Thursday, May 31, 2007
Exciting news (no kidding!): SOEs to pay dividends
link to story in Shanghai daily
Monday, May 28, 2007
Should US institutions invest in China Real Estate?
1. Developement vs Investment - well, as anyone knows who's looked at China property, if you are really serious about investing in this area, you have to do development. There just isn't enough investment-grade existing property to buy. It's a massive underbuilt market (duh) so development is really the only game here.
2. Luxury Residential - this is the area that initially appeared to be most attractive. High unlevered IRRs (even assuming no rental increases) because condo buyers front the cash to the developer before building begins. Short duration - you get your money back in about two years. But the problem here is increased regulation and taxes. Like, every single month for the last six months a new regulation and a new tax. The reason is that the government wants to emphasize middle income housing and de-emphasize luxury housing. I think its a losing proposition to invest in an area the government doesn't support - not to mention where the rules are changing every month. Pass.
3. Middle Income Residential - this has some promise, especially in second and third tier cities. The government is supportive. Put this one in the "has potential" column.
4. Commercial - toughest for me to get my arms around. The yields look okay and the rents aren't crazy but new supply appears substantial at least in certain cities. According to Q1 Jones Lang LaSalle report, Shanghai (Puxi) is about 8% cap rates with $35/square foot rents and 5% vacancy; Beijing 9% yields, $30/sf rents, but 15% vacancy; Guangzhou 10%, $12/sf, and 19%; Chengdu 12% and $10 (vacancy N/A). The flood of money into this opportunity is well underway and set to accelerate (don't act surprised). I read in the JLL report that Chinese insurance companies will soon be allowed to invest in commercial property. They have $240B in assets so $25-30 will come into property. New supply is expected to be extremely large. JLL expects 1.5M square meters of new supply this year which looks like about the same amount as the total of the last three years (do we need office buildings for the olympics?). Similar wave of supply in Guangzhou - and of course both markets are starting with relatively high vacancy rates. I am no expert on this market but these numbers look worrisome to me. Only Shanghai, with pretty much unlimited demand (have YOU opened your Shanghai office yet??) and a low vacancy rate would seem to be able to absorb lots of new supply.
Looking at the opportunity overall, the returns are okay but not amazing. China funds are promising 25-30% gross IRRs. Is this worth the risk? Compared to my favorite China opportunity, mid-market growth PE, where capital continues to be relatively scarce and potential returns higher, I begin to lose interest in China real estate. Plus, the biggest problem of all: who to invest with. There are only 3 or so US Funds targeting China. There are several HK based funds targeting China but I've never heard of them. As with all investments in China, the whole game depends on finding local partners that you can trust with your life (or US funds that you trust will be able to find local partners that THEY can trust 100%). If you don't feel it in your gut, don't play. And I'll throw one more negative into the mix: complexity. There are only so many hours in the day. You have to understand a whole new set of players, regulations, taxes, return dynamics, etc. For 20-25% net? Not yet.
Thursday, May 24, 2007
Sellout Taiwan
Madam Wu and Charlie Rangel
Wednesday, May 23, 2007
Indian Pharma: go big or go home!
Tuesday, May 22, 2007
China and Blackstone, what else
- Helps them win deals in China? No I don't think so. I believe that Schwartzman has been (like so many before him) duped into thinking that cutting a deal with the Chinese means that they are now his buddies and he will be able to get all sorts of sweetheart deals from them. Wrong. He will have to stand in line along with KKR and TPG and Carlyle (and CITIC and CDH for that matter). The vast bureaucratic and regulatory animal that is China will continue to frustrate the big bad Americans. And aside from all the execution hurdles, I don't think Beijing has the slightest intention of favoring Blackstone in handing choice deals to acquire the best SOEs. Sorry Steve...
- Hurts Blackstone in the US? Sure. They are already public enemy number one. How does this headline read, "Blackstone, the Chinese government funded LBO firm, acquires American Chemical Company, promises no layoffs but says some plants will be relocated to China". Ouch. Ah Steve, those congressional hearings about taxing GP carry as income? Consider it done.
Now from the Chinese perspective: Though at first this feels new and amazing, in reality it shouldn't be surprising at all. Beijing is just doing what Singapore, Malaysia and Abu Dhabi have all done before. Investing excess foreign exchange reserves in foreign equities. The GIC has been investing in public and private equities (including Blackstone funds btw) for decades. The only noteworthy thing I can think of about this deal is that it is SMART on the part of Beijing to buy Blackstone Inc instead of invest in a Blackstone fund. As a shareholder they will be collecting a piece of all those fees paid by Blackstone fund LPs. Plus getting a piece of the fees from all the Blackstone hedge fund of funds and other investment activities. Who needs another LBO fund? Better to invest in the fees. Smart. The last thing to note - which isn't news to me but might be to some - is that the Blackstone deal shows (once again) Beijing is fully committed to free markets, capital markets, globalization, free capital flows, etc., etc. Why? Because it's in their own interests to participate in and support this system.
