Like everyone else in the finance world (and actually elsewhere as well), I have been watching with obvious interest, the unfolding of events in the past few weeks. And needless to say, they have been quite discomforting. While I don’t have anything particularly positive or negative to say about the actions that the US Fed or other central bankers have been undertaking to mitigate the crisis (most of them were actually Hobson’s choices), I do however feel that this may be a case of postponing rather than solving the issues unless we are favored with some generous doses of luck.
Ever since the financial crisis began to unfurl, a few things have been happening. To begin with, there has been a flight of capital to safe assets, which has squeezed out all liquidity and credit in the system. This has led to a bizzare situation where from the threat of inflation a few weeks ago, the US is now staring at a sudden deflation in the economy. So, what has the fed done? - it has started pumping up money supply and inflating the economy to maintain the liquidity and keep the economic wheels turning. But there are a few things which will really work against this strategy in the long run.
First is the overhang of credit that the US carries from the past. The credit expansion in the recent past has been unprecedented and the total estimated debt in the US, which includes national and private debt is $53 trillion (thats nearly four times its GDP). With all the bad debts that the financial institutions are burdened with and with economic prospects looking dimmer and not brighter (which in turn will affect the repayment capacity of borrowers), banks and financial institutions are not going to start lending in a hurry. So, the credit unwinding process would be a long and gradual one and its not clear how the central banks can continue to shore up liquidity till then.
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Archive for the 'Uncategorized' Category
Short equities, long commodities
Posted by Arun Uday on September 22, 2008
Posted in Uncategorized | Tagged: commodities, economy | 2 Comments »
Media content industry - bleak future ahead
Posted by Arun Uday on September 8, 2008
Some time back, I had posted about the shift in power in the media industry from content generators to content aggergators. That trend seems to be picking up steam and the content generation part of the value chain seems to be dying a death through thousand cuts. Nowhere else is this starker than the newspaper industry in the US, which is quickly sliding down the path to obscurity as it registered the supposedly sharpest ever fall in history during the first half of this year. I believe that other content industries such as the movie industry will also face some serious challenges going ahead on account of the following:
a. Surfeit of supply: According to this recent article just reported on WSJ, Hollywood has been hit by a glut of movies this year. In India as well, while there has been widespread welcoming of the institutionalization of the movie industry, one of the “negative” fallouts of this has been the huge quantums of capital being planned towards movie production including those by such large corporate houses as M&M and Reliance. One only hopes that the money and efforts will be judiciously utilized as much for better quality as an increased quantity of content and not just for the latter. Else, we could very well see supply far outstripping demand. Increased participation (in content production) of individuals/indie producers/ smaller media houses has also been another important factor in adding to the supply of content.
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Posted in Uncategorized | Tagged: content, media | No Comments »
Entrepreneurship, venture capital and quantum mechanics
Posted by Arun Uday on July 30, 2008
Okay, that (I mean the title) was a ploy to catch your attention! Actually, this is the second part of my drivel on successful investing. Amongst the six factors for successful investing listed in my previous post, “insight” stands out from everything else in a distinct way in that it is “non procedural” as against the rest, which are “procedural”. Let me explain that.
In the study of logic, there are two approaches – deductive approach and inductive approach. In the former, there are tenets or premises, which are accepted as a given and conclusions are drawn on that basis. An inductive approach, on the other hand is the process of building a coherent thesis based on numerous observations (akin to a bottoms up analysis). For example, the reasoning – “All men are mortal. Joe is a man. Therefore, Joe is mortal” is a deductive line of reasoning since it is based on the *irreducible* premise that “All men are mortal”. On the other hand “I have only observed black crows and never observed a crow of any other colour. Therefore, all crows are black” is an inductive line of reasoning since the conclusion is drawn from a set of verifiable observations.
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Posted in Uncategorized | Tagged: entrepreneurship, PE, quantum mechanics, VC | 1 Comment »
What it takes to be a successful investor (Part 1)
Posted by Arun Uday on July 17, 2008
Taking off on my previous post on some ideas for industry specific funds, wanted to share my $0.02 of learning gathered in my (very) short history in the investment profession about some key success factors for successful investing. Though these will be mostly applicable to PE investing, it could also be relevant to other forms of investing such as the public markets. In my next post, I will link these with some interesting concepts in human cognition and other ideas from pure science (which may come as a surprise to most readers).
1. Insight: This is perhaps the hardest skill to acquire (if it can ever be “acquired” at all) or even measure. Ultimately, it is also what differentiates a John Doerr or a Warren Buffet from other ordinary investors. Insight - the ability to visualize a reality that other mortals don’t normally possess. And it is distinct from all other success factors in a fundamental way, which will be further elaborated on in my next post.
2. Social capital: By this I refer to your people networks. It begins with something as basic as being connected with investment bankers and other agents, who will show you “deals” and opportunities. To make an investment, you need to learn about the opportunity in the first place - as simple as that. It could also extend to your ability to make relevant introductions to your portfolio companies (to potential employees, partners, customers etc.) post investment.
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Posted in Uncategorized | Tagged: Investing, PE, VC | No Comments »
Ideas on industry specific PE funds
Posted by Arun Uday on June 26, 2008
For a long time (in fact even before I joined the PE industry), I used to think about what’s the ideal strategy for making investments (especially PE/VC ones) to earn superior returns, and I had vaguely concluded that deep domain expertise in specific industries was perhaps the only way to beat the market. And a recently released study by BCG reaches the same conclusion. The report concludes that domain expertise and industry networks rather than financial engineering or fund structure is what differentiates top funds from the rest. Frankly, I am quite surprised that almost all funds define their investment criteria by stage and deal size and we haven’t witnessed that many “experiments” with industry specific funds which invest across stages and deal sizes.
