I was awarded an Honours degree in Zoology and Geology in 1973 from the University of Reading. It was a time when universities were moving curricula from comparative anatomy and stratigraphy to interdisclinary studies in ecology, environmental sciences, and animal behaviour.
It was also a time when universities were becoming more capital intensive and research oriented. That generated a "grants" culture around the world which were sourced in the main from governments and intergovernment agencies, including the United Nations.
We were told then by an american scientist, one Paul Ehrlich, that since the world was cooling - yes cooling - and the population was growing, that we would all run out of food and starve. This Malthusian prophecy was obviously completely wrong, and since then, not only has the world population doubled, but the quality and quantity of food has significantly improved in much of the West and in Asia. At the same time, the real cost of many foodstuffs has declined with increasing proportions of the population able to afford more and better foods.
Fast forward to the 21st century, and now we are told that the world's climate is heating from so-called anthropogenic sources with likely catastrophic results. The Australian Financial Review (3rd April) reprinted a chart from the Economist ("Hot Air") which demonstrates that these predictions, like Ehrlichs' before them, are sadly and dangerously wrong.
Studying natural sciences in a politically unbiased way, teaches you that climate is infinitely variable, and as Ian Plimer has written in his book "Heaven and Earth", subject to influences totally beyond the control of mankind.
The present follies, highly politicised, are in part a result of the grants system for research, and the politicisation of that. Woe betide a university researcher if you don't agree with the established, politicised view. All at huge tax payer expense. Like the predictions from Australia's own very expensive Climate Commissioner (Australian April 3rd).
The expense is not only now being measured in the accounting dollars for tax payer funded grants and salaries. The real cost of politicised science is yet to be measured, but it will include the utter destruction of Australia's competitive advantages in energy, resources and agriculture if this nonsense does not stop.
This destruction is starting to wreak havoc. It is a slow motion economic train wreck, inflicted by an academic and political class that puts preferred policy before facts. Never again should there be a statute called the "Carbon Pollution Reduction.....". The title is of itelf a lie. Carbon is fundamental to life and carbon dioxide is the food of plants, without which we would all assuredly starve.
The world has been far warmer, wetter and richer in carbon dioxide than today, yes richer: that is why we have coal in such abundance. That is why large animals like cold blooded dinosaurs prospered for millenia. What happened when natural climate change resulted in the Ice Ages: they all died.
A warmer, wetter climate will open vast areas of North America and Russia to agriculture. Mankind will not generate such a result, but climate change from known natural causes may. Or maybe we start to cool off? Who knows? Certainly not our politicised scientists.
Wednesday, 10 April 2013
Tuesday, 2 April 2013
ROGER MONTGOMERY, WEEKEND AUSTRALIAN MARCH 30TH 2013
I would like to refer my readers to the excellent article written by Roger Montgomery www.rogermontgomery.com
His arguments clearly support my theses published in this blog, and in particular, my views on investment strategy. He states "...we might just be able to take advantage of the high Australian dollar and become the foreign investors ourselves". Exactly my strategy and practice for some years.
However, he couches this statement within a large and useful article which describes why Australia and Australians are going to face a declining standard of living in future years, whilst we see higher end property, farms, and businesses sold to foreigners.
Interestingly he says: "...we need nine tonnes of exported iron ore to pay for one imported iPhone...". Imagine how many tonnes of ore Australia needs to export if the price of iron ore behaves as commodities do, and, as Andy Xie (a respected Chinese economist) says, drops to USD 70/80 a tonne. How many iPhones will a tonne of ore buy then?
As Deutsche Bank writes in its authorative "Long Term Asset Return Study: A Roadmap for the Grey Age": reversion to the long term mean.
Roger propounds Australia needs to: "incentivise innovation and entrepreneurialism". Absolutely we do, as I have been writing here at some length. Except that we don't.
He goes on:"We are on the path to serfdom. We will be working longer hours for foreign landlords, renting their property....." Immigration law which provides Australian visas for wealthy foreigners who invest in property and other assets will exacerbate this trend. The real estate dreams of many Australians will be exactly that as this migration puts up house prices whilst Australian real incomes decline. He calls it "Invasion by acquisition".
