Latest / Bloomberg Intelligence / High Yield, EM Most Vulnerable To Asset Collapse: TCW's Rivelle

Transcript

High Yield, EM Most Vulnerable To Asset Collapse: TCW's Rivelle · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. He
• 0:33
  Speaker 1: writes in the recent Insights from TCW that failing to
• 0:39
  Speaker 1: prepare is preparing to fail. Tad Ravel is the chief
• 0:43
  Speaker 1: investment Officer for fixed income for TCW, helping to manage
• 0:47
  Speaker 1: more than a hundred and eighty billion dollars based in
• 0:51
  Speaker 1: Los Angeles. Tad Ravel, thank you very much for spending
• 0:54
  Speaker 1: time with us. What do you mean by this that
• 0:56
  Speaker 1: failing to prepare is preparing to fail. Well, what we're
• 1:00
  Speaker 1: speaking to is that there is an asset price cycle.
• 1:04
  Speaker 1: There is a credit cycle. Unless this is the first
• 1:07
  Speaker 1: one that isn't actually going to be a cycle. We
• 1:09
  Speaker 1: should expect that the relatively placid environment of the last
• 1:15
  Speaker 1: seven or eight years is ultimately going to have its
• 1:18
  Speaker 1: come up in and that it's imperative that investors understand
• 1:22
  Speaker 1: that strategies that focused on risk taking and yield emphasis
• 1:28
  Speaker 1: will probably have very disappointing results if in fact we
• 1:31
  Speaker 1: are in the late stages of the asset price cycle,
• 1:34
  Speaker 1: which we do view ourselves as being. So how do
• 1:38
  Speaker 1: you respond to people that point to the sort of
• 1:42
  Speaker 1: I guess you would call it the disintegration of a
• 1:45
  Speaker 1: connection between asset prices and growth in GDP. Right, Well,
• 1:51
  Speaker 1: you know that is probably the most consequential place that
• 1:55
  Speaker 1: people ought to be looking in terms of understanding where
• 1:58
  Speaker 1: you are in the cycle. As we would put it,
• 2:01
  Speaker 1: the disconnect that what you alluded to, the disconnect in
• 2:04
  Speaker 1: which asset prices are so robust against the backdrop where
• 2:09
  Speaker 1: GDP has been growing at very muted rates for a
• 2:12
  Speaker 1: very long period of time, suggests that there is in
• 2:14
  Speaker 1: fact that disconnect, as you say, between asset prices and income.
• 2:19
  Speaker 1: If you disaggregate asset prices into their constituent pieces, obviously
• 2:24
  Speaker 1: what you have is equities, real estate, bonds, et cetera.
• 2:29
  Speaker 1: And when you have this large disparity between asset prices
• 2:32
  Speaker 1: and GDP, which you're really saying is that one or
• 2:35
  Speaker 1: all of the following are true. Pe ratios are being stretched.
• 2:39
  Speaker 1: Cap rates in real estate are very low, or bond
• 2:43
  Speaker 1: yields and bond spreads are also quite quite compressed. What
• 2:47
  Speaker 1: it also means, of course, and just thinking about it
• 2:49
  Speaker 1: in an equity formulation, if asset prices are high, if
• 2:53
  Speaker 1: asset multiples are or pe multiples are high, ordinarily as
• 2:57
  Speaker 1: enterprise multiples left, so do debt multiples. If debt multiples
• 3:01
  Speaker 1: are lifting at the same time that income and GDP
• 3:04
  Speaker 1: is muted, sooner or later, you're going to have a
• 3:06
  Speaker 1: debt servicing problem. Well, then speak about this debt servicing
• 3:10
  Speaker 1: problem in the context of low discount rates that were
• 3:16
  Speaker 1: available at one time but may not be available in
• 3:19
  Speaker 1: the future. Right so to to a very great degree,
• 3:23
  Speaker 1: maybe this also speaks to another kind of disconnect I'll
• 3:27
  Speaker 1: call it the central bankers disconnect. Is that traditionally you
• 3:30
  Speaker 1: think of capitalism this way that when your labor and
• 3:34
  Speaker 1: capital are efficiently configured in your economy, your profits are
• 3:37
  Speaker 1: going to be growing, your wages are going to be growing,
• 3:39
  Speaker 1: your GDP is going to be growing. That's just another
• 3:42
  Speaker 1: way of saying that prosperity should naturally lift asset prices. Instead.
• 3:47
  Speaker 1: What the central banks in effect have done over the
• 3:49
  Speaker 1: course of this cycle is they short circuited the process.
• 3:52
  Speaker 1: They forced rates lower through quantitative easing, through zero rates,
• 3:56
  Speaker 1: negative rates in Europe and so forth, and by driving
• 3:59
  Speaker 1: the discount rates down. Uh, the result has been a
• 4:03
  Speaker 1: surge in asset prices. But the surgeon asset prices. It's
• 4:08
  Speaker 1: not the case that high asset prices create the prosperity.
