Solel brings Success to Bet Shemesh!

I don't have a great deal of knowledge when it comes to solar power, or cleantech in general. Nevertheless I wanted to blog about this $418 million acquisition because of the story and location of the business.

Solel is a major employer in our region and the main excitement is that Bet Shemesh (where I live and work) is in the news for all the right reasons.

Solel and its founder Avi Brenmiller have been developing their technologies and growing this business over a decade and a half and have managed to successfully build a business today turning over more than $100 million. This is a fantastic achievement which has now been recognised by the worlds leading renewables engineering company, Siemens.

This blog is to take the opportunity of congratulating Avi and his team on this achievement, and for bringing this success to the neighbourhood!

The Next Bubble?

Several years ago you may recall that following the last bust (the dotcom variety) there was a period of very low interest rates (thanks to Mr Greenspan) and as a result it was somewhat difficult to find investments that would generate a reasonable return.

Fortunately I had money to invest at the time, and thus myself and my partner went hunting assets classes that might provide such a return, and if possible in a non-correlated manner.

One of the areas we looked at was Viaticals. This is the general term for buying second hand life policies, typically from old people. The main reason why this business exists is to allow people to enjoy the benefits of the policy before they die, typically using it for health or residential care.

Due to the nature of the discount offered on the purchase, if managed correctly they can potentially offer above average returns over time, as the people pass on thus releasing the full value of the policy.

Of course the general rules apply:

• their are no free lunches (risk/reward)
  
• if it is too good to be true, then it probably is (this seems easy!)
• read the small print (and then the REALLY small print)

In the end we passed on the idea, partly as we felt uncomfortable with the seedier end of this business which has a poor reputation, and also because the actual mechanism for making money is not as easy as it first appears. Risks include (but are not limited to):

• the original policy holders living too long, during which time you have to keep paying the premium, hence eating away at your potential return, and of course an increased holding time also reduces the IRR;
• ultimate beneficiaries suing the secondary purchaser when the original holder dies.

I read with interest an article in the NY Times about bankers sitting around figuring out the next way they can make money from securitizations (as if we have not had enough) and lo and behold they are talking about the securitization of life insurance policies, to be packaged and sold off to the unsuspecting investing community.

When they come knocking on the door to offer this, remember that you read my blog in September 2009. I am not suggesting that you should not buy, just make sure that you do not fall again into the trap that caught us out last time with CDO's CLO's etc.

They will undoubtedly tell you that the product:

• is backed by a major financial institution
• has a AAA credit rating, perhaps backed by a different equally solid financial institution (like AIG or Lehman Bros)
• Historic defaults show that there is little or no real risk to the equity

And I could probably go on!

Happy hunting!

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.

Sage Twitters it Right!

You may remember some time ago I blogged (Be Smart Not Right!) on the handling of the Kashflow PR attacks on Sage, and that I felt that perhaps the Sage guys were missing a trick in getting too "formal" with Duane.

Well, I take my hat off to them and in particular to Paul Stobart, UK MD of Sage, by cutting through the BS and communicating directly and in real time with their channel partners and customers through Twitter yesterday.

There are those that might claim that Sage's partner base is too large, and indeed there may be even those over the years that might have wanted to take the knife to cut it down to a more manageable size. Right or wrong, this sort of initiative allows the company to directly interact with the more active and lively parts of the channel, which is what Sage clearly needs to do in order to stay at the forefront as a lead vendor in the SME market.

REAL US Unemployment

I am sure many of you have seen and/or heard analyses that argue that the US unemployment rate is really higher than reported, due to a number of factors. Here are a few bullets that use facts (that I got from WSJ) to put things in perspective:

Where are we today:

• Current rate = 9.5% unemployment
• 7.2 million jobs lost since the start of the recession
• The cumulative job losses over the last six months have been greater than for any other half year period since World War II
• The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion

That is bad. but it may be worse than it sounds. Now, let's increase the 9.5% to a more "real" number:

• 1.4 million people wanted or were available for work in the last 12 months but were not counted, since they may not have sent out a resume in the past 4 weeks - this adds about 0.8%.
• The number of workers taking part-time jobs instead of their sought after full time jobs has doubled to about nine million, or 5.8% of the work force. Taking 50% of this, adds 2.9%.
• The average work week in the private sector (~80% of the work force) is now 33 hours. Almost one hour less than prior to the recession. (This is driven by things like production capacity in the US is dropped to an average of 65%.) This is tantemount to 3.3 million fewer employees - an additional (quasi) 2.2% for unemployment.
• Alltogether, one could conceptually add about 6% to the 9.5% number - bringing it to well over 15%!!

So are there signs of improvement? Not looking good. And this is based on the uniqueness of this recession.

• First of all, the average length of official unemployment increased to 24.5 weeks, the longest since government began tracking this data in 1948.
• Second, the number of long-term unemployed (i.e., for 27 weeks or more) has now jumped to 4.4 million, an all-time high.
• Third, unemployment has doubled to 9.5% from 4.8% in only 16 months; very fast.

Why has all this happened? What is so unique?

I believe that in this recession, the employee cutbacks are not simply cutbacks. Normally, companies do cutbacks, and then rehire once the economy improves. The fire based on decisions taken earlier in the business cycle - to ensure earnings targets, etc.

But (if and) when economic activity picks up, (as quoted from the WSJ - ) "many unemployed workers looking for jobs once the recovery begins will discover that jobs as good as the ones they lost are almost impossible to find because many layoffs have been permanent. Instead of shrinking operations, companies have shut down whole business units or made sweeping structural changes in the way they conduct business."

Just look at two huge sectors and employers in the US - the auto sector and the financial sector. The US auto market is forever slashed across the sector's value chain, while the financial services companies have exited many parts of the world of finance - never to return.

So it seems that Americans and many other parts of the world have to rethink how to rebuild.