Comparative advantage in commodities is a fine thing, except that Australian costs structures are destroying that too. Worse is the fact that commodities comparative advantage benefit relatively few people directly. Australians would be very wealthy if there were fewer of us and we were'nt concentrated in large cities. There would'nt need to be much tax. However these conditions do not exist and Australia urgently needs to leverage its other qualities before Rogers' "Road to Serfdom" eventuates.
In the meantime, take advantage of the Australian dollar.
His arguments clearly support my theses published in this blog, and in particular, my views on investment strategy. He states "...we might just be able to take advantage of the high Australian dollar and become the foreign investors ourselves". Exactly my strategy and practice for some years.
However, he couches this statement within a large and useful article which describes why Australia and Australians are going to face a declining standard of living in future years, whilst we see higher end property, farms, and businesses sold to foreigners.
Interestingly he says: "...we need nine tonnes of exported iron ore to pay for one imported iPhone...". Imagine how many tonnes of ore Australia needs to export if the price of iron ore behaves as commodities do, and, as Andy Xie (a respected Chinese economist) says, drops to USD 70/80 a tonne. How many iPhones will a tonne of ore buy then?
As Deutsche Bank writes in its authorative "Long Term Asset Return Study: A Roadmap for the Grey Age": reversion to the long term mean.
Roger propounds Australia needs to: "incentivise innovation and entrepreneurialism". Absolutely we do, as I have been writing here at some length. Except that we don't.
He goes on:"We are on the path to serfdom. We will be working longer hours for foreign landlords, renting their property....." Immigration law which provides Australian visas for wealthy foreigners who invest in property and other assets will exacerbate this trend. The real estate dreams of many Australians will be exactly that as this migration puts up house prices whilst Australian real incomes decline. He calls it "Invasion by acquisition".
Comparative advantage in commodities is a fine thing, except that Australian costs structures are destroying that too. Worse is the fact that commodities comparative advantage benefit relatively few people directly. Australians would be very wealthy if there were fewer of us and we were'nt concentrated in large cities. There would'nt need to be much tax. However these conditions do not exist and Australia urgently needs to leverage its other qualities before Rogers' "Road to Serfdom" eventuates.
In the meantime, take advantage of the Australian dollar.
Sunday, 24 March 2013
WHERE TO INVEST NEXT?
My Ping Pong Pang series predicted a United States led resurgence supported by German led Europe. I retain that view.
What of the Pang in this economic triumvirate - China? There has been some less than encouraging news out of China. Predictions of a "looming credit crisis" & "60-70% chance that the Chinese government will need to bail out the banks in three years" (Australian Financial Review March 20th) do not make for confidence in capital markets.
Such uncertainty can have major impacts on the business plans of Australian and international entrepreneurs. There is a conference shortly in Sydney which seeks to capture inward Chinese investment. In the short run, we may see a flood of it, especially into higher end real estate. In the longer term (should these predictions be correct), it could stop. Capital flows from China are likely to be increasingly volatile as a result.
Nonetheless, there is a growing consumer market, even though the Chinese population is forecast to peak around 2015.
My view if we want to tap it is to find cashed up US and German companies which have the infrastructure and capital to implement and the patience to build a business over the long haul. The piggyback strategy. Australian bulk commodities and volume wine merchants already have this infrastructure but based on large international companies. Its very risky for a small entrepreneurial company with limited capital. There are safer fish to catch.
What of the Pang in this economic triumvirate - China? There has been some less than encouraging news out of China. Predictions of a "looming credit crisis" & "60-70% chance that the Chinese government will need to bail out the banks in three years" (Australian Financial Review March 20th) do not make for confidence in capital markets.
Such uncertainty can have major impacts on the business plans of Australian and international entrepreneurs. There is a conference shortly in Sydney which seeks to capture inward Chinese investment. In the short run, we may see a flood of it, especially into higher end real estate. In the longer term (should these predictions be correct), it could stop. Capital flows from China are likely to be increasingly volatile as a result.
Nonetheless, there is a growing consumer market, even though the Chinese population is forecast to peak around 2015.
My view if we want to tap it is to find cashed up US and German companies which have the infrastructure and capital to implement and the patience to build a business over the long haul. The piggyback strategy. Australian bulk commodities and volume wine merchants already have this infrastructure but based on large international companies. Its very risky for a small entrepreneurial company with limited capital. There are safer fish to catch.