• 4:11
  Speaker 1: The causation is completely reversed. And so now we believe
• 4:15
  Speaker 1: you're in a late cycle type of environment, and ultimately
• 4:19
  Speaker 1: you're going to have to resolve this disparity, this wedge
• 4:22
  Speaker 1: between high asset prices and low GDP growth against the
• 4:26
  Speaker 1: backdrop of substantially expanded leverage in the system that was
• 4:31
  Speaker 1: incentivized by these low discount rates that you allude to. Well,
• 4:35
  Speaker 1: does resolving this disparity? Is that a diplomatic way of
• 4:39
  Speaker 1: saying that we are headed for some real problems? Yes,
• 4:46
  Speaker 1: I guess you said it much more directly that there's
• 4:49
  Speaker 1: only one of two possibilities, as as the Great Lord
• 4:53
  Speaker 1: Kine's put it, Uh, if a trend is unsustainable, then
• 4:57
  Speaker 1: at some point it will stop. This idea asset prices
• 5:00
  Speaker 1: can permanently disconnect and continue it um or work in
• 5:05
  Speaker 1: a in a dynamic that's completely disconnected from the income economy,
• 5:09
  Speaker 1: the wealth economy. That is what I'm referencing. It's it's absurd.
• 5:12
  Speaker 1: So either we're going to get just a massive surge
• 5:16
  Speaker 1: in GDP growth going forward to validate and justify the
• 5:20
  Speaker 1: increase in asset prices, or in most most probably you're
• 5:24
  Speaker 1: going to have to see a reduction in asset prices
• 5:28
  Speaker 1: to uh correspond back to the GDP. And the mechanism
• 5:32
  Speaker 1: by which you get there is probably already being laid
• 5:36
  Speaker 1: out in front of us. It's the FED tightening, it's
• 5:39
  Speaker 1: the quantitative tightening as well as the actual rise in
• 5:42
  Speaker 1: the overnight rate. So does that mean that tad Rivella
• 5:46
  Speaker 1: is talking himself into a job of managing cash for
• 5:49
  Speaker 1: a while? Well, that that's probably an unnecessary, um uh
• 5:56
  Speaker 1: extreme step, although maintaining a proper level of liquidity is
• 6:00
  Speaker 1: probably always a smart thing to do. But in a
• 6:03
  Speaker 1: late cycle environment, what it really means is that you're
• 6:05
  Speaker 1: supposed to recall what Benjamin Graham said a long time
• 6:09
  Speaker 1: ago that bond selecting is a negative art. Uh. It
• 6:13
  Speaker 1: may not be a negative art in the early and
• 6:15
  Speaker 1: mid stages of the cycle, when leverage is increasing and
• 6:18
  Speaker 1: almost everything that you do. UM, everything that you do
• 6:21
  Speaker 1: from a risk seeking point of view tends to do
• 6:24
  Speaker 1: rather well in the late stages of the cycle. You
• 6:27
  Speaker 1: have to be very careful about not selecting assets that
• 6:31
  Speaker 1: we would deem breakable in the sense that they're going
• 6:33
  Speaker 1: to give you a permanent impairment of principle. And so
• 6:36
  Speaker 1: that means that when you survey your allocations to things
• 6:40
  Speaker 1: like high yield and in some of the more leveraged
• 6:43
  Speaker 1: area of the corporate market, is be careful. There are
• 6:45
  Speaker 1: ways to continue to capture yield premium even in a
• 6:50
  Speaker 1: asset price come up and bear market. In in in
• 6:54
  Speaker 1: risk there are plenty of things that work out, but
• 6:56
  Speaker 1: there's a lot of things that may be very disappointing
• 6:59
  Speaker 1: in terms of where where they end up. Where do
• 7:02
  Speaker 1: you believe you'd see the first indications of these problems.
