Case Blog

It was reported late last week that the United Kingdom’s economy continued to contract in the third quarter. GDP was reported to be down by 0.4 percent vs. the 2nd quarter. (FT/The Lex Column October 24, 2009) This represented a record sixth consecutive quarter of contraction, the longest since World War II. It was down 5.2% from the year-earlier period. (WSJ October 24, 2009) This contrasted with the eurozone recovery, where many are forecasting GDP to improve by 0.9 percent, largely fueled by a stronger recovery in France and Germany. Germany, in particular, saw its export business continue to show strong growth. The United States is expected to join the eurozone when it reports this week on its third quarter GDP. (WSJ October 24, 2009) We will most likely continue to see Sterling decline vs. the Euro and a weak U.S. dollar, as both governments look to encourage exports as well.

This clearly is another blow to Gordon Brown’s re-election prospects next spring. It should also serve as a warning to the Democrats in the United States about next year’s mid-term elections. The recovery in both the U.K. and the U.S. will be a business-led recovery. The consumer will remain on the sidelines, with a jobless recovery leaving unemployment in double digits in the U.S. With “home wealth” having disappeared, consumers will need to see the employment figures rise before they return to spending.

This means that business will need to lead the recovery in both the U.K. and the U.S. We are already starting to see improved earnings reports. In the technology sector, for example, both Google (GOOG) and Microsoft (MSFT) reported stronger than expected earnings this month. Tech firms are starting to see orders rebound and will be clear beneficiaries of increased capital spending in ‘10. Unfortunately, it has become fashionable for both the Labour Party in the U.K. and the Democrats in the U.S. to lambast big business and the institutional financial sector in particular, with continued calls to reduce compensation incentives. It is time for our political leaders to lead and to insure that the political climate fosters the growth that their constituents desire and deserve after the Great Recession of ‘09.

This is a guest blog post by Jason Cassidy, Asset International’s Senior Vice President of Strategy and Development.

By Jason Cassidy

In the past few weeks we have seen the busiest IPO market all year with IPOs from high-growth companies like A123 Systems in the alternative energy sector and Shanda Games in the Chinese gaming sector. More recently, Blackstone Group announced it would take some of its investments public. Private equity and venture capital firms finally have a public exit alternative again. At the same time, we have also seen some large strategic deals like Xerox and Abbott Laboratories acquiring large companies, and even in an out-of-favor sector like newspapers Gannett was able to take on debt in its recent bond deal. Thus, the M&A market for large corporations with access to cash seems to be open again.

At first glance, the availability of exits and acquisition demand from large strategics may mean that higher valuations will follow. Add to these new demands the pent-up supply of companies looking for an exit, one might expect a flood of deals to hit the market. In addition to providing current exit potential, the IPO market opening gives venture investors in high-growth sectors and private equity investors with a focus on larger companies a reason to invest again. Add to that strategics with cash and a need to acquire to boost growth, and the world seems right again for deals.

The one area we may still have to wait to return is private equity deals for smaller, lower growth companies without the prospect of an IPO exit. With the debt markets still somewhat expensive and less generous, PE investors may not be able to see their way to strong returns yet. However, this too will open up soon and we will be back to strong deal flow across the board (with perhaps a bit more conservative leverage for a little while at least).

About Jason Cassidy, Asset International’s Senior Vice President of Strategy and Development.

Prior to joining Asset International, Mr. Cassidy was Vice President of website solutions for Register.com, where he oversaw sales, operations, customer service, marketing and product management with the primary focus on small business customers. Previously, as Vice President of Reed Business Information, he was actively involved in global strategy and development, including M&A initiatives and international development, and managed a portfolio of websites. Mr. Cassidy earned an M.B.A. from Duke Fuqua School of Business (2007) and an A.B. from Harvard University (1998). Originally from Boston, he and his family reside in Staten Island, New York.