Sunday, 17 March 2013
VENTURE CAPITAL IN AUSTRALIA
The Venture Capital industry in Australia in its present form is around 35 years old. It achieved institutional recognition with the advent of the Managed Investment Companies in the early 1980's. These were tax preferred structures which led to Pooled Development Funds in the 1990's, R&D tax concessions, and ultimately to the structures seen today, including Industry Innovation Funds, and limited liability partnerships.
The term Private Equity came into vogue in the early 2000's but in practice, there was no formal definition of what is Venture Capital and what is Private Equity. There has been a lot of crossover between these asset sub-classes in the various funds available to investors. Venture capital is usually cash consuming for a period, whereas private equity may have a cash burn, but there should be the probability of cash generation and positive EBITDA within a reasonable period.
This is very important to understand since this is one of the significant value uplift points for investors in these unlisted investments. I had a major win at precisely this point in the investment life cycle for Berlin Heart AG which was sold for a considerable sum to a private family office in Europe.
In Australia, private equity is usually not equity, and to the extent it has an equity component, this was often sucked back by the private equity fund, the result being a considerable number of very highly leveraged investments which had difficulty sustaining the imposed debt levels. In my view, private equity should be equity with only limited leverage, if any.
The venture capital asset subclass has not performed as well as it should in Australia. There are a number of sources of data (eg Thomson Reuters), but they are consistent in demonstrating a return history which does not reflect the illiquidity premium sought by investors.
Why is this? Why does the US venture and private equity asset sectors perform better?
There are a number of reasons. You will see above that all of the venture fund structures are government mandated with some form of tax concession. All of these structures came with Canberra mandated strings, as you can imagine, which actually prevented many reaching their investment objectives. The only structure which comes close to the US model is the recent availability of limited partnerships, and then only this last year have these partnerships been available to smaller end syndicates of investors (A$5.0 million) which is where the private investor market is.
The reason this is important is that most US venture investing is either from HNWI who, through the partnership structure can transfer tax losses to their estate, or from the US pension funds and Ivy League endowment funds. These funds have to get a return to meet their unfunded liabilities.
In Australia, with that one recent exception, tax losses cannot be transferred to an investors estate. The superannuation industry does not have the same need as US funds, and there isn't the wealth in the University endowment sector. What we do have is government mandated and supported Industry Innovation Funds, support from Commercialisation Australia (which requires 1:1 contributions), and R&D tax credits.
We don't have the two things that matter the most: extensive limited partnerships and employee stock/stock option schemes.
There is much talk about superannuation trustees being required to allocation a proportion of funds under their trusteeship to venture capital and private equity. Some of this talk comes from government sources. It is so much tosh, and cannot happen for many reasons.
Similarly, bringing offshore capital into Australian deals is not likely to achieve much. Capital flows are more likely to be the other way around.
Therefore, the rebuild (for that is what is required) of the Australian venture capital industry requires significant changes in thinking and leadership at political and industry levels. Venture and private equity investing can be hugely profitable, but requires a regulatory and capital markets infrastructure which, unfortunately, is still in its infancy 35 years later.
The term Private Equity came into vogue in the early 2000's but in practice, there was no formal definition of what is Venture Capital and what is Private Equity. There has been a lot of crossover between these asset sub-classes in the various funds available to investors. Venture capital is usually cash consuming for a period, whereas private equity may have a cash burn, but there should be the probability of cash generation and positive EBITDA within a reasonable period.
This is very important to understand since this is one of the significant value uplift points for investors in these unlisted investments. I had a major win at precisely this point in the investment life cycle for Berlin Heart AG which was sold for a considerable sum to a private family office in Europe.
In Australia, private equity is usually not equity, and to the extent it has an equity component, this was often sucked back by the private equity fund, the result being a considerable number of very highly leveraged investments which had difficulty sustaining the imposed debt levels. In my view, private equity should be equity with only limited leverage, if any.
The venture capital asset subclass has not performed as well as it should in Australia. There are a number of sources of data (eg Thomson Reuters), but they are consistent in demonstrating a return history which does not reflect the illiquidity premium sought by investors.
Why is this? Why does the US venture and private equity asset sectors perform better?