• 7:06
  Speaker 1: Would it be and let's say the leverage loan market,
• 7:08
  Speaker 1: would it be in high yield debt? Well, the places
• 7:13
  Speaker 1: that are probably most vulnerable UM would be in the
• 7:17
  Speaker 1: part of the high yield market, particularly that part of
• 7:19
  Speaker 1: the market that has been so overgrown with covenant light
• 7:24
  Speaker 1: debt issuance. And although covenant light sounds like a sort
• 7:27
  Speaker 1: of a technical, almost obscure term. What it really comes
• 7:30
  Speaker 1: down to is we're always supposed to remember that a
• 7:34
  Speaker 1: corporate management has a fiducial obligation to its shareholders, but
• 7:38
  Speaker 1: a contractual one to its bondholders. So what that means
• 7:42
  Speaker 1: is that a business can have uh good potential as
• 7:46
  Speaker 1: a business, but without a properly constructed set of covenants
• 7:51
  Speaker 1: for the bondholder, it's also possible for management to essentially
• 7:55
  Speaker 1: uh spin those assets off the shareholders, pay sell assets,
• 8:00
  Speaker 1: and pay special dividends, and essentially leave the bond holder
• 8:04
  Speaker 1: holding the bag. So the fact that covenant light issuance
• 8:08
  Speaker 1: is essentially off the charts, it's much greater than we've
• 8:11
  Speaker 1: ever ever seen it. It's a very um imprudent form
• 8:16
  Speaker 1: of lending. So you should expect that when the Fed
• 8:19
  Speaker 1: raises rates, it also strengthens the dollar and you start
• 8:22
  Speaker 1: to see cracks develop in parts of the emerging market.
• 8:25
  Speaker 1: We've seen that just in the last week with Argentina
• 8:28
  Speaker 1: and to a slightly lesser degree, Turkey and maybe Indonesia
• 8:31
  Speaker 1: as well. Thank you very much, tad Rivell joining us
• 8:34
  Speaker 1: as the Chief Investment Officer for fixed Income at the
• 8:38
  Speaker 1: tc W group helping to manage more than a hundred
• 8:41
  Speaker 1: and eighty billion dollars global value. What is a global
• 8:59
  Speaker 1: value investing perspective? Here to help us understand this is
• 9:02
  Speaker 1: Thomas Russo, managing member of a gardener Russo and Gardener,
• 9:07
  Speaker 1: helping to manage more than ten billion dollars of customer assets.
• 9:10
  Speaker 1: Based in Lancaster, Pennsylvania. He joins us here in our
• 9:13
  Speaker 1: eleven three oh studios. Tom, it is a pleasure to
• 9:16
  Speaker 1: see you. Thank you very much for coming in. I
• 9:18
  Speaker 1: want to jump right into it and specifically start about
• 9:22
  Speaker 1: talking about tobacco stocks. Because tobacco stocks, let's leave aside
• 9:26
  Speaker 1: for the moment. Uh, they're the products in terms of
• 9:31
  Speaker 1: whether you are for or again smoking and the health concerns.
• 9:36
  Speaker 1: Many people have invested in these stocks because they have
• 9:39
  Speaker 1: looked forward to what are many consider rich dividends. Yes,
• 9:44
  Speaker 1: do you believe that that's still a valid thesis? Well,
• 9:47
  Speaker 1: it certainly has been over the past four or five
• 9:50
  Speaker 1: or six years as rates short end and the curve
• 9:53
  Speaker 1: have been so low, and so people have sort of
• 9:55
  Speaker 1: been pushed into equities and search for yield, and they've
• 9:59
  Speaker 1: had the highest the highest levels of yield. Um. Uh,
• 10:02
  Speaker 1: and it's in large measure because up until recently they've
• 10:05
  Speaker 1: they've lacked the ability to reinvest a lot of money
• 10:08
  Speaker 1: in the business. UM historically, um UH, and and the
• 10:12
  Speaker 1: dividend yields five percent plus for um Fillmore's International and
• 10:17
  Speaker 1: roughly the same for all three have attractive capital historically.
• 10:20
  Speaker 1: So do you think that they are still attractive for
• 10:22
  Speaker 1: people looking for dividends? No, I think the I think
• 10:25
  Speaker 1: the search for yield actually has has already sort of
• 10:29
  Speaker 1: begun to reverse because the two year treasury yields close
• 10:33
  Speaker 1: to two point seven percent today, and that's fully more
• 10:36
  Speaker 1: than many public companies have as as their dividends, and
• 10:39
  Speaker 1: so it's adequate. It's adequate to keep people away from equities.
• 10:42
  Speaker 1: They don't have to chase after equities just to get yield.
