Posts by MarkBorkowski:
How Should we Deal with Market Speculators?
October 19th, 2016By Mark Borkowski.
The stock markets of the world are connected and operate on a 24-hour basis through an elaborate electronic network that transacts all the time, enough to finance the entire annual volume of world trade.
Finance has taken on a life of its own, completely divorced from trade and production. It moves freely across borders at lightening speed bringing together remote New Zealand villages with financial wizards on Wall Street or in Tokyo.
In one of Faulkner’s novels he describes a scene in a small Mississippi town from the 1920’s, where small time speculators with the aid of the rapid communications allowed by the telegraph, speculate on cotton futures on the Chicago Commodity Exchange. The technical innovation has allowed big changes in the organization of commodities markets. Financial markets became national institutions, rather than local. National rules and regulations were developed to help these markets to function smoothly, and to prevent unscrupulous trades from exploiting weakness.
Canada needs a truly national regulator for the Securities Industry. Tell your politicians to get their act together and finalize the legislation to make it happen.
The explosion of computerization and automation of the financial markets has, in like manner, brought about huge changes to these markets. The ability of computers to process incomprehensible amounts of data at very rapid rates has brought about a very large increase in the volume of trading, and acceleration in the rate at which assets are turned over.
The connection of computers to advanced communication technology has led to the development of a world market. Markets are now even more global and open continuously. But while the development of national markets lead to national regulation, the development of international markets has not yet lead to adequate international regulation.
Due to these huge numbers of foreign exchange transactions, an explosive growth in speculation in international currency the markets are traced to de-regulation in financial markets, and the prevailing system of floating (market determined) exchange rates.
China has been immune from the system. It has massive inherent benefits built into its currency and system. This will not last for long. It is impossible for a country to support a currency that should have a free float. When it comes soon, the world and China will be a different place.
Today, no country is immune from the speculators. Their reach is very pervasive. No economy like the US has experienced as much pressure on its currency by speculators. There is so much trade in the US currency that the estimate runs to five trillion dollars per business day.
Not all currency trades are speculators. There are three classes of traders in exchange markets, legitimate importers & exporters, bona a fide investors, and speculators. It is easy to understand the motives of importers and exporters and even investors, but what motivates speculators.
What speculators do is gamble on future price movements. But they are so many that their actions now dominate the market. Acting on herd instinct, well known for stampedes and bubbles, their speculations become reality. Prices of currencies are no longer reflective of cost or preferential differentials, or other relevant economic conditions, but rather mirrors of the fancies of the currency speculators.
Reacting to rumours or a surge of adrenaline, these people can change the fate of a currency and with it the economic well being of millions of people. Recent research has demonstrated that financial markets usually over react to any new information. Over reacting means that price fluctuation will be larger than warranted by economic conditions.
Where will international speculators drive the Canadian dollar? I can assure you that in the short term, it will remain low. Manufacturers who export will continue to benefit, but not for long.
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Lots of Money, No Deals
October 17th, 2016By Mark Borkowski.
At this time, there is more money in the system than anyone can imagine. There is a shortage of companies to acquire, or good projects to invest in. The theory that the baby boomers were selling their companies has proved false. Capital investments are seeking established companies to invest or buy or credible investments. The institutional investment and high net worth community are crawling over each other to find projects.
Since 2001, it is reported that 66,000 manufacturing factories closed or where put out of business in the United States.
Private Equity Groups have not been hard-hit by the credit crunch or the past stock market decline. They have capital to invest and are looking for business acquisitions or investments. One of the major market shifts for the acquisition of privately held companies has been the growth in the number of Private Equity Groups (PEGs) over the last decade. These organizations number in the thousands in both the United States and Canada. Private Equity firms generally manage money for insurance funds, pension funds, charitable trusts and sophisticated investment groups. They have money to invest. Despite the downturn in the Canadian economy and the industry in general, the buyout and investment market for Canadian companies remains hot. Even early stage businesses are also being sought out.
PEGs have become key players in business acquisitions. They offer flexibility as a liquidity source, giving entrepreneurs the ability to take some cash off the table, recapitalize their company or simply sell and move on. Private equity refers to buyout groups that seek to acquire or invest in ongoing, profitable businesses that demonstrate growth potential.
The private equity market had traditionally been restricted to acquiring or investing in larger companies. But increased competition for those larger operations, the greater growth potential of smaller firms, and an easier path to exiting the investment of smaller firms in the future have played a role in attracting PEGs to smaller companies. PEGs are typically organized as limited partnerships controlled and managed by the private equity firm that acts as the general partner. The fund invests in privately held companies to generate above-market financial returns for investors.
