CFO · Investment

Ray Dalio and the Private Debt Market

Trying to predict where the economy and stock market are going in the short term is a fool’s game and is something I would not bet on. With that disclaimer out of the way I want to point you to two pieces of content I recently consumed that might give us some clues as to where the economy is headed. I would suggest you consume these articles in sequential order.

The first comes from the “Masters in Business” podcast that featured Ray Dalio as the guest, you can find the transcript and links to the podcast here. I suggest you listen to the whole podcast because it is full of great information, but knowing that most of you won’t, according to Mr. Dalio the economic cycle works in the following way:

“Okay, so what happens is in the early part of the cycle, the amount of lending that takes place produces a cash flow which is greater than the debt service payments on that, so that’s a virtuous lending because credit gives buying power.

‘And depending on how you’re using that buying power for using it to create income that’s greater than the debt service payments is a self-reinforcing positive cycle, that normally happens in the early part of the cycle.

Then it pushes asset prices up and what happens is that people start to extrapolate those things going forward. So as the debts continue to rise and they believe this is going to go higher and higher…

‘The bubble stage is also accompanied by the development of shadow banking.

‘There’s a shadow banking system now, you know, in other words it – private lending that takes place outside of the banking system in various ways and it’s not regulated. And there is an incentive to go outside the banking system because the banking system being regulated and being controlled can’t make as much money as going outside the banking system.

‘And so the irony is asset prices are higher, there’s much more leverage in the system, and so why would asset prices be higher or credit spreads be lower when there’s a lot more leverage and the price of everything is higher? It doesn’t make sense but that’s where the bubble is. These are the good times, these are the great times it seems. Right?”

Now, you may or may not agree with Mr. Dalio but I think it would still be worth considering his words when you read this article from ETF.com. Here are a few excerpts:

“Private credit funds invest in nonrated, debtlike instruments that have no readily tradable market or publicly quoted price. Assets under management in such funds were growing rapidly until 2008. However, fundraising activity slowed significantly with the onset of the 2008-2009 financial crisis.

‘The increase of both supply and demand for private credit has resulted in substantial growth in assets under management.”

Again, I would recommend you listen to the entire podcast and read the whole article before making any conclusions.

Where is the economy going in the near term I do not know but I can say with pretty good certainty that at some point we will see a downturn and a recovery. I know…my prediction is bold.

Financial Loss · Insurance · Investment

Cost is the Most Important Consideration When it Comes to Investments – It Always has been in the Insurance World

I read an intriguing blog post today on The Reformed Broker titled – “Two Thirds of Advisors Care Most About a Fund’s Cost.” The article is about financial advisors, not insurance advisors, I think if it was talking about insurance advisors the number would be even higher. The article seems to allude that cost is being driven by the client and not the advisor, the advisor is simply trying to provide for what the client is asking for which makes sense when the goal for most advisors is to increase AUM.

To me, this is a mildly surprising stat. Fees, and their potential impact on returns have been hammered home by the likes of Vanguard and Warren Buffett so they are at the front of everyone’s minds. That being said, performance should matter. Most of our purchases in life aren’t simply figuring out what we need and then buying the cheapest version of that product, but it appears that is what we are doing with our investments.

When it comes to insurance price is even more important for consumers. Does the consumer care about coverage details or will price drive the decision as long as coverage is somewhat similar? My experience shows that price will be the driver because brokers do not do a good enough job of demonstrating the differences in coverage in a policy that appear similar but are vastly different. If you buy an S&P 500 ETF cost is very important because the products are the same, they track the S&P so every additional basis point that ETF charges will lower your performance compared to that index; price matters in this case. If, on the other hand, you have ever looked at your insurance policy you realize the language is archaic, there are endorsements and exclusions added to the policy, policy sections refer to other parts of the policy, definitions that might differ from everyday use, and so forth and so on. This is why insurance is bought more on price, it is hard and tedious to go through a policy and figure out what the differences are. The buyer will usually ask if there are any “major” coverage differences and if the answer is no then the consumer will buy on price. The problem becomes we often don’t know what a “major” difference between policies is until after a loss that is either covered or excluded. What we thought was a minor coverage difference turns out to be the reason why a loss was covered or not covered.

Price should and will always be a factor when buying insurance, but coverage should play a more integral part. I understand that insurance is not something people are excited to buy as it has no upside, it is designed only to make you whole after a loss so there is no ROI on an insurance policy. All too often though, the insurance policy does not make insureds whole after a loss because what was once considered a minor policy difference has now caused a major issue in the coverage. The loss is either excluded or the coverage limit is not adequate so the insured is left making up the difference.