• 10:45
  Speaker 1: Two point whatever it is is close enough. The issues
• 10:49
  Speaker 1: with them, the three areas that you site tobacco and
• 10:53
  Speaker 1: beer and and UH and banking, is that, interestingly all
• 10:58
  Speaker 1: three of them stumble and and struggle today because they're
• 11:02
  Speaker 1: going through a remarkable period of transition. Those are traditional
• 11:06
  Speaker 1: old businesses. You can't imagine anything quite as long standing
• 11:08
  Speaker 1: as tobacco, banking, and and UH and beer. Um, But
• 11:13
  Speaker 1: each of the business is that we're involved with there
• 11:15
  Speaker 1: have new elements that make the future seem more cloudy
• 11:19
  Speaker 1: than than the past. Okay, but just final question on
• 11:23
  Speaker 1: tobacco stocks and then what we can go on and
• 11:25
  Speaker 1: talk about a by shares of Philip Mooreton International are
• 11:30
  Speaker 1: down by more than a fifth. Yes, so far this year,
• 11:34
  Speaker 1: as you say, they currently pay a five percent did
• 11:37
  Speaker 1: end um? Is this a stock in your opinion whose
• 11:40
  Speaker 1: time has come and gone. No, No, it's a position
• 11:44
  Speaker 1: still in my portfolios. Um, it's a it's a stock
• 11:49
  Speaker 1: which evidence is the expression at this moment that no
• 11:52
  Speaker 1: good deed in life goes unpunished. It's Philip Morris says
• 11:56
  Speaker 1: alone in the industry, over the past five years, directed
• 12:00
  Speaker 1: over two and a half billion dollars of shareholder money
• 12:04
  Speaker 1: to develop a reduced risk product, a cigarette substitute that
• 12:09
  Speaker 1: satisfies adult consumers who wish to quit, which are effectively
• 12:14
  Speaker 1: half the community of smokers in the world over, probably
• 12:17
  Speaker 1: a hundred and fifty million people would love to quit,
• 12:21
  Speaker 1: and yet they haven't had something they worked. Philip Morris,
• 12:24
  Speaker 1: after having spent invested two and a half billion dollars,
• 12:27
  Speaker 1: has a product that works, and in fact, in Japan
• 12:30
  Speaker 1: and other markets where it's rolled out, they now have
• 12:33
  Speaker 1: close to market share themselves. Uh. In In this in
• 12:38
  Speaker 1: what was the tobacco industry is now split with combustible
• 12:42
  Speaker 1: cigarettes and the product that Philip Morris invented called the icos,
• 12:45
  Speaker 1: which is a non combustible cigarette, and everything's moving along
• 12:50
  Speaker 1: swell up until a couple of weeks ago they had
• 12:53
  Speaker 1: a stumble in the in the rollout of of a
• 12:56
  Speaker 1: new device that's attached to this product, and that caused
• 13:01
  Speaker 1: some investor concerned. There was a slowdown in the cigarettes
• 13:04
  Speaker 1: that go with that product, and the market became a
• 13:08
  Speaker 1: bit uh disenchanted with the near term prospers. The long
• 13:11
  Speaker 1: term process of completely unaffected by this UM as far
• 13:15
  Speaker 1: as I can tell. And then on top of it,
• 13:17
  Speaker 1: it's it's a regulatory thing. The US FDA has resisted
• 13:22
  Speaker 1: allowing this product into the market, despite the fact that
• 13:27
  Speaker 1: it has helped nearly six million smokers around the world
• 13:30
  Speaker 1: in the last two years alone quit forever cigarettes and
• 13:35
  Speaker 1: so UM we believe that that relief from the FDA
• 13:39
  Speaker 1: will have to come because the product being adopted by
• 13:43
  Speaker 1: millions of people overseas, leaves of the US seeming a
• 13:46
  Speaker 1: bit of isolationists as it relates to a product that
• 13:49
  Speaker 1: has effectively helped people for the first time ever quit Now,
• 13:53
  Speaker 1: that's one thing then, and I think at five five
• 13:55
  Speaker 1: percent yields at thirteen times that income in this marketplace.
• 13:59
  Speaker 1: The investments are in Altria in Philip Morris are quite
• 14:03
  Speaker 1: reasonably priced, especially as I do believe that the product
• 14:06
  Speaker 1: that both of them will share and we'll finally get
• 14:09
  Speaker 1: approved by the U s f D. A. Thank you
• 14:12
  Speaker 1: very much, Tom Russo. I look forward to having you
• 14:14
  Speaker 1: in the future. You got to talk more about your
• 14:16
  Speaker 1: value strategy and get your insight into what's going on
• 14:19
  Speaker 1: in the beer industry because, as you say, going through
• 14:22
  Speaker 1: lots of changes. Tom Russo is managing member of Gardner
• 14:25
  Speaker 1: Russo and Gardner, helping to manage more than ten billion
• 14:28
  Speaker 1: dollars based in Lancaster, Pennsylvania, joining us here in our
• 14:33
  Speaker 1: eleven three oh studios. Well, if you've been scouring the
• 14:51
  Speaker 1: quarterly reports of companies such as Netflix, Microsoft, or Google's
• 14:56
  Speaker 1: Alphabet or even Oracle looking for how much cash they
• 14:59
  Speaker 1: have held overseas, good luck you won't find it. Brandon
• 15:03
  Speaker 1: Couch Codin is a managing editor for Bloomberg News, and
• 15:06
  Speaker 1: he joins us now to explain why, all right, Brandon,
• 15:10
  Speaker 1: why aren't companies reporting how much money they have held overseas? Yeah,
• 15:16
  Speaker 1: I mean, the simple answer is they don't have to. Um.