Posted in Uncategorized | Tagged: private equity | 1 Comment »
On Microsoft’s search strategy
Posted by Arun Uday on May 30, 2008
Last week, there was an extremely interesting exchange of views on Microsoft’s search strategy between Tim O’Reilly and Michael Arrington. See:
http://radar.oreilly.com/archives/2008/05/microhoo-corporate-penis-envy.html
http://www.techcrunch.com/2008/05/25/the-importance-of-a-competitive-search-market/
http://radar.oreilly.com/archives/2008/05/why-search-competition-isnt-the-point.html
Tim seems to think that MS’s efforts are directed in the wrong direction since search as we now know it is essentially a “done deal”. On the other hand, Mike argues that Google is headed towards monopolizing search, which portends ill as far as internet related innovation is concerned and therefore, MS’s attempts to break into search should be welcome by all. I would say, I will have to go with Tim on this one, and here’s why.
Posted in Uncategorized | Tagged: Google, Microsoft, Search | No Comments »
Where’s the VMWare for the network?
Posted by Arun Uday on May 16, 2008
I was reading a post by Henry Blodget on how Google’s search income is beginning to close in on MS’s revenues from Windows, which is unnerving the latter. In the comments section, there were many who remarked, “Why should MS feel threatened? After all, there is no connection between the two.” However, the fact of the matter is that there is a connection, and nobody realizes it better than MS (the aborted Microhoo endevaour is proof of that) . Ever since the internet exploded as a phenomenon, there have been various attempts to reduce the OS to a “plug-in that will sit below network applications” as Marc Andreessen put it when he set up Netscape. Netscape, Sun and now Google have all sweated it out in that direction. And, surely enough MS has squashed all such attempts. However, Google seems to have attained a position that seems most threatening of the lot for many reasons - a)They have amassed financial resources larger than any other challenger in the past b)they arguably have a better engineering team than MS c)they have a disruptive revenue model, which MS is yet to gain mastery over. In short, they have everything that it takes to launch a serious attack, and that they seem to be doing via Google Docs and the rest. Read the rest of this entry »
Posted in Uncategorized | Tagged: Google, MS, VMWare | No Comments »
Microhoo - the circus has just begun
Posted by Arun Uday on May 5, 2008
Looks like the business world in the US has taken a penchant for frenzied activity over the weekends. If it was the Bear Stearns episode a few weekends back, it was the Microhoo - will they, won’t they saga unfolding in all its drama last weekend finally ending pretty unventfully with leaders of both companies calling off the deal and shooting out missives intended to give the impression that the outcome was in the best interest of its stakeholders after all.
And I should admit, I got this one wrong. Given MS’s dislike for being an also ran in any area of high priority for them, and Y!’s own trouble in getting its house in order, I had thought that there was no other choice, but for them to finally come together. I had dismissed the noises made by the managements of the two companies in the interim to be just posturing for valuation negotiations. And that indeed may still be the case. In my assessment, the companies will probably keep the discussions going in the background (albeit quitely) and may just spring a surprise by announcing a deal some day when nobody was expecting one. The fact that the deal [fell apart] only on valuations (and even here, the gap doesn’t seem unbridgeable) indicates the willingness of both parties to have a discussion in principle. However, there is a huge joker in the pack, and that is AOL. If either MS or Y! decide to acquire AOL, all bets would be off. Can’t wait to see how this game is going to unfold in the near future. Expect a whole lot of twists and turns in this tale before we get to the end.
Posted in Uncategorized | Tagged: Microhoo, MS, Yahoo | No Comments »
Congratulations to UTI Ventures
Posted by Arun Uday on April 24, 2008
One of the factors holding back entrepreneurial activity in India has been the lack of enough motivational success stories. An important turning point in the history of PE investing in India was the stupendous success of the Bharti Telecom investment by Warburg Pincus. The multiple times return on capital they earned made other foreign investors wake up and take note of the opportunity here. Similar stories are required in the VC world to rev up entrepreneurial and VC activity in our country. One of the common complaints we hear is the lack of early stage funding in India, though thats changed a lot in recent past with multiple seed and early stage funds coming in. Success breeds success, and in a myriad ways. Lack of enough hi-tech entrepreneuiral successes where startup employees have taken home large sums by way of stock options has also been a deterrant for others to sign up for startups. Hence, a handful of big successes is all that is required to seed the ecosystem of investors, entrepreneurs and also other contributors (read tech staff) to come together to start building great cos.
Therefore, this news item on UTI’s blockbuster exit from Excelsoft augurs well for investors and entrepreneurs alike. Congrats to the UTI team!
Posted in Uncategorized | Tagged: Excelsoft, UTI Ventures | 1 Comment »
Stagflation may actually benefit the US
Posted by Arun Uday on April 2, 2008
Amidst all the gloomy news coming out from the US economy, the one silver lining has been the uptick that its exports have been demonstrating for the past few weeks. This is mainly attributable to the plunge in the dollar against most world currencies, rendering exports more competitive. Given the recency of this phenomenon, its hard to predict if this is a trend or a mere blip. But, given the fact that the Fed has been working the currency printing presses overtime, the dollar’s value is certainly not heading back north any time soon. On the other hand, rising commodity prices, coupled with the reduction in purchasing power of the dollar is also causing inflation to rise to uncomfortable levels. And with GDP growth also dramatically slowing down, we have the makings of a classic “stagflation”, believed to be a nightmare for central banks for the following reason. Read the rest of this entry »
Posted in Uncategorized | Tagged: economy, stagflation | 2 Comments »
