For my readers in 28 countries, you might be interested to see how we are going to generate profits from these volatile times. There is a lot of strategy generation in these blogs and its implementation can be found below.
Please visit ACF Equity Research in London at:
http://www.acfequityresearch.com/millhouse/
for a more detailed analysis.
Friday, 14 June 2013
Wednesday, 12 June 2013
THE SEARCH FOR ALPHA IN INVESTMENT STRATEGY
Do you hedge against inflation or deflation? Some economists predicted a massive inflation surge from the money printing occurring in most major economies. Yet there is little evidence of it in the real economy for tradeable assets and services, and especially given the slowdown in China and other Asian countries. There is massive supply of underutilised capacity.
In those sectors, it looks as though investment strategy should be profiting from a deflationary environment.
That is not the case with non-tradeable assets in the worlds' two growth economies, being the United States and Germany. In some cities and regions, including California, New Zealand, and Berlin, real estate prices are inflating. Some years ago, I constructed the Deutsche Property Trust, and had a Term Sheet from Lehman Bros for USD 200 million. That was in 2007, so no guesses what happened shortly after.
Now, wherever you invest, you are investing in volatile conditions. That volatility creates opportunities, the windows for which could be quite short, and sometimes strategically and rapidly obsolete.
In the United States (where I have along predicted a resurgence in growth (please see my Ping Pong Pang blogs), the volatility is on the upside at present and in my view likely to remain so even if the money printing stops. This view stems from the US and Canada being able to source and export their energy needs from domestic sources at lower than present world prices. There will be a resurgence of manufacturing as the key strengths of the US economy build on this advantage.
Germany similarly, and whatever the present difficulties in the European Union, it is important to note that Germany is playing a long term game which is likely to result in more Europe rather than less (refer my blog on Joschka Fischer recently). Manufacturing and employment is growing strongly in Germany and this is now reflected in inflating real estate prices.
Generating alpha from opportunities in these two countries will be from upside potential including in the IPO markets.
Other countries, including Australia, will be on the downside, and include acquisitions of deflating asset prices, including some real estate. That is likely to continue for at least another year, and certainly until the political and economic mess in Canberra is resolved. Until then, the present socialist Federal Government has seen fit to destroy Australia's comparative advantages, disincentivise its entrepreneurial and aspirational workforce, and destroy the country's previously enviable fiscal position. Hence, every day, in most the mainstream press and commentaries, there are predictions of recession. Hello, I predicted it in these blogs nearly a year ago. Australia is looking more like France everyday.
Nonetheless, alpha is there to be earned, but on the downside.
Alpha generation is the true skill in private equity and hedge fund investing. But one size most definitely not fit all, and all investor presentations need to reflect that.
David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane, Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.
In those sectors, it looks as though investment strategy should be profiting from a deflationary environment.
That is not the case with non-tradeable assets in the worlds' two growth economies, being the United States and Germany. In some cities and regions, including California, New Zealand, and Berlin, real estate prices are inflating. Some years ago, I constructed the Deutsche Property Trust, and had a Term Sheet from Lehman Bros for USD 200 million. That was in 2007, so no guesses what happened shortly after.
Now, wherever you invest, you are investing in volatile conditions. That volatility creates opportunities, the windows for which could be quite short, and sometimes strategically and rapidly obsolete.
In the United States (where I have along predicted a resurgence in growth (please see my Ping Pong Pang blogs), the volatility is on the upside at present and in my view likely to remain so even if the money printing stops. This view stems from the US and Canada being able to source and export their energy needs from domestic sources at lower than present world prices. There will be a resurgence of manufacturing as the key strengths of the US economy build on this advantage.
Germany similarly, and whatever the present difficulties in the European Union, it is important to note that Germany is playing a long term game which is likely to result in more Europe rather than less (refer my blog on Joschka Fischer recently). Manufacturing and employment is growing strongly in Germany and this is now reflected in inflating real estate prices.
Generating alpha from opportunities in these two countries will be from upside potential including in the IPO markets.
