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Peter Fuhrman
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Chairman, Founder and Chief Executive Officer at China First Capital (www.chinafirstcapital.com) , a China-based international investment bank and advisory firm for capital markets and M&A transactions. China First Capital was established in 2007 and has its headquarters in Shenzhen, China.... More
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China Private Equity, by China First Capital
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  • Remembering Digital Computer’s Ken Olsen: He Changed the World & My Life As Well
     One of the true heroes of American business, Kenneth Olsen, died this week. Olsen was founder of Digital Computer Corporation (DEC), which during its heyday of the 1970s and 1980s, was one of the largest, most technically advanced and most successful computer companies in the world. Bill Gates, the Microsoft co-founder, called Mr. Olsen “one of the pioneers of computing,” adding, “He was also a major influence on my life.” Gates’s interest in writing software was formed as a 13 year-old, while playing around on a DEC computer.

    Olsen was also one of the businessmen I most admire, and played a small, but lasting part in my own career. I met him in 1986, at DEC headquarters in Maynard, MA, outside of Boston. I was there to interview him for Forbes Magazine. I remember Olsen as a warm, modest, wry  – and above all, very patient man.

    It was my first assignment as a Forbes reporter, having only joined the magazine, on its lowest rung, a month earlier. Olsen was 60 at the time, one of America’s most celebrated and wealthiest entrepreneurs. I was a 27 year-old, with no real knowledge of business or journalism, and had never seen, or used, a DEC computer.  Thinking back, I’m amazed Ken Olsen didn’t take one look at me, and send me straight back to my windowless cubby in Forbes’ New York headquarters.

    I’d persuaded my editors at Forbes to let me do some research on Georges Doriot, a then 87 year-old former Harvard Business School Professor. Doriot is the founding father of the venture capital industry in the US, and his VC firm, American Research and Development Corporation(NYSE:ARDC),  was the original investor in DEC. I had a hunch that Doriot’s role in American high-technology was underappreciated. To my surprise, and even more to my editors’, Olsen agreed to see me to share his recollections of working with Doriot.

    In 1957, Ken Olsen was a 31 year-old whose only experience up to then was as a lab worker at MIT.  Doriot agreed to invest $70,000 to finance DEC’s startup. Digital began producing printed circuit logic modules used by engineers to test electronic equipment. The company also started developing the world’s first small interactive computer, a forerunner of the IBM PC.

    Within a decade, at the time of DEC’s IPO in 1967, Doriot’s investment was worth $355 million, a 500-fold increase.  Doriot’s investment in DEC  is generally considered not only the first great success of the US venture capital industry, but the standard all other venture capital investments have been measured against ever since, not only on financial terms, but also in lasting impact.

    For more than a generation, DEC was one of the world’s most important and successful technology companies, dramatically lowering the cost and complexity of business computing, by selling smaller closet-sized computers that rivaled IBM giant room-sized mainframes in power and performance. DEC made all its own hardware and software. This was before the founding of Intel and Microsoft, the two companies that eventually toppled DEC’s dominance, doing to DEC what it had done to IBM.

    When I met him, Olsen was nearing the pinnacle of a remarkably accomplished career. DEC was among the most admired and profitable companies in the world, with sales approaching $10 billion.  As for Doriot, the venture capital work was really something of a sideline for Doriot. He continued to teach management courses at Harvard Business School all the way up to his retirement.

    As things turned out that day in 1986, Ken Olsen never got around to telling me  about Doriot. Instead, when I walked in, Olsen said matter-of-factly, “I just finished a long series of interview with reporters at Fortune Magazine”, Forbes’ main competitor. “They are planning a cover story about me.”

    I may have been new to journalism, but I did figure out Olsen was spoon-feeding me my first scoop. If I could get him to talk about DEC, instead of Doriot, I could rush back to New York,  write up the interview and, with any luck, beat Fortune into print.

    Fortune was renowned, back then, for spending months reporting, discussing, polishing, photographing and group-editing their cover stories, like a group of sous chefs fussing over preparations for a Royal Dinner at Buckingham Palace.  Forbes was always pluckier,  quicker to turn ideas into print – more like short-order cooking.

    It all worked as well as planned. My story came out about a month before the Fortune cover article, which called Olsen “America’s most successful entrepreneur”.  This was my first byline at Forbes, and one of the few times a new junior hire was allowed to get a story into the magazine. It was the start of, and probably set the tone for, my very charmed nine year career at Forbes. Within less than a year, I was promoted twice and handed my dream job as a foreign correspondent in London. As far as I know, it was the fastest rise ever at Forbes, from cub reporter to foreign correspondent. Though I never got to meet Ken Olson again, I never forgot his central role in all this.