• 15:19
  Speaker 1: The the more complicated one is basically, um, with the
• 15:22
  Speaker 1: tax law changes, Um, every company how to pay these
• 15:26
  Speaker 1: this mandatorily? How to pay this tax? Already they can
• 15:29
  Speaker 1: space it out over eight years, but they have to
• 15:31
  Speaker 1: pay this tax on their fore and holdings. So cash
• 15:33
  Speaker 1: anywhere in the world is basically fungible. Now. Yeah, but
• 15:36
  Speaker 1: why wouldn't they want to report that they had, let's say,
• 15:39
  Speaker 1: brought the money back to the United States, if indeed
• 15:42
  Speaker 1: they did so. And that's the question that tax experts
• 15:45
  Speaker 1: we talked to are asking. Um, they're looking for, you know,
• 15:50
  Speaker 1: changes in disclosure right now because they haven't gotten a
• 15:52
  Speaker 1: lot of guidance from the I R S. All Right,
• 15:54
  Speaker 1: So if the company doesn't bring back the cash from
• 15:57
  Speaker 1: the United States, there's no way to know this now,
• 16:01
  Speaker 1: at least not from their quarterly reports. We might see it,
• 16:03
  Speaker 1: um through other filings, some of them are actually disclosing.
• 16:06
  Speaker 1: I mean, we have an example in there from Google
• 16:08
  Speaker 1: I believe that they told us how much UM tax
• 16:11
  Speaker 1: they paid, so from there you can kind of back
• 16:13
  Speaker 1: end it and get a sense of how much they
• 16:15
  Speaker 1: brought back. But it's up to them, I mean, otherwise
• 16:17
  Speaker 1: we're not going to know. And what about other companies.
• 16:20
  Speaker 1: I mean I mentioned Microsoft, Netflix, Alphabet the parent company
• 16:25
  Speaker 1: of Google, as well as Oracle and Apple. They don't
• 16:28
  Speaker 1: report this and in some cases I should just mention
• 16:31
  Speaker 1: that it isn't something that's just happened, correct exactly. So
• 16:35
  Speaker 1: Apple stopped last year at the end of their I
• 16:39
  Speaker 1: guess their fiscal first quarter whatever whatever it was. They're
• 16:41
  Speaker 1: back in October UM and then you know, the same thing.
• 16:44
  Speaker 1: I think Cisco stopped a little bit earlier. Otherwise we're
• 16:47
  Speaker 1: seeing them stop at this first quarter recording after tax
• 16:49
  Speaker 1: law went into effect. And what about other companies? Are
• 16:52
  Speaker 1: other companies like Coca Cola, for example, are they still
• 16:55
  Speaker 1: reporting how much money they have? That's that's sort of
• 16:58
  Speaker 1: the interesting part to us right now is seeing who's
• 17:01
  Speaker 1: reporting and who is and so Coke and Pepsi both are,
• 17:04
  Speaker 1: g Caterpillar both are um. Facebook is some of the
• 17:08
  Speaker 1: interesting things to get to see now is someone like
• 17:10
  Speaker 1: Facebook there you actually have more cash overseas now than
• 17:13
  Speaker 1: they did before, so it's not quite having the effect
• 17:17
  Speaker 1: we thought it would. The question is whether how much
• 17:20
  Speaker 1: it is just how much it matters now the new
• 17:22
  Speaker 1: rule is at a one time rate of what like
• 17:24
  Speaker 1: fifteen and a half percent for the cash and eight
• 17:28
  Speaker 1: percent for non cash or illiquid assets exactly, And and
• 17:32
  Speaker 1: they have that's on what they were holding. Um. They
• 17:36
  Speaker 1: have eight years to pay that, though they can space
• 17:38
  Speaker 1: it out, so there's sort of that um opacity right
• 17:41
  Speaker 1: now in terms of when they're paying it. And that's
• 17:43
  Speaker 1: something we're all gonna care about because it's going to
• 17:45
  Speaker 1: have an impact. So this would then make the actual
• 17:49
  Speaker 1: cash amount that is listed in the quarterly report a
• 17:53
  Speaker 1: total obviously for the entire company, and it would be
• 17:57
  Speaker 1: treated the same as if it was in the United States. Yeah, exactly,
• 18:02
  Speaker 1: So what they held overseas, that's what's going to get
• 18:04
  Speaker 1: taxed at those rates for this one time sort of
• 18:07
  Speaker 1: um you know, repatriation holiday, we want to call it that, um. Otherwise,
• 18:11
  Speaker 1: now it's all being treated the same. The questions are
• 18:14
  Speaker 1: becoming now, um around if if we're going to see,
• 18:17
  Speaker 1: you know, what the global minimum rates going to be
• 18:19
  Speaker 1: and if this is a permanent situation, or if companies
• 18:23
  Speaker 1: are keeping it overseas just in case something changes, and
• 18:26
  Speaker 1: and that there might be an advantage down the road
• 18:28
  Speaker 1: because previously they had to pay what a thirty five
• 18:30
  Speaker 1: percent tax if they wanted to bring the money back
• 18:33
  Speaker 1: into the United exactly. And so that was always the
• 18:35
  Speaker 1: rationale for why I was saying, quote locked overseas um
• 18:39
  Speaker 1: you know, like we see we see it in the article.