Other countries, including Australia, will be on the downside, and include acquisitions of deflating asset prices, including some real estate. That is likely to continue for at least another year, and certainly until the political and economic mess in Canberra is resolved. Until then, the present socialist Federal Government has seen fit to destroy Australia's comparative advantages, disincentivise its entrepreneurial and aspirational workforce, and destroy the country's previously enviable fiscal position. Hence, every day, in most the mainstream press and commentaries, there are predictions of recession. Hello, I predicted it in these blogs nearly a year ago. Australia is looking more like France everyday.
Nonetheless, alpha is there to be earned, but on the downside.
Alpha generation is the true skill in private equity and hedge fund investing. But one size most definitely not fit all, and all investor presentations need to reflect that.
David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane, Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.
For personalised solutions to the issues raised in the blog, please contact Corpbuilders TM at www.corpbuilders.com.au
Wednesday, 29 May 2013
PROFESSOR ROSS GARNAUTS' VIEW OF POOR PUBLIC POLICY
For my readers who are the remotest bit sceptical of these blogs, please have a read of the speech given yesterday at the University of Melbourne by Professor Ross Garnaut and reported extensively today in the Australian Financial Review and Australian newspapers.
Garnaut is one of Australia's leading economists and can be credited in part for Australia's 20 + years without a recession for his advices and guidance provided to Australian Federal Governments. He is worth listening to.
His message is quite simple: Australia wake up from your slumbers or face destruction (rather like Smaug the Magnificent in Tolkiens' Hobbit). Destruction in this sense means a slide into European style recession and unemployment.
One firm I should have included in my list of nine prospective industries we could have is one which is long established and manufactures and exports very specialist electronics based products - Codan, based in Adelaide. Codan fits nicely with a sustainable competitive advantage in astrophysics and the management of space. It is part of the defence related cluster in Adelaide and could become a key participant in such an industry.
Codan, like Cochlear, Resmed, CSL and others I mentioned yesterday demonstrates that you can successfully manufacture and export from Australia, at todays labour and exchange rate regimes, without tariff protection and without constant subsidy.
Garnaut is one of Australia's leading economists and can be credited in part for Australia's 20 + years without a recession for his advices and guidance provided to Australian Federal Governments. He is worth listening to.
His message is quite simple: Australia wake up from your slumbers or face destruction (rather like Smaug the Magnificent in Tolkiens' Hobbit). Destruction in this sense means a slide into European style recession and unemployment.
One firm I should have included in my list of nine prospective industries we could have is one which is long established and manufactures and exports very specialist electronics based products - Codan, based in Adelaide. Codan fits nicely with a sustainable competitive advantage in astrophysics and the management of space. It is part of the defence related cluster in Adelaide and could become a key participant in such an industry.
Codan, like Cochlear, Resmed, CSL and others I mentioned yesterday demonstrates that you can successfully manufacture and export from Australia, at todays labour and exchange rate regimes, without tariff protection and without constant subsidy.
David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane, Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.
For personalised solutions to the issues raised in the blog, please contact Corpbuilders TM at www.corpbuilders.com.au
Monday, 27 May 2013
THE OPPORTUNITY COSTS OF POOR PUBLIC POLICY
Reports suggest that the Australian taxpayer has provided some A$19 billion in financial support to the Australian automotive industry this last 10 years according to the Australian Productivity Commission and reported by Henry Ergas (Australian May 25th 2013).
This is government venture capital that should earn a return based upon its opportunity cost. If you were a venture capital or private equity fund manager investing over a period of ten years, you would expect to generate a portfolio of assets which have a return of several times the initial investment amount. Normally this is measured as an internal rate of return and/or a multiple of the original investment.
What did Australian taxpayers get in return for this investment? A truly independent economic analysis may not exist. Perhaps a Ph.D or Post Doctoral Fellow might give this a thought.
I last published in 1988 on such a topic when applying venture capital rates of return to publicly funded University research. Stirred up a hornets nest actually.
What could have Australia achieved with this quantum of venture capital? Probably 19 industries, all based on sectors where Australia and Australians do have some comparative advantages which could become sustainable, not from mineral wealth, but from human capital.
Australians do not generally understand the present economic arguments about "productivity". Most think it will mean working harder for less. Indeed, many people are experiencing declining standards of living as GDP and GSP per capita decline. That's what they feel and no one is providing leadership to demonstrate otherwise.