    When I read Olsen’s obituary, I went searching online for my Forbes article. I hadn’t read it since it came out. No luck. Forbes’ online archive doesn’t go back 25 years. I called the Forbes switchboard in New York. I don’t know anyone working now at the magazine. I eventually got through to a librarian. She sent me the article. Here it is:  Olsen article

    I’d remembered Olsen’s key part in undoing the dominance of mainframes. But, I hadn’t recalled he was such an early proponent of networked computing. At the time, I didn’t grasp the significance of what he was telling that day in his office, about introducing a new kind of office computer, called the VAX 8000 that would link newly-launched IBM PCs together. I do understand it now.  Those linking computers came to be known as servers, and this “client-server architecture” is still the way the internet, as well as company networks, are configured.

    For this, Olsen deserves to be remembered as one of the earliest and most influential pioneers of the internet. Back when I met him in 1986, there was no such thing as the internet or broadband. Signals traveled between computers using 14.4 bit modems. A typical 10kb story of mine would take about five minutes to upload to my Forbes editors. Today, sending that file would take less than a second.

    Thanks to the VAX line of computers, DEC became the world’s first dominant server manufacturer. It was because of this that Compaq, a PC company that later was bought by HP, agreed to buy DEC in 1998 for $9.8 billion. Eventually, Sun Microsystems overtook DEC as the leading specialist manufacturer of networking servers, before it too was holed below the water line – in Sun’s case, by cheap servers using Intel chips. These Intel-based servers remain preeminent today. But, this was all long after Olsen retired from Digital in 1992.

    Olsen didn’t get it all right, of course. He thought servers would always do most of the work of business computing and so earn most of the money, that PCs would remain, what they were when I met him, expensive machines with too little memory and processing power to do more than the most rudimentary tasks. I’m writing this now on a Dell laptop that is a thousand times more powerful than the VAX computer DEC launched right around the time I met him.

    While much else has changed in my life over the last 25 years, I continue to meet great entrepreneurs. I’m lucky enough to have some as clients. But, no entrepreneur played a larger role in getting me to where I am today than Ken Olson. By handing me a scoop, he handed me my first big career break. I can’t begin to compute all the wonderful things that have come my way as a result,  and so can’t begin to compute the debt I owe him.


    .



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Feb 11 7:38 AM | Link | Comment!
  • Excessive Liquidity: Is PE Industry in China Being Drowned in Cash?
    The flow of money into private equity in China is fast becoming a deluge. Six months ago, new rules were introduced to allow the country’s insurance companies to invest up to 5% of their Rmb4.8 trillion of assets in PE funds investing in China. If fully invested, that would be Rmb240 billion ($36 billion) of new capital for an investment class that is already flooded with liquidity.  Insurance assets are growing by over 15% a year, which means at least another $5 billion a year available in coming years for PE investing.

    The other fire hose of capital is the National Social Security Fund (NSSF)subject of a recent blog post of mine. The NSSF is pumping Rmb80 billion ($12 billion) into PE investing in China, and expects to add an additional $1.5 billion a year in new capital for same purpose. Never before, in the space of twelve months has so much new capital poured a single class of illiquid investing.

    In part, these institutions are chasing returns. Insurance companies and the NSSF both have very large longer-term liabilities, mainly in the form of retirement pensions and life insurance policies. PE investing can jazz up overall returns for institutions that otherwise park their money in safe but tepid investments like government bonds.

    PE investing in China has certainly been performing well lately. The more successful firms have been earning returns of +40% a year for investors. For insurance companies, that kind of performance (40% returns on 5% of its assets) would deliver 2% base annual return. For the NSSF, with up to 10% of its assets going to PE, the potential rewards would be higher.

    The investments in PE also serve a patriotic purpose. By providing additional growth capital for Chinese entrepreneurs, PE investment should help increase employment and overall economic growth in China. The insurance companies are all majority state-owned.  The NSSF is a branch of government.  Invest carefully, earn a good return and contribute to building China. That summarizes the management goals for insurance companies and the NSSF alike.

    Less clear is what overall effect of all this state-controlled money on the PE industry in China. Like any other asset class, the more capital that pours in, the lower the overall returns are likely to be. The insurance companies and NSSF aren’t the only – or even the main – source of capital for the PE industry. There is already billions of dollars available for PE firms from LPs in China, the US, Europe, Japan. By some estimates, as much as $30 billion in new capital has already flowed into PE firms over the last year for investment in China. This excludes the money from the NSSF and insurance companies.