So... no news here!
Sunday, May 20, 2007
Chinese Godzilla
Although there was an ever so slight deceleration of growth towards the end of last year, it now seems clear that economic growth and investment in China has reaccelerated this year. Any rebalancing of growth away from exports and heavy industry to consumption is not yet apparent. The central government has tightened monetary policy numerous times via increased reserve requirements and rate hikes - the latest increase in one year deposit rates to 3.06% and loan rates to 6.57% - which has accomplished exactly nothing. Which brings us to the third massive and accelerating global montrosity: the trade suplus. Stephen Green of Standard Chartered writes in BusinessWeek that the surplus will hit $400 billion this year, up from about $250 last year - this is a higher number than most any other economist and is a shockingly large figure. His basic point is that he doesn't see any slowing in investment, i.e., heavy industry capacity increases (he estimates 60% of China's exports are capital-intensive). If Mr. Green is correct than China's foreign exchange reserves will grow to $1.6 trillion by year end.
My view is that the Chinese authorities are getting very little sleep these nights - they appreciate very well the problem and the consequences for not getting this monster calmed down. They will continue the "slowing by a thousand cuts" approach until something finally gives. This much seems certain. What is not at all clear is how bad the effect will be once the world sees Chin-zilla (not very good I know, I'll work on it) beginning to slow. Stock markets don't tend to quadruple and then tread water. And the US is going to hit China with some trade protections - the only question is how much. The larger the monster grows, the greater the measures the other monster (Congress) will enact. Not only is the result unknown but the stakes are just so high. The sheer size of this thing is truly breathtaking and I can't help but worry that the resulting collapse/panic/slowdown - will be equally massive.
Friday, May 18, 2007
How it's supposed to work... A step forward for Japanese Mergers
Monday, May 14, 2007
Wait, you mean good managers make a difference? Mon dieux!
Shocking News! Outsourcing not a panacea!!
Friday, May 11, 2007
Another great (profitless) opportunity in China
Untouchables knock out other low caste party with help of brahmins (huh?)
Shocking News! The world slowly improves...
In a meeting in Hawaii on Friday, Japan Patent Office Commissioner Makoto Nakajima and his U.S., European and South Korean counterparts were to decide to let China participate in realizing previously agreed-on goals for integration. These include standardization of patent application formats, joint use of patent examination results, mutual training opportunities for examiners, and information sharing.The second non-doomsday story is that the President and the Democrats have agreed on labor and environmental standards for bi-lateral trade deals. This really should be seen as a tremendous positive for the global free-trade movement as it shows convincingly that the Dems are not the Smoot-Hawley wanna-bes they had sometimed seemed in recent months. Nor will they be pushed down the anti-globalization road by the hard left-wing luddites of the party. This is very very good news. Don't yawn...The officials were to also agree to aid China's efforts to modernize its patent system, such as digitizing the filing process and holding training sessions for examiners.
Indian Transportation Improves
A Boeing 737 aircraft has been parked on the street in Mumbai for a week. Presumably it is waiting to refuel or pick up passengers. Who cares that Indian roads are so poor and so few when their air traffic system is so robust!
Thursday, May 10, 2007
Goldman's new stock market
Wednesday, May 9, 2007
The massively overhyped threat of offshoring
Monday, May 7, 2007
Leveraged Corn Fields?
Kleiner Perkin's view of China VC
Before Schlein spoke, Andrew Metrick of Wharton had a really interesting comment which in just a couple sentences makes it clear why VC in the US is truly a 'broken model'.
Starting in the early 1980s, when the industry started to grow, we saw about 500 companies a year receiving venture capital funding for the first time, and that number held remarkably steady from the early 1980s through the mid 1990s. [During the same period,] somewhere between 20% to 30% of the companies that received initial financing eventually went public. Beginning in the mid 1990s, we really saw an explosion of companies receiving first-time financing, and toward the end of the decade, as everybody located in the [San Francisco] Bay Area will know, there were a whole lot of companies going public as well, but not nearly enough to keep pace with that old percentage. So between 1998 and 2000, roughly 2500 companies received first-time financing per year. From 2001 through 2003, and those three years put together, we had about 80 companies that were venture backed go public. So we are looking at numbers that are very much in the low single digits.