I woke up Saturday morning in Blackhawk ready to focus on college football, The Presidents Cup in Harding Park and an afternoon round of golf on The Lakeside Course, where two weeks ago the LPGA held the CVS/pharmacy LPGA Challenge, which was won by Sophie Gustafson.  While the morning fog was dense, I knew that the afternoon would yield a beautiful fall San Francisco/Bay Area day in the low ’70s.  I brewed a special blend of morning coffee and moved to the Wall Street Journal Online.  Within minutes I was greeted by the headline, Democrats Weigh Tax on Financial Transactions, by John D. McKinnon. (WSJ October 10-11, 2009) I had assumed that we had moved on when Lord Turner’s proposal did not get a serious discussion at the G-20 meeting and his own Labour Party did not endorse the idea. Our financial institutions, which are just starting to recover, looked certain to be spared an idea that would have a negative impact on them and certainly on job creation for an industry that has been very hard hit, both in The City and on Wall Street.  I had not realized that Congressman Barney Frank, chairman of the House Financial Services Committee, was a supporter of a Tobin Tax.  As the Wall Street Journal reported, the idea has significant support from large labor unions, and House Democrats are clearly growing more enamored with the idea.

If this bill advances to the Senate, we can hope that Senator Chuck Schumer, the senior senator from New York and a member of the Senate Finance Committee, will remind his colleagues from around the country, as he has before, how important the financial services industry is to New York’s economy and that a regressive tax will have a very negative impact on the overall region’s economy. I would also hope that Mayor Bloomberg would weigh in on why this type of tax is not what is needed during a recovery.

I finished my first cup of coffee, moved on to my second one and started to watch the early match play from Harding Park.  Harding Park opened in 1925 in San Francisco and offers a classic tight design and views of the Pacific Ocean. Unfortunately, as a municipal course it fell on hard times over the years through neglect.  Several years ago the city of San Francisco made a commitment to restore the course as a championship venue. Together with Bethpage Black on Long Island and Torrey Pines in San Diego, these are the three best municipal courses in the country and each of them is committed to hosting major professional events.  The Presidents Cup is relatively new compared to The Ryder Cup, where the best U.S. golf professionals compete with the best European golf professionals. The Presidents Cup inaugural year was in 1994, and it alternates every two years with The Ryder Cup. The golf professionals that play for The Presidents Cup International squad are all from outside the U.S. and Europe. This year Australia’s Greg Norman is the International team’s captain and the ever-likable Fred Couples is the U.S. captain.

As I write this on Saturday evening, the U.S. team holds a 3-point lead, 12.5 vs. 9.5, as they enter the final day and Sunday’s single matches. The U.S. seems well positioned to win its sixth Presidents Cup. Their record is 5 wins, 1 loss and 1 tie since the tournament began.  The next Presidents Cup will take place in Melbourne, Australia in 2 years.

Mary Claire and I will return to New York City this week and I will hold a strategic off-site for Asset International with the theme of “One Company” as we move to expand globally.

This is a guest blog post by Jag Alexeyev, head editor and author of Strategic Insight’s international publications on fund management and the architect behind the Simfund Global analytical platform.

By Jag Alexeyev

The meteoric success of Carmignac, an investment manager based in Paris, is forcing the industry to think again beyond its box. In just one year, Carmignac’s flagship fund went from #40 in assets in Europe to number one. Overall the boutique captured $15 billion of net inflows through the summer, while many other companies struggled to get back on their feet. How did they do it, and what does it mean for the industry?

Strategic Insight’s client engagements and published research in recent weeks delved into the many factors behind Carmignac’s success, from (not so) simple performance results to the rising importance of balanced and asset allocation structures, long-term brand building, steadfast investment focus, clarity of message, and a distinct distribution approach. Their story has resonated not only in Europe, but also in major cities such as Boston, where we just finished a round of meetings. It also spread as far as India, where the media tuned in to how much Carmignac was putting into their stock markets in search of higher returns, a common theme uniting emerging markets with the rest of the world today.

While the manager’s progress offers many lessons, it also means that other fund managers no longer have the same old excuses for marketing failure. If a relatively tiny firm situated in the ritzy Place Vendôme can grow to become the highest selling manager in Europe, why can’t others with more resources do better? Many are rethinking what it takes to be successful in the investment business, especially in the shadow of mega deals such as Blackrock and Barclays. Although the new BGF funds group is quite a bit bigger in assets, Carmignac has captured more inflows to its long-term funds this year — indeed, twice as much if ETFs are excluded.

