Author Topic: Non-public market strategies  (Read 3715 times)

netnet

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Non-public market strategies
« on: March 27, 2020, 02:12:08 PM »
Let me preface this by saying bravo to the those on the front lines, including my college roommate who is a pulmonologist (who just made out his will along with his wife, who is a ER doc)  And my thoughts and prayers to those who are sick now and/or who have loved ones who are gravely ill or worse.

Now that we are in this horrible mess and the third US government bill has passed 2 T and counting;  does anyone have any interesting ideas for non-public market strategies?

I think that within a month a plurality (if not a majority) of small businesses will be hurting.

What are some ethical ways of proceeding.

Some ideas
  • Talking formerly strong business that you know to offer management help and cash
  • lOffering to 'factor' i.e. pay in advance the SBA loan, which I can not believe the banks are going to process in a timely manner
  • Buy illiquid private market securities


Kaegi2011

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Re: Non-public market strategies
« Reply #1 on: March 29, 2020, 07:22:57 PM »
Let me preface this by saying bravo to the those on the front lines, including my college roommate who is a pulmonologist (who just made out his will along with his wife, who is a ER doc)  And my thoughts and prayers to those who are sick now and/or who have loved ones who are gravely ill or worse.

Now that we are in this horrible mess and the third US government bill has passed 2 T and counting;  does anyone have any interesting ideas for non-public market strategies?

I think that within a month a plurality (if not a majority) of small businesses will be hurting.

What are some ethical ways of proceeding.

Some ideas
  • Talking formerly strong business that you know to offer management help and cash
  • lOffering to 'factor' i.e. pay in advance the SBA loan, which I can not believe the banks are going to process in a timely manner
  • Buy illiquid private market securities

I've thought about this a little bit but do struggle with the ethical side.  This isn't a situation like 08/09 where people could've been prepared - nobody can predict a pandemic and run their business that way, and nobody can predict when a govt will shut down commerce.  Trying to take advantage of the situation for small businesses seems unethical (to me). 

Even if you get past that point, I think it'll be difficult to try to find an opportunity.  I think most small business owners will likely negotiate their way out (e.g., not paying rent, etc.) before they'll take a vulture loan or something similar.  After all, what are their suppliers going to do? 

Last, even if you do get past both of those issues and can put in something like a 20% secured loan, you'd still have to be able to follow up on it (Eg foreclose if covenants / payment are breached / delayed).  It'll go through a process.  Are you willing to pay for those legal expenses?  Will these businesses wither a bankruptcy and continue running even with the owner is fighting for survival?

Certainly not impossible, and if you know someone personally and know their character maybe something can be worked out that's both attractive to you for the risk and attractive to the borrower / seller in terms of terms, then bya ll means go for it, but I'm not sure how I can get there...

winjitsu

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Re: Non-public market strategies
« Reply #2 on: March 29, 2020, 07:39:20 PM »
Seems like the interesting and ethical things are definitely in the credit space that is served by middle market PE funds ... asset-backed lending, senior secured loans etc. Going into a Mom and Pop and offering a loan is in that weird unethical area (either you set the rate too low for risk/reward, or you set it fairly, but it seems like you're taking advantage of them).

How do people raise money? Pawn shops, subprime and payroll loans, monetizing assets like houses or cars.

Other than that, have a feeling that real estate seems like the best bet. Reports of things like super Airbnb hosts that hold 5+ mortgages unable to make payments, mass restaurant and hospitality layoffs / shuttering etc... seems like we will start to see tons of opportunity soon especially if this stretches into May. Meanwhile, rates could go down to 2.5% or 3%.

Maybe some RE sale/leaseback options for a few months of payback forbearance?

Jurgis

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Re: Non-public market strategies
« Reply #3 on: March 29, 2020, 10:16:24 PM »
There's some interesting ethics lessons going on in this thread...

It's not OK to screw small companies.
But it's OK to screw larger ones.

Maybe someone can tell me at which size it becomes OK to screw a company so I don't make a mistake in the future?

Bonus question: is "screwing" what Buffett did when he offered to buy his "friend's" business on the only day out of the 365 days when the guy was unhappy and wanted to sell his business?

--------------------------------

I'd think angel funding for startups is gonna drop if not evaporate.
Since a lot of startups rely on funding rounds to continue as ongoing concern, this is a potential death knell to them.
But then investors are in a bind:
- the valuation should likely be (way) lower than before the pandemic crisis
- but we don't want to "screw" the startup owners with a (hugely) down round
- but if we don't "screw" invest, then the startup is likely completely kaput... so maybe we should "screw them" invest?

Triple-A positive ESG-compliant angel investors want to know...  ::)
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Kaegi2011

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Re: Non-public market strategies
« Reply #4 on: March 30, 2020, 07:15:37 AM »

But it's OK to screw larger ones.


How are you getting to this conclusion?

Jurgis

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Re: Non-public market strategies
« Reply #5 on: March 30, 2020, 07:20:35 AM »

But it's OK to screw larger ones.


How are you getting to this conclusion?

Presumably everyone is buying stocks and bonds at 30-50-80% discounts from Jan 2020 valuations. And (will be) participating in BK restructurings if/when  companies fail.

How's that different to loaning small business money at (way) higher interest rate or investing into it via down round?