What more do you need to know? Schlein on India & China as labor arb:
China and India, in particular, originally started for us as labor arbitrages: smart, inexpensive labor. At one point in time, India was a six-to-one arbitrage in labor cost. Then, the big guys moved in. IBM set up shop there and drove all the prices up, and now it is about a three to one, just to give a little perspective for you. And slowly, with the rise of the middle classes in these countries, they have become huge markets of their own.Then he talks about the lack of VC experience in China - but what that really means is a lack of operating experience:
Wow, didn't realize it was that bad. 25 of 39 tech IPOs at or below issue price. And this is when times are supposedly good!Most of the venture capitalists in China are ex-investment bankers. I am generalizing [based on my experience there], but most come from a finance background. A large number of the venture capitalists here in the United States come from operating backgrounds. Certainly every one at Kleiner Perkins has an operating background. I spent 10 years building a software company before coming to do venture. What this has used is a very transactional point of view over in China--what I think is kind of a scary point of view. Everything is about the IPO. And in venture, we like to think of ourselves as company building. We are here to build a company, and an IPO is an event that takes place--yes, it is a way for us to get compensated eventually--but it is not the endgame. It is actually part of the first-third game, if you will. And quite honestly, statistically, we make far more money post-IPO than we do prior to an IPO.
So, growing these companies is not a mentality there. It is about getting a company public. There are a couple of problems with that. There have been 39 Asian tech IPOs since 2000. Of those, 25 trade at or below their asking price, most below. That doesn't show a whole lot of attention to the future--the building of the company. Capital markets will wake up to that eventually, and a backlash will happen. It is also indicative of something else that I see a lot of: The talent pool cannot absorb $3 billion in investments yet. There is not enough management yet. …There are a whole lot of really smart folks over there, [but] they work really inefficiently, and there is not a lot of accountability. And this is a problem.
Dream is dying for YouTube's of China
Friday, May 4, 2007
A Bridge to Nowhere...
Some choice bits from the article:
"There's a lot of value trapped in these assets," says Mark Florian, head of North American infrastructure banking at Goldman, Sachs & Co (GS ).Translation: my bonus is trapped in these assets and I'm going to get it out!
Ms. Thornton, the author of the piece, writes that although its true cities are getting big piles of cash, but
...are investors getting an even better deal? It's a question with major policy implications as governments relinquish control of major public assets for years to come. The aggressive toll hikes embedded in deals all but guarantee pain for lower-income citizens—and enormous profits for the buyers. For example, the investors in the $3.8 billion deal for the Indiana Toll Road, struck in 2006, could break even in year 15 of the 75-year lease, on the way to reaping as much as $21 billion in profits, estimates Merrill Lynch & Co. (MER ) What's more, some public interest groups complain that the revenue from the higher tolls inflicted on all citizens will benefit only a handful of private investors, not the commonweal (see BusinessWeek.com, 4/27/07, "A Golden Gate for Investors").Oh my, another investment that is "socially irresponsible". After divesting from Sudan, all the pension funds were feeling pretty good about themselves (as well they should). But then they'll wake up one morning and read on the front page how they're oppressing poor Americans by their rapacious toll hikes.
"We're using [infrastructure] as a fixed-income proxy," says William R. Atwood, executive director of the Illinois State Board of Investment, who plans to invest $600 million to $650 million, or 5% of its portfolio, in infrastructure funds over the next three years. "We're hoping to get 11% to 12% returns and lower risk."Those Goldman marketers are good, aren't they. Let's see, a 6% spread over treasuries with lower risk. Can you say, "free lunch"?
Infrastructure "delivers similar yield expectations to high-yield bonds and real estate, with less risk," says Cynthia F. Steer, chief research strategist at pension consulting firm Rogerscasey.We know it has less risk. We calculated it. It's right there in the spreadsheet. Spreadsheets don't lie. Remind me never to hire RogersCasey.
Indiana legislators became so alarmed by promised hikes that they changed the terms before the toll road lease was completed. The state set aside $60 million to pay the difference in tolls for up to two years or until the buyers install electronic tolling equipment. After that, the fee for cars with electronic toll cards will rise to $4.80 over the full 157 miles, while the fee for cars without the cards will soar to $8. After 2010, both rates will rise each year by 2%, the pace of inflation, or the rate of economic growth, whichever is highest.Wait, let me see if I understand this. You mean legislators are responsive to voters? You mean they care even more about staying in office than they do about the contracts they signed with Goldman Sachs? Incredible!