Productivity can mean working less, but a lot smarter. If there is going to be a replacement for economic activity from quarrying of resources, in what is a hollowed out economy, then some serious strategic thinking about the future needs to occur.
This will need to include the elimination of the present Federal government vilification of entrepreneurs and wealth creation and a return to the previous and productive environment where wealth creation based on innovation and entrepreneurship was encouraged by both mainstream political parties. Peter Beattie, the former Queensland Premier writes regularly on this topic. If there is no wealth creation, then there is less to distribute, and the whole population becomes poorer. This is happening in Australia today.
So what are these industries where there is the opportunity to create sustainable competitive advantage? What could we have had? All of these industries are labour intensive, not easily commoditised or replicated, and are high value adding, high reward industries. A$19 billion invested in accordance with venture capital criteria would go a long way to advance the economic and social wellbeing of Australians.
Here are 9 examples:
1. A world class venture capital industry, well funded, with the capital and skill sets to finance the next generation of Cochlear, Resmed, CSL, Vaccine and drug development start ups.
2. A world class arts sector, building on the magnificent success of the Queensland Art Gallery/Gallery of Modern Art in cultural tourism. This would include full sized orchestras, ballet, opera and theatre companies in each major city attracting higher paying international tourists from around the globe. Competitors to Berlin, London, Paris, St Petersburg and New York; Bayreuth and Glyndebourne. If we want to get away from the economic and social tyranny of low end volume based tourism, this is a strategy.
3. Astrophysics and the management of space, a scientific sector where geography and intellect combine to generate a national sustainable competitive advantage.
4. Clean energy from nuclear power for domestic consumption and for the servicing of nuclear fuelled ships. Baseload power to complement irregular power from solar infrastructure. Stability in energy input costs is fundamental to all manufacturing.
5. Research universities equivalent to Stanford or MIT, with the spin offs from them generating our own Silicon Valleys instead of exporting scientific and entrepreneurial talent to the US, Singapore, and other countries.
6. The built environment. With limited exceptions, people do not come to Australia for its built environment. The value of design and architecture is not a quality generally recognised in this country.
7. Embrace online merchandising of products and services. The quality of the internet today and the devices that allow access to it is such that the whole world is now the market place. Printing books was the precursor to the Renaissance and the Enlightenment in Europe. Similarly today, the internet enabled the "Arab Spring". This global shift in the sourcing and distribution of value added products can change the demand profile of most industries.
8. Medical and dental services and the provision of telemedicine internationally, and especially into growing and modernising middle classes in Asia.
9. The recent Federal Governments' "Asian Century" White Paper is "laudable", but "disappointing that it fails to discuss how Australians can engage more meaningfully with Asia"..." it needs to develop its comparative advantages - and an understanding and respect of Asian culture" says Mr Trevor Rowe one of Australia's leading business men with close links to Asia and to academia. (The complete article is found at Asia Today International authored by Florence Chong).
My own experiences in Europe & Asia demonstrate just how right Trevor is.
There is a whole new industry to be had, not only in language training but in the development of much deeper cultural and historical understandings. It is the combination of these which make for successful business engagement.
What Australia has at present is nostalgia masquerading as sound policy. Please send this blog to your Federal and State members of parliament. Ask them to explain the opportunity cost of their policies.
This is government venture capital that should earn a return based upon its opportunity cost. If you were a venture capital or private equity fund manager investing over a period of ten years, you would expect to generate a portfolio of assets which have a return of several times the initial investment amount. Normally this is measured as an internal rate of return and/or a multiple of the original investment.
What did Australian taxpayers get in return for this investment? A truly independent economic analysis may not exist. Perhaps a Ph.D or Post Doctoral Fellow might give this a thought.
I last published in 1988 on such a topic when applying venture capital rates of return to publicly funded University research. Stirred up a hornets nest actually.
What could have Australia achieved with this quantum of venture capital? Probably 19 industries, all based on sectors where Australia and Australians do have some comparative advantages which could become sustainable, not from mineral wealth, but from human capital.
Australians do not generally understand the present economic arguments about "productivity". Most think it will mean working harder for less. Indeed, many people are experiencing declining standards of living as GDP and GSP per capita decline. That's what they feel and no one is providing leadership to demonstrate otherwise.
