The Investor's Consigliere

Moore Capital and Sticky Capital

In his annual letter to Moore Capital investors, Louis Bacon wrote about his fund's new marketing strategy:

Bacon also said it's looking to attract longer-term investors after its performance was restrained by redemptions during the financial crisis.

Moore Capital has a new marketing team, which "has had very good success in attracting what we hope is sticky capital from more institutional investors," he wrote in the letter.

Bacon is a rock star among hedge fund rock stars. His fund has returned over 20% for over two decades. My understanding is that he charges above-market fees and has a long lock-up. If even he needs stickier capital, imagine how difficult it is for everyone else. And how important.

My working hypothesis about attracting sticky capital is that it is a two-part process. The first part involves, as Bacon notes, attracting more institutional investors with a long-term capital base. This is not easy, but it is simple: everyone knows who these investors are. You might think of this as "structural stickiness": that portion of an LP's propensity to redeem capital from your fund that can be explained by the type of investor it is (pension, endowment, fund of funds, high net worth, etc). The way to increase the aggregate structural stickiness of your capital base is to attract LPs in the right categories. Simple but not easy.

The second part of the process is more amorphous and intangible. It is the effort to increase an LP's "non-structural stickiness," which can be defined as that portion of an LP's propensity to redeem capital that cannot be explained by its category. High non-structural stickiness can overcome low structural stickiness. That is, an investor in a category known for being flighty can sometimes be your most loyal investor. Consider Warren Buffett's father-in-law:

"Doc Thompson was the kind of guy, he gave me every penny he had, basically. I was his boy."

That was in 1956, and it worked out well. Non-structural stickiness is a function of persuasion, positioning, and underwriting.

I've created a new category called "The Search for Sticky Capital" in which I plan to explore these issues further, the search for both structural and non-structural sticky capital. I will explain what I mean by "persuasion, positioning, and underwriting." The presence of sticky capital is a significant source of competitive advantage for a hedge fund, so the ability to attract it and create it is crucial.

I confess I am a novice in this area, so I welcome any thoughts you may have.

P.S. On the flip-side, from the perspective of a prospective investor in a hedge fund, sticky capital is also very important. You want to spend time learning about how a fund goes about increasing the stickiness of its capital, both structural and non-structural.

Ryan Seacrest Financial Times Profile

Read it here.

Once upon a time media personalities enjoyed ratings shares that are unheard of today: people like Ed Sullivan, Perry Como, and Johnny Carson in his prime could count on something like 1/3 of the country tuning in to see them every time they did a show. As media fragmented, many predicted that the age of the mega-celebrity would end, to be replaced by a long tail of niche celebrities.

It hasn't quite worked out that way. There are plenty of niche celebrities, but the mega-celebrity has not gone away. In his unassuming way, Ryan Seacrest is one of them. Through his various television, radio, and digital projects, he gets more regular face time with more Americans than any other person, with one possible exception.

And no one does a better job monetizing celebrity than Seacrest. Unlike many of his mass media peers, he recognizes that he is, at the end of the day, in the advertising business. His job is to generate advertising return on investment for marketers by aggregating audiences and associating his personal brand with the brands of others.

The Economist on Funds of Funds

Read it here.

Singapore Moving Away from the Harvard Model of Endowment Investing

Gillian Tett column in the FT. An excerpt:

. . . After all, the whole point of a sovereign wealth fund (or endowment fund) is that it is supposed to take a long-term perspective, which should enable it to ride out any temporary storms.

However, in the past two years, sovereign funds discovered that the long-term mantra provides far less protection than previously thought. For by investing in private equity and hedge funds, the GIC (and others) ended up being exposed to the vagaries of their co-investors - and some of those had short-term horizons, or mark-to-market triggers. Thus what hurt groups such as the GIC was not just the issue of asset correlation, but a contagion of investor style as well.

That raises some big questions about how the GIC (and others) should conduct themselves. Should they only co-invest with similar investors in the future? Could they now demand detailed lists of their co-investors (even if they hate providing such data themselves)? Could they ask to be paid for assuming illiquidity risk? Or should they dump external managers altogether, and bring that activity "in-house"?

BTW, if someone is moving away from it, it's called the Harvard model. If someone is moving towards it, it's called the Yale model.

