Thomas R. Lawrence
456 South 10th Street
Opelika, AL 36801
As I See It!
The Newsletter for Capital Consultants Company
July 2010 Volume 1, Number 1
In This Issue:
Welcome from Tom
Small Private Company Financing
As I Like it!
Welcome to the inaugural issue of As I See It! I believe there has been a systemic change in the ability for entrepreneurs and small business to secure financing and that the present situation is very poorly understood. This has prompted me to offer my commentaries on the debt and equity markets. As I See It! will be published on no particular schedule, but rather when I have something to say about the state of small private company financing and other issues.
One of the nice things, and believe me there are not many, about managing to live to geriatric status is that you don’t much give a damn what people think about you. This ranks right up there with the senior citizen discount. I have always been opinionated, and there is a school of thought that I might even be pig headed. There is no doubt that I like what I like. From time to time I will be commenting on things that tickle my fancy. This may range from food I like to locations that I feel are special. I will be commenting more on this in the section headed As I Like It!
SMALL PRIVATE COMPANY FINANCING
The world of small private company financing can best be defined by the period prior to mid 2008 and the period since. Pre 2008 there were numerous sources for both debt and equity financing for small ($10,000,000 and less) startups, early stage and expansion stage companies.
In the area of debt there was a wide range of options including local and regional banks, merchant banks and asset based lenders of every ilk. Lending criteria tended to be extremely liberal and the all in cost of borrowing ranged from Prime, for the very best credits, to the mid 30’s for structured financing. Debt was plentiful and very reasonably priced and the machine was being fed fresh funds by securitization of anything that produced a stream of cash.
Equity financing was readily available in a variety of forms. Private Equity Investors were competing for the next home run deal and euphoria ran unchecked. Real Estate values were at all time highs and the financial markets were making new highs nearly every day. Americans felt wealthy and everyone wanted a bigger piece of the pie. All forms of private equity ranging from friends and family to the largest hedge funds and Silicon Valley venture firms were blowing and going. The only danger was that you might miss the train by staying on the side lines.
What a difference a year can make!
The recession that began in late summer of 2008 resulted in the near total melt down of the world’s financial markets. In the United States the financial markets were already burdened with paying for two foreign wars and steeply increasing national debt. When the housing bubble burst and home prices begin to fall to market based evaluations this triggered a collapse of the trillions of dollars worth of mortgage backed securities that depended on the average Joe making his mortgage payment. These securities began to implode taking the credit swap market with it. Major financial institutions began to fail.
For a period of time in late 2009 it appeared that the whole financial system would unravel. Massive and repeated government intervention propped up the financial institutions and disaster was averted. But at the cost of trillions more in government debt. From the fall of 2008 to the fall of 2009 there was no debt or equity financing available. Wall street could not provide IPO funding, the banks were shell shocked and would not even consider a loan, and most merchant banks and structured finance companies went out of business. Hedge funds crashed and 100 year old financial institutions either failed or were forced to merge with the few remaining solvent banking companies.
Individual Americans no longer felt wealthy. Their real estate holdings were down 30% or more in value and their IRA, 401K’s and brokerage accounts were down as much as 50%. Investing in new ventures was the last thing on anyone’s mind. Financial survival was the focal point. In early 2009 the system began to recover and a large part of the portfolio damage has been repaired. Real estate values continue to be depressed and home building and construction industries are still floundering.
Investors are slowly coming back to the private equity market, but with an entirely different goal. They are no longer looking to hit the home run, but are really interested in income producing investments. This has led to what I am calling venture lending, a hybrid of debt and equity. Capital Consultants Company is arranging venture lending to clients that would in ordinary circumstances be bankable, but in today’s market are being turned away by traditional bank lenders. I will have more about venture lending in later newsletters.
TURMOIL IN THE GULF
Several weeks ago I was asked by one of my long time consulting clients to visit the Gulf Coast and prepare a situation report on the ongoing oil spill. I have recently submitted the final report, and while the report itself is confidential I feel comfortable sharing some of my findings.
