Books: The Final Crash, Private Equity as an asset class and The Wernlin Directory

Date: 02 Mar 2007

Citywealth

Being positive and sunny is a natural state for most of us, indeed it is something we strive for. Best seller books on “self help” fly off book shelves, keenly priced at ¬£7.99, as we collectively prepare ourselves to be open minded and ready to receive the worlds opportunities. We are go getting, achievers and ultimately winners.

Unfortunately one thing nobody mentions in the “everything in the world is wonderful so long as you think it” books is that this doesn’t apply to investments. Investments go up and down no matter what positive thought you apply to them. Unfortunately not only is this not understood by many investors but this view is positively detrimental to their portfolios. It is a known phenomenon that people hang on to investments far longer than they should even in the face of disastrous consequences or building losses because they always believe they will come up smelling of roses.

Although in some circumstances like property, history has shown it is worth riding a storm: for instance purchasing property in a downturn; on the reverse there are times like black Monday and the dot.com era when you have to recognise that things are never going to get better. It’s time to save what you can and retreat, retreat, retreat.

Other problems in understanding investments are that the media often provide confusing commentary – one moment it’s “property still rising” and the next day it’s “property on downward trend” and likewise financial organisations have information that is often as clear as mud.

The Final Crash written by Hugo Bouleau, who is Guernsey based, is a quick scissor cut through our material world and what will happen if we carry on endlessly signing up for risky investments and credit like its going out of fashion. Sharp as a razor it provides an easy, amiable read aimed at students or unsophisticated stock marketers. Also ideal for those who should probably know all this stuff (like journalists or intermediaries) but somehow don’t.

The Final Crash is full of statistics including (pg 47 in the book) that bingeing Britains are supporting £1.3billion in personal and household liability. To put this in perspective it is equivalent to more than the external debt of Africa and South America combined and greater than the entire economic output of Britain in
2005.

The book also explains Americas role in the grand scheme of economic problems in a very unflattering light and how this marries with Asia who are playing ball now by utilising the dollar but might just turn around at some stage and ignore this economic super power leaving it a shadow of its former self.

But the book is not all doom and gloom. Aside from suggesting we buy gold – getting back to ‘old fashioned’ or historic investment styles Hugo also suggests the impending crash will highlight problems with banking practices that have inevitably been working to line institutional pockets leaving many of us in “debt slavery”.

Hugo believes a brave new world will come following an impending crash and says this won’t be without substantial pain to our pockets. He concludes that should prepare now to buffer future misery. He says “pay off debts and put money aside.” He also says buy safe and less risky investments and recommends that banking operations may in future emulate Islamic methods which insist transactions look after each party in a deal and not just the lender.

Ultimately Final Crash serves as a warning to us all: don’t buy now and pay later if you can’t afford to live in a landscape of rising interest rates; banks calling in loans earlier in a nervous environment and investment returns that may start to be lacklustre.

The Final Crash is a bit worrying and can make you want to rush out and get a Saturday job to pay off your credit card bills but it is right in pointing out that our credit filled lives are only fun whilst interest rates remain low and property prices high. If we reverse this trend we suddenly have more bills to pay and less chance of relying on equity release to bail us out. Suddenly that Prada bag or Gucci loafas don’t look so good.

Private Equity

My next book for review is from Guy Fraser Sampson who publishes “Private Equity as an asset class” with Wiley Finance and is a known authority on the topic of private equity.

Private equity is a subject that causes most to nod their heads knowingly, in fact many of us are guilty of only half understanding what on earth it is and it’s implications. Most news stories talk of private equity as though it is a large predatory tiger roaming a prairie for any unwilling victim to fall prey to its bite. Others have an alternative view. Private equity although generally thought to tip half the work force onto the street and leave infrastructure so minimalist even The Hempel hotel lobby would look crowded can make companies lean and mean and good investments for pension funds, providing a good return for otherwise very badly off pensioners.

Whatever your view and a past Citywealth survey showed people firmly on both sides of the fence in terms of it being a force for good or bad, private equity is here to stay and has almost taken over the world.