Or are you saying that people won't buy stocks/bonds at yuge discount because hey that's unethical and screws up the company?
« Last Edit: March 30, 2020, 07:22:33 AM by Jurgis »
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"Before you can be rich, you must be poor." - Nef Anyo
"Money is an illusion" - Not Karl Marx
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Kaegi2011

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Re: Non-public market strategies
« Reply #6 on: March 30, 2020, 09:48:42 AM »

But it's OK to screw larger ones.


How are you getting to this conclusion?

Presumably everyone is buying stocks and bonds at 30-50-80% discounts from Jan 2020 valuations. And (will be) participating in BK restructurings if/when  companies fail.

How's that different to loaning small business money at (way) higher interest rate or investing into it via down round?

Or are you saying that people won't buy stocks/bonds at yuge discount because hey that's unethical and screws up the company?

Are we talking about the same small businesses?  When I think about small businesses, I think about single proprietor type of situations (restaurants, lawn care service, small landlords, etc.).  I'm not thinking about startups in SF nor some MCD franchisee with 200 stores. 

Small businesses tend to be owned by one person or family, not a bunch of institutional investors.  So when you're buying shares at a 50% discount vs. two months ago, you're not buying it from the person who's livelihood has vaporized through no fault of their own. 

Public companies have a choice on their capital structure, and have access to equity and credit markets (albeit expensive now), something that doesn't really exist at the moment (pending the CARES act...). 

Even private but somewhat larger businesses have access to private equity capital (again, expensive).  Nobody's doing the dilignece on some 5mm local business to figure out whether it's worth investing in or not - it's not worth the time if it's institutional capital. 

So if you see no difference between buying shares at 50% price vs. going into your local restaurant and giving the owner a 25% interest rate loan with the intention of foreclosing and owning the business and negotiating with someone who has worked his whole life to get there, then that's where we'll differ. 


Jurgis

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Re: Non-public market strategies
« Reply #7 on: March 30, 2020, 10:15:53 AM »
Are we talking about the same small businesses?  When I think about small businesses, I think about single proprietor type of situations (restaurants, lawn care service, small landlords, etc.).  I'm not thinking about startups in SF

So according to you someone who started restaurant should be treated differently from someone who started a software or medical device business?

Wow. Just wow.

Quote
Small businesses tend to be owned by one person or family, not a bunch of institutional investors.  So when you're buying shares at a 50% discount vs. two months ago, you're not buying it from the person who's livelihood has vaporized through no fault of their own. 

Public companies have a choice on their capital structure, and have access to equity and credit markets (albeit expensive now), something that doesn't really exist at the moment (pending the CARES act...). 

Even private but somewhat larger businesses have access to private equity capital (again, expensive).  Nobody's doing the dilignece on some 5mm local business to figure out whether it's worth investing in or not - it's not worth the time if it's institutional capital. 

So if you see no difference between buying shares at 50% price vs. going into your local restaurant and giving the owner a 25% interest rate loan with the intention of foreclosing and owning the business and negotiating with someone who has worked his whole life to get there, then that's where we'll differ.

So you are totally fine giving your money to large company that's in dire straits by buying a secondary or buying their bonds, but you won't do that for a small business because that's exploiting the owner?
And you are totally fine that this small business will go under because you gave your money to the big corp instead?

Thanks for the ethics lesson. I guess.
"Human civilization? It might be a good idea." - Not Gandhi
"Before you can be rich, you must be poor." - Nef Anyo
"Money is an illusion" - Not Karl Marx
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LC

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Re: Non-public market strategies
« Reply #8 on: March 30, 2020, 11:51:18 AM »
Quote
So you are totally fine giving your money to large company that's in dire straits by buying a secondary or buying their bonds, but you won't do that for a small business because that's exploiting the owner?

Let's come back to reality for a minute.

Giant corporations are able to do stuff like this:

https://www.hollywoodreporter.com/news/bob-iger-forgo-disney-salary-top-execs-take-pay-cuts-1287418

https://thehill.com/blogs/blog-briefing-room/news/490079-columbia-sportswear-employees-to-receive-regular-pay-as-ceo

You can cut one guy's salary and now are able to pay the salaries of hundreds, thousands of people.

Small businesses do not have that luxury.
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Jurgis

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Re: Non-public market strategies
« Reply #9 on: March 30, 2020, 12:02:25 PM »
Quote
So you are totally fine giving your money to large company that's in dire straits by buying a secondary or buying their bonds, but you won't do that for a small business because that's exploiting the owner?

Let's come back to reality for a minute.

Giant corporations are able to do stuff like this:

https://www.hollywoodreporter.com/news/bob-iger-forgo-disney-salary-top-execs-take-pay-cuts-1287418

https://thehill.com/blogs/blog-briefing-room/news/490079-columbia-sportswear-employees-to-receive-regular-pay-as-ceo

You can cut one guy's salary and now are able to pay the salaries of hundreds, thousands of people.

Small businesses do not have that luxury.

Small businesses also don't have hundreds/thousands of employees.

But also I don't understand what your point is in regards to the investing (whether that's "screwing" or not) into small vs big businesses.
Can you explain?
"Human civilization? It might be a good idea." - Not Gandhi
"Before you can be rich, you must be poor." - Nef Anyo
"Money is an illusion" - Not Karl Marx
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"American History X", "Milk", "The Insider", "Dirty Money", "LBJ"