If all the issues raised by this aren’t enough, fund executives are contending with a slew of additional challenges today, from hedge fund managers aggressively seeking to offer alternative UCITS products to a reappraisal of constant NAV pricing of money funds. On the bright side, industry flows rebounded strongly worldwide between April and July. But financial markets have come far too, leaving some advisors with more questions than answers about what to do next for clients, and more hard work for fund managers to guide the way.

About Jag Alexeyev, Senior Managing Director & Head of Global Research, Strategic Insight

Jag Alexeyev directs Strategic Insight’s global investment industry research and consulting effort. Leading the group’s global expansion, Alexeyev is also the head editor and author of SI’s international publications on fund management and the architect behind the Simfund Global analytical platform.

Yesterday Mary Claire and I flew back to our Blackhawk home in northern California. Blackhawk sits in the East Bay at the base of Mt. Diablo, which provides the highest vista in the Bay Area. The weather in the East Bay is much closer to that in Napa and Sonoma Valleys than the weather in San Francisco.  The cool morning air with gradual warming during the day, along with all the winery information I have received lately, reminded me that harvest is in full swing.  The early predictions are for an excellent harvest that should yield, in several years, some spectacular ‘09 vintage wines.

The fall harvest in wine appellations around the globe reminds one of the rhythms of life that we often take for granted.  The fall is a special season beyond what crops are harvested and eventually make their way to our dining room tables, and in some cases to our wine cellars to age and mature — it is also the season that gives us football. On campuses across the country the stadiums are once again filled on Saturdays with fans pulling for their school’s team.  At this point Florida is #1 in all the polls, followed by Texas and Alabama. We will take in the Boston College vs. North Carolina State game in two weeks in Chestnut Hill. In spite of this year being billed as a rebuilding year, the Boston College Eagles have remained competitive in the ACC and find themselves 4-1 as the showdown in South Bend with the Irish of Notre Dame looms on October 24th.

On Sundays our attention turns to the NFL. With only four games played in a 16-game season, it is much too early to predict the February Super Bowl combatants, but with Eli Manning and the Giants matching his brother Peyton Manning’s Colts 4-0 record, there is an outside chance that we could see an epic brother vs. brother Super Bowl. I trust that I will hear from many friends and colleagues with alternative scenarios and teams!

Fall is also an excellent time for those of us in the advertising business to focus on closing out ‘09 and preparing for ‘10, where we all hope that we will find improved fortunes for our own companies and our industry. For a look back at the advertising industry in the ’60s, I recommend AMC’s superbly written drama Mad Men, built around the fictional Sterling Cooper advertising agency. It is written and produced by the talented Matthew Weiner. Weiner’s previous credits include being an executive producer and writer on The Sopranos.  John Hamm plays the lead as the creative director Don Draper, around whom there is always mystery and intrigue.  In many ways it carries us back to a simpler time in the ad business, when campaigns and fortunes were built around relationships often forged over long lunches and dinners. I must admit, though, that I do not recall all of the office drinking, which is a staple in the offices of Sterling Cooper. Perhaps those of us on the media side missed what really was driving the creative?

As we prepare for ‘10 and try to forget the pain of ‘09, it would serve us well to remember that even in the age of Google and automated, search-driven advertising, relationships matter, and we need to partner with our clients to find new and creative ways for them to reach their target audiences in a way that will be impactful.  Search or lead generation will continue to be an essential part of the marketing mix, but our clients are looking for opportunities that will allow their products and services to be distinguished from their competitors, and in this way we have much in common with Don Draper and the Sterling Cooper team.

For those of you who cannot get enough of Mad Men and would like a Monday morning analysis of each Sunday’s episode, I highly recommend MediaPost’s MADBLOG, by Dorothy Parker. You can sign up to have it delivered by email to your inbox at www.mediapost.com.