Conference · Investment · Life Sciences

A Recap of the McDermott Will & Emery Life Sciences Deal-making Symposium

I was pleasantly surprised by how much l learned at the McDermott Will & Emery Life Sciences Deal-making symposium last week.  I don’t say that by inferring I know a lot, in quite the opposite, but what I mean is that a lot of conferences and events are the same content but with different names for each panel.  This conference was different, I took more notes than I can ever remember and walked away thinking I better understand the challenges that are faced in life science deal making.  I also realized what a small part insurance is but if used properly can help get a deal across the finish line.

The event was a mix of attorneys, investors and of course companies in the life science space.  There were also a few service providers (my company, Alliant, being one of them) that helped underwrite the event as you would expect.  Investors included angel investors, family offices, corporate venture, private equity and venture capital, so a little bit of everything.

MWE4

So what were the takeaways?  Here are some of the highlights:

  • Vertical Integration can be a challenge as there are anti-trust issues
  • Legal bar for getting deals done is getting higher. Due Diligence quality is going up but the quantity is going down.
  • Reps & Warranties coverage is now part of almost every deal and for the most part makes getting deals done easier. However, it does bring another party (insurance company) into the equation which can add some challenges (Shameless plug – I can help place this coverage for you)
  • The recent Akorn/Fresenius decision was surprising and could have implications for other deals down the road. This case allowed Fresenius to exit the deal because of a Material Adverse Change, believed to be the first time a court has allowed this.  You can read about it here.
  • Having strong patents is very important and can be instrumental in getting a deal done. Alliant spoke on a panel and discussed patent insurance which for most of the audience was something they never heard of or even knew existed (another shameless plug – I can also help you understand this coverage and place it on your behalf).
  • Non-dilutive funding is out there, but don’t become a slave to it.
  • If you are a company raising money you should you know the answers to these questions – How much? What is the money for? What is the valuation of the company? What is the inflection point that you are hoping to reach?

A learned a bunch more, but wanted to share some of the hig

MWE2

hlights, at least for me, about what I learned.  A big thanks to McDermott for hosting the event and letting us at Alliant partake.

MWE1

Conference · Investment · Medical Devices

Device Talks Boston – A Recap

Last week I had the pleasure of spending a few days in Boston attending two separate life science events, Device Talks and McDermott Will & Emery’s Life Sciences Dealmaking Symposium.  Although I love spending time in Boston, which is booming, I wish these events had been another week as I was not at home for my wife’s birthday (FaceTime is nice but it doesn’t replace the real thing).  Fortunately, I have a super supportive wife and I tried making up for it, but one more time…happy birthday!  Today, I want to focus on the Device Talks event and what I learned.

Boston Skyline

Because the two events overlapped I was only able to attend Device Talks on Monday and Tuesday.  As you probably guessed, the event was focused on medical device companies.  There were a wide range of companies there, from the largest device companies to early stage companies and everything in between, along with investors and service providers.  There were three concurrent tracks – Ecosystem, Technology and Investment – that you could pick and choose from depending on what interested you.  For Tuesday I attended only the Investment sessions and was very pleased with the content.

I attended two of the sessions, the first focused on the use of Strategic investors and the second focused on the risks facing companies as the mature.  It seems to me that most of these events now have a panel on strategic investors or corporate venture and rightfully so as this is a large source of capital.  Some takeaways were that strategics have a time horizon of 24-36 months when they make an investment.  For the majority of products they want the product to be in the market and producing revenue within that time frame or they will not be very interested unless your product is a completely new product.  They essentially were saying that they want the product to be as derisked as possible.  They are also looking to fill holes within their portfolio.  They may do a deal simply to fill in a gap that their competitors can offer and might be less about the economics of the deal. If they can prevent their competitor from getting shelf space and getting a foot in their door for their other products then smaller deals to prevent this scenario could make sense for them.

