of the crash in 2008-2009.  Maybe at late 80’s prices.

 

________________________________

ABOUT VERTICAL

Vertical Capital Advisors is an Atlanta-area business advisory firm built on creating tangible value for our clients, serving clients in just about every industry.  Our clients are both capital growers and capital allocators.  How can Vertical help your firm maximize value?

Joe Briner
Managing Director
Vertical Capital Advisors LLC
briner@verticalcapitaladvisors.com
866-912-9543 ext 108

 

 

 

Reference: http://www.wsj.com/articles/asset-bubbles-from-stocks-to-bonds-to-iron-ore-threaten-china-1477952654

 

 

Watch Out for the Twin Capital Destroyers

Paraphrasing, a friend wrote to me last night and asked, “Hey Joe, is it time to invest?”  I polished me crystal ball, gazed inside and saw the charts below magically appeared:

m2-money-stock velocity-of-m2-money-stock

Pay attention to the shaded areas.  The shaded areas are recessions, destroyers of capital.  Do you see how the velocity line decreases in the shaded areas in the top chart?  What this shows is that a decrease in velocity predicts a recession.  PREDICTS a recession.  That’s an important verb, predicts.  It is not often in the life of a practitioner in the financial markets (or business manager or investor…) that you can see with clarity what is going to happen next.  And the exact timing of an event is always the most difficult part of the game.

In the top chart we have an exception to the rule.  The line bends straight down since 2011 yet no recession because of what is happening in the bottom chart.  The bottom chart shows that we printed $4.4 trillion since 2011 to prevent a recession.  PREVENT a recession.  That’s a mighty hard thing to do.  Prevent a recession.  But money supply is the only input the government controls.  So it is the only tool they have to “fix” the
economy.  And it is a binary tool – either it is on and they are pumping money into the economy or it is off and they are drawing liquidity out of the market.  This month we learned that the Fed is actually drawing money oupricet of the system.  This will accelerate the next recession.  That is government interference in the markets in action and the price we will pay is pain – material pain in the financial markets.  Great Depression-magnitude pain?  Possibly.

We should have been in a recession since 2011 based on the declining velocity of money.  If you remember the pain of the 2008-2010 recession and you can see the magnitude of the downward trajectory in the velocity of money since 2011 in the top chart, you can see that the next recession will be every bit as painful as the last recession, and, I predict, actually much worse.

As we have blogged a couple of times, the slowing velocity of money indicates that capital is being trapped or logjammed inside the financial system.  So I wrote to my friend:

When money slows, it indicates it is not being invested in productive, growing enterprises.  And if money is not being invested in productive assets, it is being invested in idle assets (read: financial engineering or speculation).  And this is a predictor of a recession (or more precisely, a bubble before a recession).  I think the drop could be 70% across the board – investment real estate included.

Today we have twin destroyers of capital working in collusion: The Fed mainlining money directly into the markets (Increasing Money Supply) and the markets plowing it into non-productive assets (Slowing Velocity of Money).  This dual action is driving prices of financial assets higher while generating no (or very little) new production of goods and services.  The twin destroyers of capital.

Be patient.  Soon you should be able to buy assets at 2008 prices.  The NASDAQ today is over 5,300.  In November 2008 it dropped below 1,500.  That would be a decline of over 70% from today’s figure!  It could get close to that number in the next downturn and while that would wipe out trillions of dollars of net worth, it will only send us back to 2008.  And somehow we all survived that setback.

Have some cash in hand but don’t rush in.  You may have an opportunity to create dynastic wealth that will transform the lives of several future generations if you can be disciplined in your approach to the market.

Business owners and capital allocators, you would do well to dust off the worst case scenario plan and focus on cash generation.  And if the storm hits as it looks like it will, give us a call.  We are experts at navigating such waters.  We can help stabilize the ship, pare back to the key drivers and help you maximize the value of your assets.  That’s how we create tangible value.

______________________________________

ABOUT VERTICAL CAPITAL ADVISORS

Based in Atlanta, GA and created to help businesses survive the devastation of the Great Recession, Vertical Capital Advisors is a firm built on creating tangible value for our clients.  We work with clients in just about every industry and we work with both capital growers and capital allocators..

Joe Briner
Managing Director
Vertical Capital Advisors LLC
briner@verticalcapitaladvisors.com
866-912-9543 ext 108

Sources: https://fred.stlouisfed.org/series/M2, https://fred.stlouisfed.org/series/M2V