Productivity can mean working less, but a lot smarter. If there is going to be a replacement for economic activity from quarrying of resources, in what is a hollowed out economy, then some serious strategic thinking about the future needs to occur.
This will need to include the elimination of the present Federal government vilification of entrepreneurs and wealth creation and a return to the previous and productive environment where wealth creation based on innovation and entrepreneurship was encouraged by both mainstream political parties. Peter Beattie, the former Queensland Premier writes regularly on this topic. If there is no wealth creation, then there is less to distribute, and the whole population becomes poorer. This is happening in Australia today.
So what are these industries where there is the opportunity to create sustainable competitive advantage? What could we have had? All of these industries are labour intensive, not easily commoditised or replicated, and are high value adding, high reward industries. A$19 billion invested in accordance with venture capital criteria would go a long way to advance the economic and social wellbeing of Australians.
Here are 9 examples:
1. A world class venture capital industry, well funded, with the capital and skill sets to finance the next generation of Cochlear, Resmed, CSL, Vaccine and drug development start ups.
2. A world class arts sector, building on the magnificent success of the Queensland Art Gallery/Gallery of Modern Art in cultural tourism. This would include full sized orchestras, ballet, opera and theatre companies in each major city attracting higher paying international tourists from around the globe. Competitors to Berlin, London, Paris, St Petersburg and New York; Bayreuth and Glyndebourne. If we want to get away from the economic and social tyranny of low end volume based tourism, this is a strategy.
3. Astrophysics and the management of space, a scientific sector where geography and intellect combine to generate a national sustainable competitive advantage.
4. Clean energy from nuclear power for domestic consumption and for the servicing of nuclear fuelled ships. Baseload power to complement irregular power from solar infrastructure. Stability in energy input costs is fundamental to all manufacturing.
5. Research universities equivalent to Stanford or MIT, with the spin offs from them generating our own Silicon Valleys instead of exporting scientific and entrepreneurial talent to the US, Singapore, and other countries.
6. The built environment. With limited exceptions, people do not come to Australia for its built environment. The value of design and architecture is not a quality generally recognised in this country.
7. Embrace online merchandising of products and services. The quality of the internet today and the devices that allow access to it is such that the whole world is now the market place. Printing books was the precursor to the Renaissance and the Enlightenment in Europe. Similarly today, the internet enabled the "Arab Spring". This global shift in the sourcing and distribution of value added products can change the demand profile of most industries.
8. Medical and dental services and the provision of telemedicine internationally, and especially into growing and modernising middle classes in Asia.
9. The recent Federal Governments' "Asian Century" White Paper is "laudable", but "disappointing that it fails to discuss how Australians can engage more meaningfully with Asia"..." it needs to develop its comparative advantages - and an understanding and respect of Asian culture" says Mr Trevor Rowe one of Australia's leading business men with close links to Asia and to academia. (The complete article is found at Asia Today International authored by Florence Chong).
My own experiences in Europe & Asia demonstrate just how right Trevor is.
There is a whole new industry to be had, not only in language training but in the development of much deeper cultural and historical understandings. It is the combination of these which make for successful business engagement.
What Australia has at present is nostalgia masquerading as sound policy. Please send this blog to your Federal and State members of parliament. Ask them to explain the opportunity cost of their policies.
David
Millhouse is an international entrepreneur with over 30 years in venture
capital and private equity internationally. Based in Brisbane Australia he is a
specialist in venture financing and capitalisation, as well as the management
of high growth companies, many of which proceed to IPO. He has conducted
business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong,
Australia and New Zealand. A scientist by original profession, with an MBA and
LLM from Bond University in Australia. He is a trustee of Bond University,
Australia’s premier private University, and was formerly a trustee of the
Queensland Art Gallery/Gallery of Modern Art. There are 30 years of
publications and media on his professional activities and he has had a stellar
career at CEO level since 1983.
For
personalised solutions to the issues raised in the blog, please contact Corpbuilders TM at www.corpbuilders.com.au
Wednesday, 22 May 2013
FINALLY THE TRUTH IS OUT 2
On the 6th December 2012 I wrote:
"Finally the truth is out about the Australian economy: it is in recession. The real world has been telling us this for a year, but the Australian Government and much of the media has been hiding behind mining activity skewed aggregate GDP data. Could be good for some borrowers, but those that are worried about security of employment will not want to become even more indebted. Add to this the fiscal contraction from governments at all levels, and 2013 will be horrible for many people".