• 18:42
  Speaker 1: We have tax experts that are that are saying, you know, look,
• 18:44
  Speaker 1: we tried this before in two thousand four. We didn't
• 18:46
  Speaker 1: see a ton come back. You know, we're doing it now,
• 18:49
  Speaker 1: expected to be sort of tactical, and don't expect this
• 18:52
  Speaker 1: all to all of a sudden, you know, come on
• 18:54
  Speaker 1: to us accounts. And one of the reasons why investors
• 18:57
  Speaker 1: would look at the cash position of a company is
• 19:01
  Speaker 1: that when you do a total valuation of the company's stock,
• 19:05
  Speaker 1: you want to back out, or at least you want
• 19:07
  Speaker 1: to make note of how much cash they have on
• 19:09
  Speaker 1: their books, because that would then be something you could
• 19:11
  Speaker 1: deduct from the actual share price. Yeah, of course, all right,
• 19:15
  Speaker 1: And any word from the Internal Revenue Service as to
• 19:19
  Speaker 1: whether they're going to make this kind of filing, uh,
• 19:23
  Speaker 1: you know, mandatory in the future in order to sort
• 19:26
  Speaker 1: of see or check to see whether the law itself
• 19:28
  Speaker 1: was was effective. Everyone we've talked to is said that
• 19:31
  Speaker 1: there's you know, the problem right now is the lack
• 19:33
  Speaker 1: of guidance from the I R S. So there hasn't
• 19:35
  Speaker 1: been anything to that effect yet. All right, well, thanks
• 19:38
  Speaker 1: for the guidance. Appreciate it. Brandon Couch Cotton is managing
• 19:42
  Speaker 1: editor for a Bloomberg News on the story that the Apple,
• 19:45
  Speaker 1: along with a variety of other companies such as Netflix, Microsoft,
• 19:49
  Speaker 1: as well as Oracle, uh not reporting how much money
• 19:53
  Speaker 1: or cash they have on their books outside the United States,
• 20:12
  Speaker 1: go public or get sold. Well, there may be an
• 20:17
  Speaker 1: advantage to being acquired. Sandy Miller is the general partner
• 20:21
  Speaker 1: at Institutional Venture Partners i v P, based in San Francisco,
• 20:26
  Speaker 1: and Sandy joins us now to explain what's going on
• 20:28
  Speaker 1: in the world of technology and initial public offerings and
• 20:31
  Speaker 1: mergers and acquisitions. Sandy, thank you very much for being
• 20:34
  Speaker 1: with us. You know, one of the things and preparing
• 20:36
  Speaker 1: for this, I was taking a look at Snap, which
• 20:39
  Speaker 1: was a headline grabbing initial public offering. It came public
• 20:43
  Speaker 1: at seventeen. It currently trades around ten dollars a share.
• 20:47
  Speaker 1: UH that's a decline of a little bit more than
• 20:49
  Speaker 1: forty percent. On the other hand, mule Soft was acquired
• 20:55
  Speaker 1: by Salesforce dot Com in March of this year for
• 20:58
  Speaker 1: a price of five point six billion dollars. And also
• 21:03
  Speaker 1: looking at the number of technology initial public offerings, I
• 21:05
  Speaker 1: think they are about six that are currently trading year
• 21:08
  Speaker 1: to date. Give us your overview of what is going
• 21:11
  Speaker 1: on in the world of funding for a large technology
• 21:15
  Speaker 1: companies such as the Sandy sure Well's first. It's a
• 21:19
  Speaker 1: very healthy environment. The i p O s for for you.
• 21:22
  Speaker 1: I'm looking here at US technology companies have really been
• 21:25
  Speaker 1: working well. The last three that have gone Carbon Black
• 21:29
  Speaker 1: Smartsheet Docum sign all raised the range from the initial
• 21:33
  Speaker 1: filing range, priced adder above the range and traded up
• 21:37
  Speaker 1: an average of Actually the nets consistent. It's actually been
• 21:41
  Speaker 1: fifteen US tech i p O so far this year,
• 21:44
  Speaker 1: which is running well ahead of and they're up an
• 21:48
  Speaker 1: average of the most prominent one. The biggest name of
• 21:51
  Speaker 1: the group was Dropbox. UH was an i VP portfolio
• 21:55
  Speaker 1: company which has traded up over so deals are working
• 21:59
  Speaker 1: Um it's not really that a surprise because there's a
• 22:03
  Speaker 1: there's great companies as a backlog of great companies that
• 22:05
  Speaker 1: are expecting to see more I p O s. UM.
