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“Oh Sailor beware the Bight of Benin
There’s one as comes out
For a hundred goes in”
(Ancient sailor’s chant)
Cruise the Hamptons on Labor Day weekend and you will get a fair idea of how the money world feels at the start of the school year. The tent at the Hampton Classic horse show in Bridgehampton had a distilled sample of those hedge fund limited partners at the top of the general partners’ calling list, not to mention a number of the general partners themselves.
In between following the riders and horses, you chitchat about your respective intuitions on market direction. What struck me was how much eagerness there was to put money to work.
You would think with the agitation for a strike on Iran, a sinking housing market and talk of coming recession that the rich would want to keep their hands on their wallets.
Hardly – the people I talked to wanted to find some way to go long beta and short volatility, as their risk managers would put it. There may be fear in the headlines but greed is still the driving force.
Some of this can be explained by the dynamics of how institutional money works, what they call agency theory. The general partners of your funds have to keep moving, like those sharks in television documentaries. They have to put money to work, and more has been flooding in the door.
The leveraged buy-out industry estimates for the “overhang” of uninvested funds was up to $143.6bn from $112.3bn at the end of last year.
Apparently, the lack of success of LBO artists in doing many buy-outs this year has only increased their investors’ frenzy for putting assets to work.
Since people seem to need to bet the pay cheque on a horse with a cute name, I’ve decided to come up with a couple of investment ideas for people who laugh at Sharpe ratios and the fiduciary’s duty of care. These are investment ideas for widows and orphans – widows and orphans, that is, whose character would benefit if they were involuntarily shoved out into the workforce. Who knows? They might work.
The Bight of Benin, referred to above, is the Nigerian coast. Of course that was in the old days when what is now Nigeria was a treacherous, fever-ridden, violent place. Now, it’s a place with a stock market that’s done very well this year, a government that’s paid off all but $5bn of its official debt, and a great deal of oil much closer to Europe and the US than the Gulf.
Nigeria’s foreign debt was a wonderful plaything for the speculative community. The promissory notes in particular were great. They seemed incredibly risky but the government kept paying on them. The waspish suggested it did so because there were government officials who owned them.
So when Nigeria settled with its creditors, the speculators were bereft. Peter Bartlett, the managing director of Exotix Ltd, the emerging markets brokers in London, has come up with a substitute for those investors of a sporting disposition – Nigerian bank shares. Edgy? Yes, I suppose. And yet so far this year shares in Zenith Bank are up by 48 per cent, and those of Guaranty Trust Bank are up by 41 per cent.
There are Nigerian banks whose share prices haven’t done as well but overall, Mr Bartlett says: “We think the banking sector has potential for very significant growth. The Nigerians have done a very good job of cleaning up corruption and imposed regulation. They have raised minimum capital requirements to $187m, so it’s a very well capitalised sector.”
Exotix calculates that the return on equity for a sample of Nigerian banks is about 25 per cent, and spreads between the cost of funds and lending rates are 500-700 basis points. That’s very attractive. Also, as Mr Bartlett says: “These stocks have been uncorrelated with world markets. They do not fall apart when, for example, Turkey gets into trouble.”
As an African friend says: “This is a very thin market and there is tons of cash that will be chasing this paper. But if you get in early enough, you could make a lot of money.”
For those who prefer to play at lawsuit roulette, I have another binary pay-off idea – notes of Iridium. Iridium the company is no more. Its assets, a global satellite phone network, were purchased by a successor and now all that’s left is a shell with a claim on Motorola, which built the system. The bondholders, other creditors, and the shareholders’ lawyers claim Motorola controlled the company, and so owed a fiduciary duty.
They further argue that its supply and service contracts were unfair to Iridium so Motorola should pay off on the bonds. Motorola denies this. If the bondholders win in court, they should get $4.5bn. If they lose, they get nothing. Right now, the bonds are valued at about $750m. A big decision by the bankruptcy judge but not the final one, will come down in the next few days.
Matthew Dundon, a lawyer and director of Miller Tabak Roberts Securities in New York, has been following this for some time. He thinks it most likely that Motorola will settle with the bondholders on favourable terms.
I’ve followed the Iridium story since the late 1970s and early 1980s. From what I’ve seen Mr Dundon could be right. If he is, you would win big by buying them now. If he’s wrong, you don’t even get those colourful certificates for your bathroom – the notes are all book entry.
And by the way, sell your Russian stocks – I think that’s over now.