    All this new capital is enough to fund PE investments in over 5,000 companies, based on a typical PE deal size in China. Are there that many good deals out there? It’s hard to say. Overall,  I’m very bullish about the number of great private companies and great PE investment opportunities in China.

    The big bottleneck is certain to be within the PE firms themselves. The good ones, currently, do anywhere from 10-15 deals a year, and look seriously at another 25- 40 companies. They don’t have the partners and skilled staff to review, close and manage many more deals than this a year. The irony here: while PE firms demand portfolio companies use PE capital efficiently and scale quickly after investment, PE firms generally have no such ability. Adding capital to PE firms is like adding salt to soup.  More is not necessarily better.

    As the amount of capital has surged, the preferred deal size of the more successful PE firms in China has risen steeply, from $10 million per deal, to over $25 million now. But,  in China, bigger deals are not generally better deals. Often, the opposite is true. The best PE investment I know of, for example, was the $5 million investment Goldman Sachs made in Shenzhen pharmaceutical company Hepalink. Its investment rose 240 times in value, based on Hepalink’s IPO price last year.

    More capital also can also skew the priorities and tame the animal instincts of PE firms. When money is easy to raise,  as it is now, PE firms can spend more time on this than hunting for great companies. It’s easy to understand why. For every $100 million they raise, a PE firm generally keeps $2 million in annual management fees. This management fee income keeps rolling in like an annuity, regardless of how well the PE firm is doing in its “day job” of putting capital to work on behalf of investors.

    Insurance companies and NSSF can generally negotiate a lower management fee. But, the incentive is still there for PE firms to focus on raising money rather than investing it.

    The PE industry in China is blessed, as nowhere else is, with abundant capital, stellar investment opportunities and favorable IPO markets. My view: over the next decade, PE deals in China will produce more wealth for entrepreneurs and investors that any other major asset class anywhere in the world. Anything less will mean many opportunities in China were squandered rather than seized.




    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jan 24 10:03 AM | Link | Comment!
  • Toiling from the Tang Dynasty to Today – the high cost of Chinese real estate
     How long would it take an ordinary Chinese peasant to save up and buy a nice apartment in Beijing? You’ll need to brush up on your dynastic history.

    1,400 years ago, as the Tang Dynasty dawned in China, a peasant began farming a small plot of decent land 6mu (one acre) in size. Every year, in addition to providing for his family’s needs, he was able to earn a small profit by selling his surplus. His son followed him on the land, and maintained his father’s steady output and steady profit. Same with is children, and children’s children, through the Song, Yuan, Ming, Qing Dynasties into the Republican period and then the modern era marked by the founding of the People’s Republic in 1949, down to present day.

    Some 280 generations later, there should now be just about enough in the family bank account for the family to pay cash for a new two-bedroom apartment in Beijing. This is assuming no withdrawals from the bank account during that time, and even more unlikely, no bad years due to floods, famine, locusts, rebellion.

    I heard this calculation second hand, and so can’t check the figures. But, it certainly has a ring of truth about it. Property prices in Beijing particularly, but other large cities as well, have reached levels utterly disconnected from average earning levels, especially in rural China.  New apartments can now cost over USD$1 million. Prices continue to rise by over 5% a month, despite aggressive actions by government to curb the increases in residential property prices. According to the Wall Street Journal, “Housing prices in the U.S. peaked at 6.4 times average annual earnings this decade. In Beijing, the figure is 22 times.”

    The collapse of this “housing price bubble” has been widely predicted for years now  — not since the Tang Dynasty, but it sometimes seems that way. The housing price crash was meant to be imminent two years ago, when prices were about 30% of current levels.

    Still, they keep rising, most recently and most dramatically in second and third tier cities in China, places like Lanzhou, a provincial capital in arid Western China, where the cost of a 100 square meter apartment has doubled in price in the last year, to about $300,000.  Some apartment owners in Lanzhou earned as much profit  during 2010 from the sale of their property as a typical peasant in surrounding Gansu Province might make in a century.

    My prediction is that housing prices may soon peak relative to incomes, but will keep moving upward. There are a few fundamental factors at work that raise the altitude of housing prices: rising affluence, China’s continuing urbanization and a dearth of alternative investment opportunities. Real estate, despite what can seem like dizzying price levels, is often seen to be a safer long-term bet than buying domestically-quoted shares.

    Introducing property taxes, and allowing ordinary Chinese to buy assets outside China, would both alter the balance somewhat.  But, many a hard-working peasant is still going to need a thousand years of savings to join the propertied classes in Beijing.




    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jan 13 9:21 AM | Link | Comment!
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