Net-a-Porter: a New Media Success Story

This article about the sale of Net-a-Porter appeared in the back of Friday's WSJ Marketplace section.

What a new media success story. In 2000 Natalie Massenet was a fashion journalist with an idea to sell luxury clothing over the web. There were many doubters and haters. Fashion journalists were not supposed to do such things. They were supposed to be fashion journalists, which meant they were supposed to produce the words that went in between all those lucrative advertisements.

Fast forward to today. Those advertisements are not so lucrative any more. But well-executed online retailing in a specific niche is (see Amazon, Zappos, etc.). Once of Massenet's great insights was that she did not completely leave the journalism businesses, she just transferred it to a different platform. From the WSJ article:

Lately, however, the big luxury brands have made digital retailing a higher priority, having recognized that shoppers are increasingly willing to buy very expensive products on the Web. But selling $1,000 dresses online is different from hawking groceries or second-hand books: Customers want an editorial element, a guiding hand to replace the in-store salesperson and signal what's in style, which is where Net-a-Porter has carved out its niche.

The Web site, which says it has been profitable since 2004 and reported sales of about £120 million for the fiscal year ended Jan. 31, has established itself as an interactive shopping fashion magazine, publishing 52 weeks of editorial content each year alongside its designer clothes sales operation.

"It's just as much a magazine as it is a store," said Ms. Massenet in an interview. "That really has served us well, because when you're online you lose the offline experience of walking into a store."

I doubt that Net-a-Porter is being studied in journalism schools, but it should be. I believe it represents one of the futures of the media business. The definition of "journalism" will become much more fluid, and the basic skillset of journalists, with a little adaptability, will continue to be in demand.

Update: Mrs. Massenet has been reading her Investor's Consigliere. Maybe. Here she is in today's Financial Times:

"I think there will be an increasing convergence between content and commerce . . ."

Aggregator Economics

This article about Hulu in yesterday's NY Times contained the following interesting excerpt:

Mr. Kilar [Jason Kilar, Hulu's CEO] points to his company’s new profitability as evidence of the success of Hulu’s business model — collecting various types of video in one place and making it free, supported by ads. Revenue topped $100 million in 2009 and could reach that number this year by early summer, he said.

“Aggregation works for consumers,” he said. “It makes it easier to find and discover and enjoy premium content, and it works for advertisers, because with that aggregation you get greater reach.” 

Once upon a time aggregators were called middlemen, and if they happened to be the wrong race or religion they often faced physical risk from those on either side of their middleman function. "We break our backs growing the crops but the grain wholesalers make all the money" and "Why, if that merchant doesn't make any of the goods he sells, does he make so much money?" were (and in some corners still are) common refrains.

The answer is in Kilar's succinct description of the double-barrelled economics of aggregators. A successful middleman aggregator offers consumers low searching costs to find a given product, be it food, dry goods, media, whatever. It correspondingly also offers suppliers the cheapest per-consumer exposure to their products, even if they have to share actual or "virtual" shelf space with other suppliers. As a middleman aggregator grows it benefits from economies of scale, which improve both barrels of the business model.

As the article notes, Viacom has taken its shows off Hulu. It's the equivalent of a fashion designer refusing to supply its clothing to a department store and opening a standalone boutique instead. It will be interesting to see whether Viacom sticks to this strategy or capitulates and returns its content to Hulu or another aggregator.

Some of the best moats in business, in media but elsewhere too, are middleman aggregators of one sort or another. Google is the ultimate in modern media, Wal-Mart is the ultimate in modern retail. Before Google it was monopoly newspapers, which aggregated news and ads for readers at low cost, and aggregated consumers for advertisers at lowest costs. Before Wal-Mart it was the urban department store.

Even buildings can be aggregator middlemen. The Chicago Merchandise Mart, the jewel in the crown of the Kennedy family's business interests for over half a century, aggregated wholesale goods buyers and suppliers from all over the country. The Brill Building in New York aggregated buyers and suppliers of music.

If you can spot a middleman aggregator moat in its early stages you can make a lot of money. The key is to look at Kilar's two metrics: low discovery costs for buyers and high reach for suppliers.

Funds of Funds Under Pressure

From Reuters Breakingviews.