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Following 23 years with JPMorgan, Simon Lack founded SL Advisors, LLC, in 2009. Prior to that, Simon was CEO and founder of the JPMorgan Incubator Funds, two private equity vehicles that took economic stakes in emerging hedge fund managers. From the late 1980s through 1999 through several bank... More
My company:
SL Advisors, LLC
My blog:
In Pursuit of Value
My book:
The Hedge Fund Mirage – The Illusion of Big Money and Why It’s Too Good to Be True
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  • The Value Of Facebook

    I have watched the endless TV hype about Facebook's (NASDAQ:FB) IPO with great interest but from a safe distance. FB is SO not the kind of stock we'd ever invest in - not that anyone should feel dissuaded because over the years we safely avoided Apple and Google amongst others too. So nobody should interpret anything profound - it's just that if we don't understand how they make money we just move on to other things.

    Although I'm not a stockholder, I use Facebook to stay in touch with friends and family. I'm not on every day, and many people have more "friends" than me. In fact for a while my total was barely in double digits until my children's friends began to take pity on me and helped me get to a few dozen. The college-age crowd that are the engine for FB often number friends in the several hundred. I am clearly not that popular, but I can claim that my FB friends really are friends.

    About a year ago FB e-mailed me to enquire whether I'd like to advertise my business, SL Advisors, on FB. I was surprised. I honestly didn't know FB carried ads. I'd never spent much time considering their business model or how they managed to exist. So much of the internet is free, and FB was just there whenever I needed it without even the occasional NPR-like pledge drive.

    Unable to recall a single ad I'd ever seen on FB, I concluded that my own advertising budget could be more usefully deployed elsewhere. And in fact even now I can't remember anything advertised on FB. I do know that GM have stopped advertising there due to poor results, and I also know that Ford are very happy with their FB ads. This probably speaks to the average age of their customers, but in both cases I read about these developments elsewhere and don't know what GM or Ford have actually advertised on FB.

    Meanwhile, FB continues to be a fun way to stay connected with friends and family scattered around the U.S., UK and Canada. The price is right, and if advertisers deem it a useful way to spend their budgets they truly don't even distract me. In spite of what economic theory holds, sometimes there really is a free lunch.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    May 22 9:05 AM | Link | Comment!
  • The Venture Capital Mirage

    The Kauffman Foundation in Kansas City, MI is to be commended for the open manner in which they've shared the results of their own venture capital (NYSE:VC) investing. In a remarkably candid appraisal that covers twenty years of experience, the authors reveal that much of the conventional wisdom about this area of private equity is wrong. Larger funds reliably underperform smaller ones; fees eat up disproportionate chunks of performance; investors too easily sign up for second tier managers in order to deploy capital that's "burning a hole in their pockets" while top tier funds seem to be the only way to justify the risk (as long as they don't grow too big).

    The authors, who include CIO Harold Bradley, note with irony that while venture capital funds search tirelessly for new business models and innovation there has been remarkably little of this in the vc industry itself. Fees of 2&20 with limited transparency around GP compensation have prevailed with remarkably little change. The report also notes that while vc funds demand complete transparency around the financials and compensation of the companies in which they invest, they generally refuse to provide anything similar to their own investors.

    Kauffman reports that only 20 out of their 100 vc funds beat a public equity market equivalent by more than 3% (a modest reward for illiquidity) and that half of those began investing prior to 1995. They also find that the "J-curve" (which holds that early negative returns quickly improve as investments mature) doesn't really exist.

    In many ways what's wrong with vc investing is similar to what's wrong with hedge funds. Their findings echo my book, The Hedge Fund Mirage. Too much money chasing returns; LPs that don't press for better terms. Poor transparency.

    The Kauffman Foundation should be applauded for their open approach to discussing issues that demand more attention. I hope their step forward provokes other investors to similarly examine their own results.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    May 10 4:29 PM | Link | Comment!
  • Optimizing Shareholder Value – A Lesson From Devon Energy’s Management
    By Henry Hoffman

    In November of last year Devon completed its $3.5B share repurchase program announced in May of 2010. Under this program the company repurchased 49.2MM shares, for an average price of $71/share, reducing the share count by 10%! During the same period, management sold non-core acreage raising the cash to fund the repurchases, pay down debt, and acquire onshore core acreage. This strategy realizes full asset value for non-core properties, improves Devon's balance sheet, reduces shares outstanding, and allows management to focus on the highest IRR projects. As shareholders we love this. A little bit of arithmetic shows why.

    As seen in the table below, the company sells 7% of its proved reserves for $10B. The after tax proceeds of $8B are used to: reduce shares outstanding by 10% for $3.5B; reduce debt by $1.8B; acquire new core acreage positions for $1.2B; add $500M of cash to the balance sheet. Furthermore, Devon's management has excelled at more than optimizing the capital structure as they have demonstrated continued strong operating results increasing proved reserves per share by 17% notwithstanding the divestitures.

     

    Pre-plan (YE2009)

    Post-plan (YE 2011)

    Shares Outstanding

    447MM

    404MM

    Proved Core Reserves

    2641MMBoe

    3005 MMBoe

    Proved Divested Reserves

    200 MMBoe

    0 MMBoe

    Total Proved Reserves

    2841 MMBoe

    3005 MMBoe

    Net Debt

    $6.6B

    $2.7B

    Average repurchase price

    $71

    $71

    Proved reserves/share

    6.4Boe/share

    7.4Boe/share

    Net Debt/share

    $14.76

    $6.68

    Cash Margin per Boe*

    $19.37

    $19.37

    Value/share debt adjusted

    $109.21

    $136.66

    Using a simplistic analysis for debt adjusted value per share based on proved reserves illustrates how Devon's management created $27/share of value for stock holders over the past two years. While there are other ways to value shares, this way does serve as a useful evaluation of Devon's value enhancing capital redeployment and highlights the virtuous cycle of share repurchases for undervalued companies.

    Data is taken from 10-Ks, earnings releases, and company presentations

    *Based on 2011 results as provided in the 2/18/12 company presentation

    Disclosure: I am long DVN.

    Additional disclosure: Devon is a holding in the Long Only Equity Strategy of SL Advisors

    Feb 24 5:27 PM | Link | Comment!
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