Corner of Berkshire & Fairfax Message Board

General Category => Strategies => Topic started by: netnet on March 27, 2020, 02:12:08 PM

Title: Non-public market strategies
Post by: netnet 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
Title: Re: Non-public market strategies
Post by: Kaegi2011 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...
Title: Re: Non-public market strategies
Post by: winjitsu 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?
Title: Re: Non-public market strategies
Post by: Jurgis 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...  ::)
Title: Re: Non-public market strategies
Post by: Kaegi2011 on March 30, 2020, 07:15:37 AM

But it's OK to screw larger ones.


How are you getting to this conclusion?
Title: Re: Non-public market strategies
Post by: Jurgis 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?
Title: Re: Non-public market strategies
Post by: Kaegi2011 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. 

Title: Re: Non-public market strategies
Post by: Jurgis 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.
Title: Re: Non-public market strategies
Post by: LC 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.
Title: Re: Non-public market strategies
Post by: Jurgis 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?
Title: Re: Non-public market strategies
Post by: LC on March 30, 2020, 12:15:15 PM
In general:

Small business are already cut to the bone. They have nothing left to give - truly on life support.

GiantCos are not. As evidenced by the CEO salary cut anecdotes.
Title: Re: Non-public market strategies
Post by: Jurgis on March 30, 2020, 12:26:04 PM
In general:

Small business are already cut to the bone. They have nothing left to give - truly on life support.

GiantCos are not. As evidenced by the CEO salary cut anecdotes.

In general, I agree (there are shades, but in general you are right).

I'm afraid that with the attitude in this thread small businesses should not expect much (anything?) from investors either.

Government help it is!
Title: Re: Non-public market strategies
Post by: Spekulatius on March 30, 2020, 03:11:55 PM
In general:

Small business are already cut to the bone. They have nothing left to give - truly on life support.

GiantCos are not. As evidenced by the CEO salary cut anecdotes.

In general, I agree (there are shades, but in general you are right).

I'm afraid that with the attitude in this thread small businesses should not expect much (anything?) from investors either.

Government help it is!

Buying shares or participating in an secondary offering or a downround of a startup is anonymous. Giving a vulture loan to a business in dire straits is not and it pretty much hand on. Same than being a slumlord for example.

It’s two different things. I don’t think there is something wrong with either one necessarily (your CC Company will happily rip you off with 20%+%  interest rates) but dealing with individuals is high touch and you could get yelled at or worse.
Title: Re: Non-public market strategies
Post by: Jurgis on March 30, 2020, 03:18:31 PM
... participating in ... a downround of a startup is anonymous.

No, it isn't. Not at angel investing level. I think it was made clear we are not talking about Uber-size startups.


Anyway, I think there's no point to continue this topic. It has been made abundantly clear that investments into small businesses experiencing difficulties is sleazy and reprehensible.

At least government support isn't.
Title: Re: Non-public market strategies
Post by: Kaegi2011 on March 30, 2020, 08:05:59 PM
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.

Are you just looking for a fight to pick?  I made it abundantly clear that my ethical standards are just that, MINE.  Clearly I'm not not the only one, so please stop the condescension.  I'd be happy to dive into more detail on the differences between buying a security for a discount from a mutual fund vs. an owner, but clearly you're not interested in hearing another perspective, so I'm not going to waste my time. 

I'm sure you have no problem selling PPE on ebay right now for a 100x markup because that's the market and you believe in free market in all instances.  Fine - you do you.   
Title: Re: Non-public market strategies
Post by: Jurgis on March 30, 2020, 09:36:12 PM
I'm sure you have no problem selling PPE on ebay right now for a 100x markup because that's the market and you believe in free market in all instances.  Fine - you do you.   

Project much?
Title: Re: Non-public market strategies
Post by: SharperDingaan on March 31, 2020, 06:52:38 AM
You're in business, you have a corporate social responsibility, and the size of your business just gives you greater ability. Hence 'we the people' expect more from a large business, than we do from a small one. It's called leadership, and either you have it - or you do not.

To some this is ridiculous, business is not a charity, and we're in business, to make as much as possible.
Go on TV, talk my book, and actively trade against it while doing it; perfectly legal, but ethically challenging. As Taleb points out; if the punters are far away from me, they exist to be taken advantage of. Repugnant to many.

In all markets, there will always be these people.
Doesn't mean you have to do as they do.

SD
 

Title: Re: Non-public market strategies
Post by: Kaegi2011 on March 31, 2020, 12:17:24 PM
I'm sure you have no problem selling PPE on ebay right now for a 100x markup because that's the market and you believe in free market in all instances.  Fine - you do you.   

Project much?

Absolutely guilty as charged.  But you should hold up a mirror as well. 
Title: Re: Non-public market strategies
Post by: Jurgis on March 31, 2020, 01:20:21 PM
I'm sure you have no problem selling PPE on ebay right now for a 100x markup because that's the market and you believe in free market in all instances.  Fine - you do you.   

Project much?

Absolutely guilty as charged.  But you should hold up a mirror as well.

Well, I asked pointed questions and stirred the pot. Maybe too pointed. But it elicited some interesting answers. So thanks for that. 8)


Just to return to OP, netnet asked "What are some ethical ways of proceeding." (emphasis mine).

It appears that there were very few (no?) ideas.

