5 Notes about Lev Leviev

1. All the press in Israel were "shocked and surprised" by the news that Leviev-controlled Africa Israel has admitted that it cannot see its way to paying off all of its debt and will need to restructure. The only real surprise is how long it has taken for them to admit it!
2. Of the debt mountain that Africa Israel has built up, the vast majority has been to the institutions who have blindly subscribed for its bonds during the bubble years, without worrying too much about the underlying ability of the company to repay.
3. The banks have a relatively minor exposure, thus there is no dramatic impact on the stability of the financial system. Within this amount, it is worthwhile noting that Bank Hapoalim has a significantly larger exposure than Bank Leumi - is this bad luck, or bad risk management? Given the events of the last 18 months, it would look more like the latter than the former.
4. It is crucial that the bond holders act firmly with Leviev, otherwise the genuine ranking of bonds in "tycoon" controlled companies - like Leviev, Tshuva, Fishman etc will be called into question, hence undermining future confidence in the corporate bond market.
5. How comforting to know that the Israeli market can withstand problems at one of its biggest companies and bond issuers without overall market panic setting it. This is a crucial period for the markets, during which it is important that moral hazard is not created by weak treatment of failing management teams.

I have a great deal of admiration for all of the "big guns" of the Israeli capital markets. They are not afraid to travel far and wide to seek out investment opportunities. This does not mean that our pension fund investors blindly follow them everywhere they go, without creating the crucial distinction between risk levels at different companies.

Finally on a personal note. Those of you that know me well, know that one of my hobby horses is conflict of interest. Whilst entrepreneurs like Leviev and Tshuva have both public and private entities doing substantially the same thing, the public's money should not be used to fund their public entities, as there is no real protection against what is an obvious and in-built conflict of interest. Our financial institutions must protect the public from this situation if the Tel Aviv capital markets seek to continue its maturing process whilst trying to attract the best investors from around the world.

Krugman vs Ferguson

I was reading about the "Great Debate" between Nobel prize winner Paul Krugman, and Harvard Professor Nial Ferguson about the how the future looks and what the right course of action is for governments in order to secure a stable economic future for the world. This is just one example, I could of course have picked, Buffet, Soros, Rubini, Bill Gross and many others to describe the debate.

Those of you who know me, know well enough that I am no economist - indeed I have very little academic claim to fame. It will be no surprise to you to discover that I am not going to weigh in on this particular debate.

Then why, you my ask, I am writing about this at all!

The answer is simple.

At Goldrock we are in the business of backing management teams to execute on their growth plans. Management in a era of uncertainty is certainly more challenging than in "normal" times.

During my short military career as a humble tank driver in the Israeli army we were taught a very important lesson in risk management. Loosely translated "when you are in doubt, then have no doubt."

This is broadly helpful when only risk is to be considered as it will keep you away from making some risky blunders, neutralizing the uncertainty, which is such an important element in risk.

However, this is not so helpful when managers and entrepreneurs are being asked to make decisions in the current uncertain environment that could have a long-term affect on their future growth prospects, which is, after all, why they are in business.

My take, for what its worth: Whilst Krugman and Ferguson are so far apart in their analysis and economic conclusions, it is probably too early to simply ignore the risk which still abounds in markets around the world, and that risk management will be a tool whose importance will be over-weighted for some time to come.

We have seen some improvement in the trading environments for our portfolio companies, but I think that the reality of this is not as rosy as the reaction of the world's stock markets.

As a result we ask managers out there to have a little more patience. We have seen some of the fog that has shrouded growth prospects lift in recent months, but we think only far enough as to see a few paces ahead. We will need some more robust indicators of economic improvement before feeling confident about the return of serious growth prospects to the economies of the world.

As a manager of money, rather than a manager of businesses I have the luxury to be able to sit on the sidelines for a while, and whilst we have seen the investing environment improve, we still retain a cautious stance.

Micro Focus "Migration" Challenge

I am a keen reader of TechMarketView and have been a fan of the Holway view of the world for many years.

Philip Carnelley made an interesting comment yesterday on the integration challenge ahead for Micro Focus having made recent acquisitions that increase turnover by 55%, just over Holway's rule of thumb which holds that companies acquiring businesses over 50% of their size tend to be high risk acquisitions.

The thought that occurred to me was that the "migration" issue that Philip referred to is the post merger integration of the two acquisitions, whereas ir could just as easily be the focus on the Borland and Compuware deals will take the focus away from their legacy migration business, and whether this is a strategic decision to diversify, or whether these skills compliment this part of the business.

Migration and modernisation have long been seen as the plumbing and rather dirty end of the IT business. In the current environment, and indeed as we go forward with the backdrop of weak economic growth the old Yorkshire adage of "where there's muck there's brass" might apply to this segment of the business.