I always love being in New York and last Tuesday I attended the AAAIM 2010 Investment Themes event in New York (a fairly closely held affair, thank you, Brenda Chai).
With a keynote from John Liu, newly appointed New York City comptroller (closely guarded by his security detail) and other luminaries from the New York investment world, including Kelly Williams from Credit Suisse Customized Fund Investment Group, Marcos Rodriguez from Palladium Equity Partners, Jimmy Yan from New York City Employees’ Retirement System and Peter Marber from HSBC.
All speakers (and attendees) manage multi-billion (double and triple-digit) dollar funds and what struck me was how little these top managers know about venture, except to frown or stay away from the sector given its miserable performance and reputation for the last 10 years (we describe often).
There is clearly more work needed, and an opportunity to be gained to resurrect the face of venture and to establish new faith and trust. That trust of-course can only come from being honest and critical about past venture performance and offering a clear rationale and remedy to resurrect it. Exactly what our focus has been for the last few years.
Now, I am not a journalist and I am not going to go into the many personal conversations I have had with regard to venture investing, yet I do want my readers (specifically those interested in venture) to understand how some of the financial pressures will impact venture directly, indirectly or potentially, as could be surmised from the speeches of the public speakers.
And, the more every venture marketplace participant knows about its dependencies (especially from the Limited Partners at the top of the venture food-chain), the more we can each respond to and secure a better future for a sector that, in my view and with my venture model, deserves much more commitment than 10-15% of overall LP commitments.
The State of the City
Both New York City and New York State have racked up sizable budget deficits. New York State has a $7B deficit and New York City as the nation’s 4th largest government with a budget of $60B has incurred a $4B deficit. If Comptroller John Liu has his way the deficit will not be hidden under the rug by borrowing money but lowered by cutting expenses and/or raising taxes to erase the deficit of about 1/5th of the flexible $25B part of the total budget. The City is looking for creative ways to achieve those savings objectives.
A question from the audience raised about increasing taxation on $25B of newly issued Wall street bonuses was quickly and politically sidestepped by forecasting its prospective value to only yield $0.5B, assuming those bonuses were all distributed in liquid form. In addition, the comptroller stated he prefers to find more long-term solutions to erase the deficit, essentially leaving the contentious issue of dealing with Wall street up to the President.
John Liu is also custodian/board member of 4 of the New York pension funds (including NYCERS with $35B under management), consisting of $100B in assets. No mention of fund performance (we know from other sources more or less what is going on) but he expressed specific interest in widening the network and making it easier for small new asset managers, with unique industry experience and merit to participate in the deployment of diversified assets.
As you can imagine, after having written for years about the lack of verifiable investor merit at the bottom of the food chain, I was enthused to hear the comptroller usher rudimentary free-market principles as its new goals in deploying monetary assets. The proof, of course, is in the pudding and I hope to meet with his people soon to exchange my macroeconomic views on how financial systems ought to work.
Another highlight of the evening was a great overview of emerging markets by Peter Marber who runs emerging market investments for HSBC. Peter stressed the need for a renewed focus on emerging markets, supported by some interesting statistics and the use of “The Mac Theory” (I’ve heard before), not a Macintosh this time but a MacDonalds Big Mac. He simplified the value of a currency by comparing the price of a Big Mac in a country with the price of a Big Mac in the US. The difference yields a fairly accurate view of the expense of doing business in the juxtaposed country.
According to Peter, emerging markets cover 6 Billion people who cover 77% of the global landmass. He sees new opportunities in what he calls shifting democracies, with Japan’s economy growing at a 4% rate versus a growth rate of 2.5% for the US. Emerging market debt has grown by 171% and global equity growing by 82%, while US equity has declined by 24%. BTW: Just yesterday it was reported China’s GDP grew a stunning 10.7% in the 4th quarter of 2009.
Peter comes across as a savvy asset manager with his feet still firmly planted in the ground, practicality we can never have too much of. Peter’s global viewpoints are well put and he expects that venture will remain (for now) a US-dominated opportunity as long as the products we build have a (immediate) global market impact. I concur, as long as we free innovation from the chokehold of our current venture system.
New York, your lights continue to inspire me.