There are a number of reasons. You will see above that all of the venture fund structures are government mandated with some form of tax concession. All of these structures came with Canberra mandated strings, as you can imagine, which actually prevented many reaching their investment objectives. The only structure which comes close to the US model is the recent availability of limited partnerships, and then only this last year have these partnerships been available to smaller end syndicates of investors (A$5.0 million) which is where the private investor market is.
The reason this is important is that most US venture investing is either from HNWI who, through the partnership structure can transfer tax losses to their estate, or from the US pension funds and Ivy League endowment funds. These funds have to get a return to meet their unfunded liabilities.
In Australia, with that one recent exception, tax losses cannot be transferred to an investors estate. The superannuation industry does not have the same need as US funds, and there isn't the wealth in the University endowment sector. What we do have is government mandated and supported Industry Innovation Funds, support from Commercialisation Australia (which requires 1:1 contributions), and R&D tax credits.
We don't have the two things that matter the most: extensive limited partnerships and employee stock/stock option schemes.
There is much talk about superannuation trustees being required to allocation a proportion of funds under their trusteeship to venture capital and private equity. Some of this talk comes from government sources. It is so much tosh, and cannot happen for many reasons.
Similarly, bringing offshore capital into Australian deals is not likely to achieve much. Capital flows are more likely to be the other way around.
Therefore, the rebuild (for that is what is required) of the Australian venture capital industry requires significant changes in thinking and leadership at political and industry levels. Venture and private equity investing can be hugely profitable, but requires a regulatory and capital markets infrastructure which, unfortunately, is still in its infancy 35 years later.
Friday, 8 March 2013
SOLUTIONS TO VOLATILE TIMES
My readers will have seen that I am not expecting a return to some pre-GFC Golden Age. The Hawker-Keating-Howard-Costelly years may well in hindsight be viewed with a Menzian 1960's glow.
There is no doubt we are in for volatile times with a recessionary flavour, and especially when the truth about the Federal Governments real fiscal position finally drips out. If Andy Xie's forecast for iron ore prices becomes reality, it will be hugely worse. Xie is a very respected Chinese economist.
Strategy needs to be developed for times which are going to be more like the 1970's, a previous period where government interventions caused volatility. Wealth creation strategies need to recognise this.
Those that achieve Prosperity and Financial Security in this environment are those who Negotiate and Survive. The preconditions are a preparedness to change. You can see this in retail and financial services TODAY.
Some of the solutions to these times are to be found at www.corpbuilders.com.au which is a link to four specialist webinars. These will shortly be available online but in the meantime are delivered personally in the Brisbane, Sydney & Melbourne CBD's.
There is a small charge for this, but if you are interested please call Rikk Millhouse on( 61) 7 3733 1588 to make a reservation.
Financial knowlege is financial empowerment, and these webinars are designed to maximise your negotiating power with banks, investors, and in strategy implementation.
There is no doubt we are in for volatile times with a recessionary flavour, and especially when the truth about the Federal Governments real fiscal position finally drips out. If Andy Xie's forecast for iron ore prices becomes reality, it will be hugely worse. Xie is a very respected Chinese economist.
Strategy needs to be developed for times which are going to be more like the 1970's, a previous period where government interventions caused volatility. Wealth creation strategies need to recognise this.
Those that achieve Prosperity and Financial Security in this environment are those who Negotiate and Survive. The preconditions are a preparedness to change. You can see this in retail and financial services TODAY.
Some of the solutions to these times are to be found at www.corpbuilders.com.au which is a link to four specialist webinars. These will shortly be available online but in the meantime are delivered personally in the Brisbane, Sydney & Melbourne CBD's.
There is a small charge for this, but if you are interested please call Rikk Millhouse on( 61) 7 3733 1588 to make a reservation.
Financial knowlege is financial empowerment, and these webinars are designed to maximise your negotiating power with banks, investors, and in strategy implementation.
Tuesday, 5 March 2013
HENRY THORNTON
I recommend my readers to read Henry Thorntons' column in the Australian today (5th March). HT is a nom de plume for one of the most eminent economists in Australia. For those SME's who are struggling, this is essential reading. For those that aren't struggling, it provides an insight into what the future might hold for you.
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