I visited the four States that are currently being directly affected and found one common denominator running through the entire mess. There is no one in charge. BP is doing a shuck and jive PR effort that would be comical if it weren’t so serious. The U.S. Government looks like a deer in the headlights and there is no coordination among the alphabet soup of Federal Agencies running around like Chicken Little screaming that the “sky is falling”. The individual States are behaving a bit more rationally, but are really focused on the immediate impact to their economies. The Oil Industry is conspicuous by its complete absence. The only real actions are being taken by local governments to protect their own beaches and marshes.
No one that I talked to, including people who work for BP, have any confidence in the flow of oil being stopped in the near future. No one has any real idea that spread of the oil could be confined to any definable geographic region and no one has a clue of what could or should be done. All the players are standing in a big circular daisy chain passing the blame around like a hot potato. It reminds me of elephants making love: there is a great deal of noise and activity, but there is little hope of anything coming out of it anytime soon.
I came away with three thoughts. First the petroleum industry should take BP off the point. This mess belongs to any organization that is involved with off shore drilling and the processing and marketing of the oil that is being recovered. BP just had the misfortune to be the company that the inevitable disaster hit. All of the deep water drillers shared the same risk and use the same technologies. They ought to man up to the problem and begin owning their collective responsibility.
These companies have a combined net worth in the multi trillions and a long term vested interest in oil recovery. A collective effort to define what went wrong, a solution to stopping the flow of oil from the BP well and determining a technical program to greatly reduce risk of this happening at another site in any body of water worldwide.
The second action that I would recommend is the formation of a cabinet level, interagency task force similar to the Manhattan Project or NASA. This super agency should have the power to cut through all of the bureaucratic and congressional BS and the funding to marshal the science and technology to address this particular mess.
Thirdly, I believe that nothing is going to produce a long term solution to environmental disasters like this until we have an energy policy in this country that does not depend on long term use of fossil fuels. In short this is a complete cluster f… that is going to get one hell of let worse. There is nothing on the immediate horizon that offers hope of things getting better.
As I Like it!
Everyone has stuff they really enjoy and appreciate. For me it’s good food, good places to eat and interesting places and people. I plan to devote the final section of each issue of this newsletter to one or more of these.
All Southerners are foodies. Everybody has their favorite BBQ joint or steak house. Everybody has an opinion and everybody is absolutely certain that they have the last word on the subject. I am no exception. I don’t necessarily think that I have a lock on what’s good or interesting, but I damn sure know what I like, and this is all about that.
Since I mentioned BBQ, I guess I better deal with that first. There are some simple ground rules concerning BBQ. First, BBQ is pork. You may choose to smoke or grill some other substance, but it ain’t BBQ. Grilled and smoked meat, chicken and fish can be really tasty but they ain’t BBQ. BBQ is pork and there only two cuts of pork that matter, shoulders and ribs. The lamb riblets at The Rendezvous in Memphis are to kill for, but they are not BBQ. BBQ sauce is superfluous and was invented to cover up the taste of bad BBQ. A dry rub on ribs is permissible and in some cases superb.
It is my intention to not only introduce my favorite dishes, such as BBQ, but offer my opinion of the source for the best of the best, the standard setters for each category. In the case of BBQ, this is irrefutable fact: the best BBQ in the South is prepared in Memphis, Tennessee; and since it is the best in the South it is by definition the best in the galaxy.
The best BBQ shoulder can be found in an un-air conditioned country store in a little cross roads East of Memphis call Eads, Tennessee. Morris’s grocery has a limited menu, BBQ shoulder, the preparation of which is overseen by the Merlin of Meat, Laddie Morris. The shoulder offered by Morris is deep smoked over indirect coals for hours. The meat retains its flavor and is juicy and moist. The smoke seems to permeate the shoulder all the way to the bone. Morris will chop a serving or a whole shoulder and sprinkle it with seasoning salt for a zesty finish. If Morris makes a BBQ sauce, I have never tried it. The meat stands totally alone. This is the standard to which I will compare other purveyors of BBQ shoulder. I hope that one day I will find some better, but I really don’t think that’s going to happen. Next time we will visit BBQ ribs. Bon Appetite!