Thursday, November 17, 2016

Since the 1980 Presidential campaign, a tradition has existed among the press corps that travels with the presidential candidates on their planes. Reporters will roll an orange up the aisle in an attempt to reach the candidate’s seat. This aerial kegling evolved into a rolling deposition where a question (Putin?) for the candidate would be written on the orange. If it reached the candidate, the effort might bear fruit, with the reporter being rewarded for a skillful roll with an answer. Amazingly, during the recent campaign an argument developed between the press and the Clinton press wrangler, Nick Merrill, as to whether or not an orange response was off the record.

Several symbolic question-laden oranges have been rolled toward Olympus’ resident philosopher Ima Thinkin, PhD regarding the private equity business. She has generously offered to respond in this blog. Ms. Thinkin earned her PhD in sensus communis, completing her dissertation “Why common sense is not so common” in 1988.

Orange: Pension funds continue to increase their allocations to private equity in an attempt to increase returns to meet actuarial performance targets, will this succeed?

Ima Thinkin: Public and private equity are analogous to the two gentlemen who operate the first down chains at a football game. They are always a bit apart, but are inextricably connected. Whenever one moves the other follows immediately, but reaches the same point a bit after the first fellow. No matter how they try, they are never in the same place. PE performance is linked with a similar lag to the public market. PE returns are highly correlated, yet a touch out of phase with the public market. Part of the difference in correlation is artificial as it relates to the less volatile methods used in valuing PE assets. The other performance differences are real as PE leverages assets differently than publicly traded firms and PE can actually change companies for better or worse in a fashion that public shareholders cannot. An increased allocation can modestly move the performance needle, but as more capital enters PE, the inefficiency benefit diminishes. Since PE performance is tied to public market performance, an increased allocation will not overcome a flat or declining public market to help achieve actuarial targets.

Orange: Can you explain why the judge was correct in awarding an extra $3.87 to certain Dell shareholders after Dell was taken private for $13.75 a share?

Ima Thinkin: No

Orange: Can you outline the facts?

Ima Thinkin: Dell conducted an auction for the company. The highest bid was $13.75. The judge concurred with the auction result and that the CEO and the Board had fulfilled their fiduciary duties admirably. The judge ruled that the bidders took too short term a view of the company’s prospects and should have more closely looked at its long term prospects. He effectively said the market, unlike the judge, did not correctly assess the value of Dell’s future. The judge used an expected 11% rate of return in his valuation model. That would have been unacceptable to any bidder. He actually wrote “The sale process functioned imperfectly as a price discovery tool. (However) Due to risk inherent in such a deal it is not surprising that no one else came forward.” Therefore, even though no one was willing to pay $17.62 per share he ruled it was the fair price.

Orange: Can I ask a follow up?

Ima Thinkin: No, this Dell question has exhausted me. I need to do some paddleboard yoga to process it.

I’m Rob Morris and I approved this blog.

Orange You Glad You Asked?