The strategy and focus of these groups vary widely in investment philosophies and transaction structure preferences. Some prefer complete ownership, while others are happy with a majority or minority interest in acquired companies. Some limit themselves geographically while others have a global strategy. PEGs also tend to have certain things in common. They typically target companies with relatively stable product life cycles and a strategy to overcome foreign competition. They avoid leading-edge technology (this is what venture capitalists want) and have a preference for superior profit margins, a unique business model with a sustainable and defensible market niche and position.
Other traits that appeal to PEGs are strong growth opportunities, a compelling track record, low customer concentrations, and a deep management team. Most prefer a qualified management team that will continue to run the day-to-day operations while the group’s principals closely support them on the Board of Director level.
Private equity buyouts or investments take many forms, including:
Outright Sale – This is common when the owner wants to sell his ownership interest and retire. Either existing management will be elevated to run the company or management will be brought in. A transition period may be required to train replacement management and provide for a smooth transition of key relationships.
Employee Buyout – PEGs can partner with key employees in the acquisition of a company in which they play a key role. Key employees receive a generous equity stake in the conservatively capitalized company while retaining daily operating control.
Family Succession – This type of transaction often involves backing certain members of family management in acquiring ownership from the senior generation. By working with a PEG in a family succession transaction, active family members secure operating control and significant equity ownership, while gaining a financial partner for growth.
Recapitalization – This is an option for an owner who wants to sell a portion of the company for liquidity while retaining equity ownership to participate in the company’s future upside potential. This structure allows the owner to achieve personal liquidity, retain significant operational input and responsibility and gain a financial partner to help capitalize on strategic expansion opportunities.
Growth Capital – Growing a business often strains cash flow and requires significant access to additional working capital. A growth capital investment permits management to focus on running the business without constantly having to be concerned with cash flow matters.
PEGs have become a major force in the acquisition and investment arena. They can also be thought of as strategic acquirers in certain instances, when they own portfolio companies in your industry or a related area that addresses the same customer base. These buyers may be in a position to pay more than an industry or strategic buyer that does not have this financial backing.
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Lots of Money, No Deals available
May 7th, 2016By Mark Borkowski.
At this time, there is more money in the system than anyone can imagine. There is a shortage of companies to acquire, or good projects to invest in. The theory that the baby boomers were selling their companies has proved false. Capital investments are seeking established companies to invest or buy or credible investments. The institutional investment and high net worth community are crawling over each other to find projects.
Since 2001, it is reported that 66,000 manufacturing factories closed or where put out of business in the United States.
Private Equity Groups have not been hard-hit by the credit crunch or the past stock market decline. They have capital to invest and are looking for business acquisitions or investments. One of the major market shifts for the acquisition of privately held companies has been the growth in the number of Private Equity Groups (PEGs) over the last decade. These organizations number in the thousands in both the United States and Canada. Private Equity firms generally manage money for insurance funds, pension funds, charitable trusts and sophisticated investment groups. They have money to invest. Despite the downturn in the Canadian economy and the industry in general, the buyout and investment market for Canadian companies remains hot. Even early stage businesses are also being sought out.
PEGs have become key players in business acquisitions. They offer flexibility as a liquidity source, giving entrepreneurs the ability to take some cash off the table, recapitalize their company or simply sell and move on. Private equity refers to buyout groups that seek to acquire or invest in ongoing, profitable businesses that demonstrate growth potential.
The private equity market had traditionally been restricted to acquiring or investing in larger companies. But increased competition for those larger operations, the greater growth potential of smaller firms, and an easier path to exiting the investment of smaller firms in the future have played a role in attracting PEGs to smaller companies. PEGs are typically organized as limited partnerships controlled and managed by the private equity firm that acts as the general partner. The fund invests in privately held companies to generate above-market financial returns for investors.
The strategy and focus of these groups vary widely in investment philosophies and transaction structure preferences. Some prefer complete ownership, while others are happy with a majority or minority interest in acquired companies. Some limit themselves geographically while others have a global strategy. PEGs also tend to have certain things in common. They typically target companies with relatively stable product life cycles and a strategy to overcome foreign competition. They avoid leading-edge technology (this is what venture capitalists want) and have a preference for superior profit margins, a unique business model with a sustainable and defensible market niche and position.
Other traits that appeal to PEGs are strong growth opportunities, a compelling track record, low customer concentrations, and a deep management team. Most prefer a qualified management team that will continue to run the day-to-day operations while the group’s principals closely support them on the Board of Director level.