I copped considerable criticism for this view actually.
Interesting then that in the Australian Financial Review of the 22nd May 2013, the Secretary to the Australian Treasury Dr Martin Parkinson finally states "conditions in the non-resources sector have been not much better than the recessionary days of the early 1990's".
Hallelujah! Although he is wrong. They are worse. I was there and founded my previous business in 1991. That became very successful over its 19 year lifespan.
It is a tragedy that the leaders of the country are not being open and honest with the people, and when they are, then they are very late in admitting it. Probably the real truth will come out after the September election in Australia. The damage is already being done.
Dr Parkinson used to run the Australian Department of Climate Change.
"Finally the truth is out about the Australian economy: it is in recession. The real world has been telling us this for a year, but the Australian Government and much of the media has been hiding behind mining activity skewed aggregate GDP data. Could be good for some borrowers, but those that are worried about security of employment will not want to become even more indebted. Add to this the fiscal contraction from governments at all levels, and 2013 will be horrible for many people".
I copped considerable criticism for this view actually.
Interesting then that in the Australian Financial Review of the 22nd May 2013, the Secretary to the Australian Treasury Dr Martin Parkinson finally states "conditions in the non-resources sector have been not much better than the recessionary days of the early 1990's".
Hallelujah! Although he is wrong. They are worse. I was there and founded my previous business in 1991. That became very successful over its 19 year lifespan.
It is a tragedy that the leaders of the country are not being open and honest with the people, and when they are, then they are very late in admitting it. Probably the real truth will come out after the September election in Australia. The damage is already being done.
Dr Parkinson used to run the Australian Department of Climate Change.
Monday, 20 May 2013
PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS, WASHINGTON DC
I would refer my readers to the Peterson Institute for International Economics in Washington DC. In recent reports, there are some salient insights from that institution for my Australian readers and some very different insights for my thousands of international readers.
To summarise:
In the Australian context, I have pointed out before that Australia is a smallish (albeit worlds' 12th largest) economy but not as developed as other larger economies with which it is often benchmarked. It also has a small and illiquid domestic bond market and is very exposed to the vagaries of international capital and internationally traded commodities.
Hence the recent warnings about Australia from some very eminent opinion makers including Prof. Ross Garnaut and the deflationary warning signals now being commented upon in the mainstream Australian press.
In the European and German context, Northern countries are likely to continue to do reasonably well, especially as the US economy starts to grow again. Had the European institutions imposed their own regulatory standards earlier, then it is likely that the profligate fiscal and tax policies at the national level in the Southern countries would not have been able to inflict such damage on their own citizenry.
Australians take note. Think about getting your assets denominated in USD and Euros, your liabilities in AUD.
To summarise:
- Countries that have reined in public spending are now growing faster whilst the profligate founder;
- Small countries with illiquid bond markets can lose access to international financing at minimal levels of indebtedness;
- Many countries hit their borrowing ceilings suddenly and unexpectedly because of the inherent volatility of credit markets;
- Northern Europe has minimised fiscal stimulus and grown reasonably well;
- Southern Europe, France and the United Kingdom have pursued fiscal stimulus and all suffered from recession;
- The earlier sufficient fiscal adjustment is undertaken, the earlier confidence can be restored amongst citizens, businesses and investors.
In the Australian context, I have pointed out before that Australia is a smallish (albeit worlds' 12th largest) economy but not as developed as other larger economies with which it is often benchmarked. It also has a small and illiquid domestic bond market and is very exposed to the vagaries of international capital and internationally traded commodities.
Hence the recent warnings about Australia from some very eminent opinion makers including Prof. Ross Garnaut and the deflationary warning signals now being commented upon in the mainstream Australian press.
In the European and German context, Northern countries are likely to continue to do reasonably well, especially as the US economy starts to grow again. Had the European institutions imposed their own regulatory standards earlier, then it is likely that the profligate fiscal and tax policies at the national level in the Southern countries would not have been able to inflict such damage on their own citizenry.
Australians take note. Think about getting your assets denominated in USD and Euros, your liabilities in AUD.
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