• 22:09
  Speaker 1: They're benefiting from obviously deals perform and money managers are
• 22:13
  Speaker 1: looking to add to the these companies to their portfolio
• 22:16
  Speaker 1: to you know, as a form of alpha. And they're
• 22:19
  Speaker 1: benefiting from a favorable regulatory environment because the Jobs Act,
• 22:23
  Speaker 1: which wanted to affect several years ago, has been expanded
• 22:26
  Speaker 1: to include larger tech companies. Uh and some of these
• 22:30
  Speaker 1: new I p O s are pretty mature companies that
• 22:33
  Speaker 1: that didn't meet the standards of the Emerging market UM
• 22:36
  Speaker 1: qualifications for the job back but now they too. All
• 22:39
  Speaker 1: the all the companies, not just tech of course, but
• 22:41
  Speaker 1: all the companies can can use the confidential filing and
• 22:45
  Speaker 1: the test the waters features of the Jobs Act, which
• 22:48
  Speaker 1: has been a great boon to the I p O
• 22:50
  Speaker 1: market because it gives CEO is much more confidence that
• 22:53
  Speaker 1: if they go through the process that it's going to
• 22:56
  Speaker 1: be successful. UM. So I think it's a very healthy
• 22:59
  Speaker 1: environment for ips. But one of the things that I
• 23:01
  Speaker 1: wanted to mention really was the M and A market.
• 23:04
  Speaker 1: You mentioned the mule Soft acquisition happened to be one
• 23:07
  Speaker 1: of our portfolio companies as well, the very very successful
• 23:10
  Speaker 1: after going after a successful IPO. But many cases, companies
• 23:15
  Speaker 1: are going to be acquired prior to going I P O.
• 23:18
  Speaker 1: And this isn't new. But I think, you know, people
• 23:20
  Speaker 1: sometimes think the M and A market people buy when
• 23:23
  Speaker 1: things or prices are low or whatever, that it's going
• 23:26
  Speaker 1: to be counter cyclical to the I p O market,
• 23:30
  Speaker 1: But just isn't true. It's been consistently the case that
• 23:33
  Speaker 1: I p O s and M and A, certainly in
• 23:36
  Speaker 1: the tech sector cycled together. Well, what ap app Dynamics,
• 23:40
  Speaker 1: which was purchased by Cisco. Would that be an example,
• 23:44
  Speaker 1: it's a particularly vivid example. Happened to be another IPP
• 23:47
  Speaker 1: portfolio company, the very successful one. They got to the
• 23:51
  Speaker 1: they took it to the brink. They were required really
• 23:54
  Speaker 1: almost at the eleventh hour and fifty nine minute by Cisco,
• 23:58
  Speaker 1: even though they had market the road show was going
• 24:01
  Speaker 1: to be clearly successful, very well received offering, but Cisco
• 24:05
  Speaker 1: just made a bid that you know, you just couldn't
• 24:08
  Speaker 1: say no to. I guess the but we'll see others.
• 24:11
  Speaker 1: There are you know, two I p O s I'm
• 24:12
  Speaker 1: sorry to M and A transactions this past week both
• 24:15
  Speaker 1: our companies that could have gone public and UH recruit
• 24:19
  Speaker 1: bought glass Door, the online review for employees company, for
• 24:25
  Speaker 1: one point two billion, and Walmart brought flip Guard, the
• 24:28
  Speaker 1: big Indian e commerce giant, for well, they paid sixteen
• 24:32
  Speaker 1: billion for seventy seven percent of the company that you
• 24:34
  Speaker 1: applies to twenty one billion dollar company value. Those are
• 24:37
  Speaker 1: two companies could have gone public but are being acquired instead.
• 24:40
  Speaker 1: And we'll see we'll see more of that once companies
• 24:43
  Speaker 1: get on either on file or gearing up publicly on file,
• 24:47
  Speaker 1: or are preparing for an IPO and have made a
• 24:50
  Speaker 1: confidential filing. And sometimes companies announced that they've made a
• 24:53
  Speaker 1: confidential filing. You're actually allowed to do that. Um, the
• 24:57
  Speaker 1: they become it kind of, it becomes a cattle for
• 25:01
  Speaker 1: the big tech companies that probably have been tracking them
• 25:03
  Speaker 1: for a while to move in and make an acquisition
• 25:07
  Speaker 1: if it makes strategic sense for them. Do you see
• 25:10
  Speaker 1: more untraditional types of money raising activity? And I'm thinking
• 25:15
  Speaker 1: for example of Spotify, which went public but not in
• 25:17
  Speaker 1: a traditional way. Yeah, of course it wasn't money raising
• 25:21
  Speaker 1: for Spotify because they did a so called direct listing. Uh,
• 25:25
  Speaker 1: they didn't need the money, they didn't need the visibility
• 25:28
  Speaker 1: of an IPO road show because the company was so
• 25:31
  Speaker 1: well known has been you know, it's an eleven year
• 25:33
  Speaker 1: old company that's very prominent, very certainly very extensive, you know,
• 25:38
  Speaker 1: consumer base and the so they did a direct listing.