Chicago's former chief financial officer, Dana R. Levenson, sums up the situation: "There is money to be had, and cities need money."Who is this dude, Dana Levenson?
Former CFO Levenson has been one of the movement's biggest champions. He was an architect of the Skyway deal, which kicked off the market. Then he sold control of parking garages to Morgan Stanley for $563 million. Next, he started shopping around a lease for Midway Airport that could fetch as much as $3 billion. And soon the city hopes to auction off rights to operate some recycling plants. Levenson dismisses critics who argue that he has dumped prized assets. "This is not like where a person goes in and buys a loaf of bread from a store and walks out with that loaf of bread," he says. "Some entity, we expect, will make an offer to lease the Midway Airport for 75 to 99 years, and the following day I'm pretty sure it will still be there."Great loaf of bread analogy Dana. What are you up to now?
Wearing a crisp suit and stylish eyeglasses, Levenson looks like the Wall Streeter he once was, working for Bank One Corp. and Bank of America Corp. (BAC ) before taking the Chicago city job in 2004. In April he returned to banking: As a managing director at the Royal Bank of Scotland Group (RBS ), he now beats the bushes for infrastructure deals.Smart career move Dana. After doing infrastructure deals for a few years, then you can move over to RBS's newly formed infrastructure workout/restructuring group. You will be just the man for that job.
Juan Rodriguez used to patrol the freeway for Chicago city. Today, he cruises the road for private owners. He discovers some potholes have grown unacceptably large because of salt that was spread the previous night. There's some tire debris that must be removed, and a disabled vehicle holding up traffic. In the past, Rodriguez says, he had to write out a ticket for each problem, which would be added to a long list of chores. Addressing problems often took days, Rodriguez recalls. But by 10:25 a.m., all of this morning's issues on the Skyway's 7.8-mile stretch of pavement are resolved. "The new owners are taking the Skyway to a whole new level," he says.He "cruises the road for private owners"? I thought this was a business magazine. Seriously, at least Juan is digging this whole infrastructure thing. Imagine the boost to American productivity as we fill our potholes a hundred times faster! Who says we can't compete with India!
Levenson doesn't understand how local governments can afford not to put public works up for sale. Thanks to the 99-year lease for the Skyway, Chicago has paid off its debt and handed over $100 million to social programs like Meals on Wheels. Plus, says Levenson, it's earning as much in annual interest on the $500 million it has banked from the transaction as it used to earn from running the Skyway ($25 million).Wait, Dana, you mean, I can't afford not to do this? Well, if you put it that way, where do I sign?
Meanwhile, the higher tolls will take a big bite out of lower-income people's wallets. "You have to ask yourself if you want roads that used to be considered a public service to be rationed by income class," says Princeton University economics professor Uwe E. Reinhardt.Damn, just when you're beginning to enjoy your lower risk, up pops this guy Uwe with his class warfare stuff. C'mon Uwe, I dumped all my French oil stocks with Sudan projects. You mean by investing in these low risk but higher returning investments I'm taking a bite (a big one!) out of lower-income people's wallets? It's enough to make me (you guessed it) jump off a bridge!
Thursday, May 3, 2007
No to Russia, Yes to China
During the presidency of the recently departed Boris Yeltsin, Russian archives were opened to the public and its recent past examined. President Yeltsin was ready, at some times more than others, to recognize the crimes of communism. For example, he apologized to Finland for the 1940 Winter War.But Mr. Putin has dramatically altered the approach at the Kremlin to the past -- and therefore to the future. The current Russian president builds a new messianic and imperial identity around the victory over Nazism, which was also used by his predecessors to legitimize the U.S.S.R. This war, which the Russians call the "Great Patriotic War," didn't start with Hitler's invasion of Poland in 1939. Russia helped start World War II through the Molotov-Ribbentrop pact signed a week before the Panzers stormed east, while Stalin's troops took chunks of Poland and all the Baltic countries. The "Great Patriotic War" begins in 1941, when Hitler turned on his ally.
In a context where Stalin is more and more a founding hero for the "new Russia," it's no wonder that the crimes of occupation of neighboring countries and of communism are denied. And Russia aggressively demands that formerly occupied countries in the Soviet bloc accept its new understanding of the past. Any mention about the crimes of the Soviet era is called an insult to the "heroes of the Great Patriotic War."
New private/public equity fund structure in India
Prepare for the China stock market bubble to burst
China VCs move in a herd
This is why I love expansion PE in China. There are more than three sectors to invest in!