Which I think is sad both from investors' PoV and from a suffering small business' PoV.
But I do understand that it's hard to find a win-win solution. Even harder to find solution that is both win-win and also has win-win optics.
It's not impossible, IMO there are people who have done it. Not gonna point fingers, they may or may not volunteer their experience.
Still hard.
So I'm gonna repeat my easy conclusion: Government help it is!
(I have more controversial conclusions, but I think the pot was stirred enough.  ::) )

Anyway, good luck, have fun.
Title: Re: Non-public market strategies
Post by: Spekulatius on March 31, 2020, 04:46:38 PM
You can argue that if you are dealing with a stranger, there is no bad offer. An offer is just that,  and the solicitor isn’t obliged to take it. You could argue that the worst of is no offer, not a terrible high interest or cheap one. Same Opi you. Are a lowball bid on a stock that gets filled , because someone gets a margin call.

It gets a bit more difficult if there is a social construct around it like the solicitor is a friend or even someone  from the same town or it’s Deal with a community bank. Then there is an issue, both moral and reputational for both sides.
Title: Re: Non-public market strategies
Post by: Gregmal on March 31, 2020, 04:52:54 PM
A wise man once told me to never mix business and personal relationships. Another crudely said, donít shit where you eat. Both good advice here.
Title: Re: Non-public market strategies
Post by: netnet on April 05, 2020, 03:23:06 PM
After the ethics 'discussion', btw I'm on Jurgis's side,(and I did say ethical in the original post) let's get some ideas going. 

20% loans to SMB and hoping to foreclose, just does not interest me.   Also anything to do with restaurants or lending to friends doesn't either for that matter.

-One idea, going to a small business owner (hopefully in your area of expertise) and give them some cash and an offer to run it and he/she gets some percentage of the upside.  Remember there are going to be owners whose businesses have basically evaporated and just don't have the energy to restart, so this would be a salvage/asset sale type deal.

-Second idea, do the AirBnB mortgage take over play, i.e. take over assumable mortgage.

-Third idea, in 2 months or so start going thru the BK proceedings.  (Unbelievable tedious and time consuming though.)

-Fourth idea, stick to public markets, just wait to see what Buffett does and see if you piggyback. 
Title: Re: Non-public market strategies
Post by: rb on April 05, 2020, 03:41:55 PM
Well, in the private markets it's way more complicated. On average there's more fraud, less liquidity, and people are way more willing to screw you because it's "their company". So you definitely need to pay more attention to your counterparty.

The other thing is that prices are way more inelastic in private markets. So why would you want to do a deal now. I'm actually doing a private to public swap/arbitrage with a client of mine that owns a bunch of apartments in DC. Switching from physical to to EQR because the public prices went down so much further than the private ones. So what's even the point of dealing with the private dudes?
Title: Re: Non-public market strategies
Post by: Jurgis on April 05, 2020, 08:01:53 PM
@netnet: one can wait for startup down rounds. But as you know there's a bunch of reasons this is problematic. Like rb says there's also the fact that private cos (startups) are much less likely to drop the price 50%+. We can see what happens but I don't hold my breath much.

Or wait for new startups to raise money. But similar issue: they won't raise at very low valuation; and likely they won't raise at all until this passes.

There might be some opportunities, but likely they would depend on existing network.
Title: Re: Non-public market strategies
Post by: netnet on April 06, 2020, 03:11:05 PM
Quote
Well, in the private markets it's way more complicated. On average there's more fraud, less liquidity, and people are way more willing to screw you because it's "their company". So you definitely need to pay more attention to your counterparty.
Well, you do have to get your hands dirty and really, really play close attention, even more than public markets--there is no fiduciary standard or SEC to (somewhat) protect you.

Quote
The other thing is that prices are way more inelastic in private markets. So why would you want to do a deal now. I'm actually doing a private to public swap/arbitrage with a client of mine that owns a bunch of apartments in DC. Switching from physical to to EQR because the public prices went down so much further than the private ones. So what's even the point of dealing with the private dudes?

Prices for private market tend to trade in a much narrower band, that said, sometimes you can find almost giveaway prices in private markets, mostly in assets that the seller deems surplus, but you know better. (A friend bought a piece of prime, but unused waterfront California real estate owned by a midwestern church. Not a friend, but a guy in the Bay Area, bought acres attached to a disused marina on the San Francisco Bay that sold for less than the average local house.)

In any case, I'm trying to be proactive here.  I expect there to unbelievable fall out in the small business segment. (BTW, I heard that some banks have stopped taking PPP applications today (Monday!) and the program just opened.

Quote
@netnet: one can wait for startup down rounds. But as you know there's a bunch of reasons this is problematic. Like rb says there's also the fact that private cos (startups) are much less likely to drop the price 50%+. We can see what happens but I don't hold my breath much.

There will be down rounds. It is just going to take some time.
Title: Re: Non-public market strategies
Post by: JayGatsby on April 11, 2020, 12:27:24 PM
-Second idea, do the AirBnB mortgage take over play, i.e. take over assumable mortgage.
Will banks actually do this or how would you go about that? In Sam Zell's book he talked about at one point (early 90s / S&L collapse) he was scooping up commercial properties from the banks by doing this. I don't remember exactly, but basically they'd just give him the property and he'd cover monthly costs. To the banks it was great because they got to turn a non-performing loan into a performing loan. For him he got a property with no equity at close.