• 25:41
  Speaker 1: I don't think we'll see a lot of it, but
• 25:43
  Speaker 1: I'm glad to see it because I'm all for alternatives
• 25:46
  Speaker 1: for companies, and we just see the Hong Kong market
• 25:49
  Speaker 1: is getting more lively, so obviously that's going to be
• 25:52
  Speaker 1: more for the Chinese companies. But shallow be going public
• 25:55
  Speaker 1: plans in UM in Hong Kong. So I think it's
• 25:59
  Speaker 1: good to have alternatives. But the direct listing doesn't raise
• 26:02
  Speaker 1: any money UM, but it does get you, get you public.
• 26:06
  Speaker 1: I don't think it's that biggest savings. You know. The
• 26:08
  Speaker 1: reason why people want to do it is there's jealousy
• 26:12
  Speaker 1: over who gets the gains from the first day pop
• 26:15
  Speaker 1: of an I p O. That's really what it's all about.
• 26:18
  Speaker 1: They're not so much looking to save the underwriting fees.
• 26:20
  Speaker 1: They're looking to redirect the pop of the first day
• 26:23
  Speaker 1: to their own share existing shareholders rather than a new
• 26:27
  Speaker 1: set of hand picked investors from an investment bank, you know,
• 26:31
  Speaker 1: occurrying favor with their best clients. Want you to get
• 26:34
  Speaker 1: specific if you can right now, because I know that
• 26:36
  Speaker 1: you have a lot of well you've got a lot
• 26:38
  Speaker 1: of history in the in the in the industry, but
• 26:41
  Speaker 1: telematics and and the logistics industry, and what if you
• 26:44
  Speaker 1: could just comment on what you see, what you see happening. Sure,
• 26:48
  Speaker 1: well it's an area that I've personally been pretty involved in.
• 26:52
  Speaker 1: We're back to uh, we're back three companies so far,
• 26:55
  Speaker 1: one right, Fleet Maddox was one of them. Yes, I
• 27:00
  Speaker 1: was on the board of Fleet Maddics. We've backed at
• 27:02
  Speaker 1: road Um, which you know was acquired very very successfully,
• 27:07
  Speaker 1: the Fleet Maddics which went public and then was later
• 27:11
  Speaker 1: required and most recently a company called keep truck and
• 27:14
  Speaker 1: based here in San Francisco, which has sort of turned
• 27:17
  Speaker 1: the business on its head. And it's a it's a
• 27:19
  Speaker 1: rather than a system that's kind of imposed by the
• 27:23
  Speaker 1: fleet owner, is actually a telematic system and uh, combined
• 27:29
  Speaker 1: with a lot of other functionality that the truckers that
• 27:32
  Speaker 1: have adopted themselves. And then you know, much like most
• 27:35
  Speaker 1: technology today, you know, it starts with the users, then
• 27:39
  Speaker 1: the company picks up on it. So it's it's gotten
• 27:42
  Speaker 1: very very broad positive acceptance from the actual truck driver community.
• 27:48
  Speaker 1: I think it's an area really right. You know, this
• 27:51
  Speaker 1: is a massive amount of our Our whole industry moves
• 27:54
  Speaker 1: by truck uh. It's a very old fashioned industry. The
• 27:59
  Speaker 1: information and available is remarkably limited historically, and it's really
• 28:04
  Speaker 1: right for you know, technology improvements and people like Keep
• 28:08
  Speaker 1: Talking and others are providing that. Thanks very much for
• 28:11
  Speaker 1: being with us. Sandy Miller's general partner for Institutional Venture
• 28:15
  Speaker 1: Partners i v P, based in San Francisco, and you
• 28:19
  Speaker 1: can follow them at i v P on Twitter. Thanks
• 28:25
  Speaker 1: for listening to the Bloomberg P and L podcast. You
• 28:28
  Speaker 1: can subscribe and listen to interviews at Apple Podcasts, SoundCloud
• 28:32
  Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
• 28:35
  Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
• 28:39
  Speaker 1: It's one before the podcast. You can always catch us
• 28:42
  Speaker 1: worldwide on Bloomberg Radio.