Private equity buyouts or investments take many forms, including:
(1)
Outright Sale– This is common when the owner wants to sell his ownership interest and retire. Either existing management will be elevated to run the company or management will be brought in. A transition period may be required to train replacement management and provide for a smooth transition of key relationships.
(2)
Employee Buyout– PEGs can partner with key employees in the acquisition of a company in which they play a key role. Key employees receive a generous equity stake in the conservatively capitalized company while retaining daily operating control.
(3)
Family Succession– This type of transaction often involves backing certain members of family management in acquiring ownership from the senior generation. By working with a PEG in a family succession transaction, active family members secure operating control and significant equity ownership, while gaining a financial partner for growth.
(4)
Recapitalization– This is an option for an owner who wants to sell a portion of the company for liquidity while retaining equity ownership to participate in the company’s future upside potential. This structure allows the owner to achieve personal liquidity, retain significant operational input and responsibility and gain a financial partner to help capitalize on strategic expansion opportunities.
(5)
Growth Capital – Growing a business often strains cash flow and requires significant access to additional working capital. A growth capital investment permits management to focus on running the business without constantly having to be concerned with cash flow matters.
PEGs have become a major force in the acquisition and investment arena. They can also be thought of as strategic acquirers in certain instances, when they own portfolio companies in your industry or a related area that addresses the same customer base. These buyers may be in a position to pay more than an industry or strategic buyer that does not have this financial backing.
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Three Insurance Pitfalls
December 28th, 2014
By Mark Borkowski.
Life and health insurance promise peace of mind but often leave doubts and unanswered questions. The inner workings of this business are not well understood. Where can you get unbiased advice?
To find out, I asked an actuary. Promod Sharma knows insurance. He designed products for a decade and then helped advisors sell them across Canada for five years. He now shares his insider insights by blogging and speaking to accountants, lawyers and the curious.
Over the years, Sharma noticed three common problems that still have not been eliminated
– Poor blueprints
– Shoddy construction
– Lousy after-sales service
POOR BLUEPRINTS
The right blueprint is essential at the outset. The design can easily be suboptimal because the expertise of advisors varies vastly. With insurance, you might get the wrong product, the wrong amount or both.
There are many, many choices these days. For practical purposes, insurance products are often interchangeable when configured precisely. Accountants are in a similar situation. They work from the same tax rules but their solutions vary with their skill, knowledge and courage.
SHODDY CONSTRUCTION
Chefs using the same ingredients create different dishes. Expertise counts.
Even skilled advisors make mistakes. Since there is no mandatory review of their work, errors can sneak through. There are also advisors who look more skilled than they are or who are not up-to-date with the latest developments. An insurance policy is a complex, legal contract. What is written takes precedence over what was intended or assumed. Where can clients get an independent second opinion?
“You are at a disadvantage unless you know how products are designed and how advisors sell them. Sometimes there’s more veneer than substance. What looks great today might fail to last.”
LOUSY AFTER-SALES SERVICE
Since selling life and health insurance is considered difficult, insurers pay most of the compensation when the sale is made. As a result, there’s little money paid in future years. That means there’s little incentive to provide after-sales service. When advisors make future visits, they are more likely to sell something new than service what’s already in place. That’s unfortunate. Insurance appreciates in value since the likelihood of payout increases every year.
There’s a practical problem too. Products are complex and new versions keep getting introduced. Advisors have difficulty remembering how the old products worked. Selling products from different insurers aggravates the confusion. Advisors who keep good records can re-familiarize themselves with what they sold but that takes time away from selling more products.
“These days, every field is complex. The solution is specialization to find the ideal strategy and tailor it for the perfect fit. Yet many advisors are generalists who sell insurance, investments and even employee benefits. That’s like the proverbial jack of all trades.”
WHO LOSES?
Advisors are not required to put the interests of their clients first. They can start selling with minimal training. That means buyer beware.
Prudent clients consult their trusted advisor — often their accountant — before making important financial decisions. Deciphering insurance strategies is a particular challenge because they are sales tools designed to show the positives. It’s difficult to figure out what’s left out, ask the right questions and figure out what the answers mean.
“How do you ask questions about what you do not know are missing? That is a very tough.”
Accountants face a tough dilemma. Rejecting insurance strategies is easy but their clients then lose out on valuable protection and tax benefits. Recommending insurance strategies is even more dangerous. If problems arise, will clients blame the well-meaning accountant they trusted or the salesperson?
The path to peace of mind starts with awareness of the pitfalls. A confidential, independent insurance review lights the safe route.
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