Although Guy’s book is an ABC guide to private equity, some of its terms do leave you scratching your head if you are a complete novice. I discovered the best thing to do was keep ploughing through and explanations would suddenly arise to clear your once blocked path. Then later noticed a comprehensive PE dictionary at the back.

The first battle in the reading game was getting to grips with the most basic of terms like the LP or GP. An LP (a limited partner) is an investor into a fund or a person who invests and simply waits for a return whereas a GP (general partner) is the manager or person who invests the money directly into companies to get returns for LP’s.

Guy laments that although the LP’s should have strength in that they are investing, in fact because of market conditions which have made private equity houses the Ferrari of the investment world, GP’s rule the roost and crack the whip with LP investors. Guy suggests that LP’s should lump together and tackle the GP’s with more unity but says this isn’t happening at the moment.

Within the book, Guy says these investments require diversification over periods of time rather than a hot headed approach chasing big numbers. “If you choose to blow your wad in one year on internet biased funds, you must expect things to go wrong.” He says diversification in company type which should be available in the fund you are investing in is essential but also across a number of years to hit the inevitable “good and bad” year cycles. He also warns investors to stand their ground over the chosen time period if that is the strategy. Although this seems to counteract our previous book review, it does makes sense. As he points out there will be a period of investment and turnaround before the company can be expected to “harvest”. He says in a buyout fund the rule of thumb is three years to hold a company and a venture fund would be five years. If you are told periods should be longer then it is important to find out why and what effect it will have on returns.

For due diligence in venture funds Guy says it is important to review the other partners in any deal. He points out that good quality venture capital firms want to invest in good quality companies and to work with partners with similar badges of honour. He suggests this research gives you a “quick and dirty” heads up on whether you should also invest. He says you should research the manager style and “victories” they have had.

Apparently US venture is the “golden circle” something that always makes money no matter what but it seems access to this golden ground is limited or nigh on impossible with funds becoming a hundred or a thousand times over subscribed. The author says it’s important always to seek “a good manager” which is the ultimate. He says “they can make a difference of 100% in venture scenarios or 10-15% in buyout.”

Another worthy note is to perform ongoing due diligence and Guy suggests that anything discovered as a surprise at an annual meeting like a team person leaving means you are out of the loop. Timely reporting is important as is analysis of the figures received.

Other points of interest are the J curve: which shows the expected drop when the investment cycle happens before returns kick in. And also the difference between allocated, committed, drawndown and invested capital. Allocated capital is the overall asset mix, committed is the amount that is legally contracted and to be paid on demand; drawndown is the part that has been drawn on demand already perhaps for fees or fund expanses and invested means money that has actually gone into a company.

Although Private equity as an asset class goes into immense detail and is so interesting it pulls you back for a second read which I suspect means it has a second career as a reference book. If you ignore the obvious self marketing, you have a worthwhile accompaniment to any airplane journey.

Wernlin directory of private bankers in Switzerland

Gunter Weornle is a portfolio manager in Geneva working at Banque Baring Brothers Sturdza. At seventy two he has witnessed first hand an industry growing up from tottering toddler to sophisticated gent.

He first started his memorable career in publishing after writing a book called The Private Bankers of Switzerland. Although published in the ’70’s it still offers clear insights on a sector with circular problems – one quote says “glossy brochures are all well and good but where is the information the client needs to decide if you are a good manager?” He is a truly spirited man and a genius to boot. Who else could have persevered with a closed private banking who simply wouldn’t listen to him in the early days to eventually make such a magnificent directory on the who’s who of private banking in Switzerland today.

Werlin is the “who’s who” on every banker based in Switzerland and beyond. Set up some twelve years ago by Gunter Woernle it is a business developers dream.

Although bankers may not warm to the book, lawyers, accountants and trust companies should have this as part of a prized book collection. Its like email: you didn’t know you needed email until you got it, then you couldn’t live without it.

Updated every year it provides every name of each individual and their role in banks throughout Switzerland, assets under management and office locations. There is also an email-able CD Rom with the book.