Device Talks Presentation

The second session was about thinking about the risks emerging companies might face and how to overcome those when seeking investment or acquisition.  The panel was a mix of investors and attorneys.  This panel started out discussing that M&A deal activity is down as far as dollars are concerned compared to 2017 but if you took out the mega deals in 2017 the average deal size is actually up.  Similar to Corporate VC’s, investors are looking for companies to be more accretive to revenue faster and this is especially true when compared to biotech.  Interesting tidbit, biotech companies are sitting on an average of two years’ worth of cash.  The panel had the following suggestions to help derisk your company/product:

  • Reimbursement is and will continue to be very important. Investors want to know companies have a track for reimbursement and it was suggested that you bring in reimbursement specialists early because it can be a stumbling block for getting a deal done.
  • Along the same lines, bring in a regulatory specialist early.
  • When raising money, make sure your goals are aligned with your investors and they are a good fit for what you want to accomplish, there is a lot of money out there so don’t necessarily take the first check that you are offered.
  • Be honest and transparent when engaging with investors or a company that might acquire you. The starting price is usually the top number you can get and if skeletons are found in the closet it could derail the whole deal or reduce the price.  If you lay out issues from the get go before a number is agreed upon you will be in a much better position long term.
  • Listen, keep your ears open. The industry is constantly innovating and you want to be able to adapt.  Don’t be afraid to take advice (I think this could be applied to most industries).

The second panel was excellent and unique in the makeup of the panelists, more attorneys than you would expect but all with diverse backgrounds and specialties.  Although I only attended half of the event, I learned a lot and would recommend if you are an emerging company that you attend this in the future.  There is a lot to learn and a good mix of companies that would be worth meeting.

Investment · Life Sciences

Are We In A Biotech IPO Bubble?

Are we in a biotech IPO bubble?  Two things have clearly happened over the past few years within this sector.  First, pre-money valuation has gone way up, roughly a 130% increase from the 2012-14 period which was a comparably active period to today.  Secondly, a larger percentage of companies are Phase II or earlier. That means they are further away from generating revenue and in fact may never even have a product that is approved by the FDA.  For an even more in-depth take a look at the particulars of the current IPO market check out this recent article in Forbes.

The similarities are easy to draw between the period we have now and the dot.com bubble. Let’s take a look:

  • Both periods had companies going public with no revenue.  I understand this is how biotech works, it is very capital intensive to move a drug forward, but a parallel could still be drawn since the biotech companies going public now are further away from the point of generating revenue.
  • A lot of similar companies are going public based on some common theme.  In 2000 it was e-commerce sites, think pets.com or any other product.com you can think of.  Today, many of the biotech companies are oncology companies. Can there be room for all of them?
  • People are clamoring to get invest in these companies.  Look at the size of the rounds biotechs are raising before going public and then look at the day one pricing of the dot-com companies.  I would argue that VC money was not nearly as plentiful in the late 90’s so a connection between the two can be made.

There are definitely differences as well.  First, a biotech is a much different type of company and the founders understand it is a long and difficult process with the chance of becoming rich not necessarily their driving force.  I think it could be said that many dot-com companies were founded on the hopes of getting rich. Biotech companies objective is to help people by curing a disease or at least making it more tolerable.  Finally, we are not seeing the market caps of established companies continue to rise at the pace we did of the dot-com companies like we did in 2000 where you could throw a dart and any tech company you happened to hit would make you money.

I could go on about the similarities and differences but I do believe this is a bubble. I hope it turns out I am wrong and this is the new normal.  Biotech companies need money to continue to develop their product and the public market is a great way to raise money. If the public market closes it makes it harder to continue moving a product forward and also can make it tougher to raise money in the private market.  Investors in the private market like knowing there is a way to exit and an IPO can be one of those ways outside of an acquisition.

I would love to hear what other people think.  Is this a bubble? Why or why not? Are we simply seeing the glut of IPOs because investors in the private companies see a way to monetize their earlier investments?  Let me know your thoughts.

Investment · Life Sciences · Risk Management

Why Securities Class Filings are a Reality for Publicly Traded Companies

Cornerstone Research always puts out great data and this report on Securities Class Action Filings for the first half of 2018 is no exception.  I recommend you check out the full report which you can find here.

These visuals really speak for themselves but the big takeaway is that if you are publicly traded company the chances of being subject to a Securities Filing are rising.  In 2017, 8.4% of exchange listed companies were subject to a filing and in 2018 it is projected to be 8.5%.

Pct of US Exchange Listed Companies subject to Filings

If you are a member of the S&P 500 the chances of a filing are even higher at 9.6%.

Pct of SP 500 Companies Subject to Core Filings

Breaking this down even further, the industry you are in can change the odds dramatically as the chart below demonstrates.

Heat Map

The clients I work with are in the Life Science and Healthcare space and this is how filings breakdown in that group.

Life Science Filings by subgroup

I believe companies need to believe a Securities Class Action filing is inevitable and should prepare accordingly.  Of course, one way to prepare is buying having a broad Directors & Officers Liability in place, but risk prevention is even more important.

Once again I recommend you check out the full report from Cornerstone Research which you can find here.

Investment · Life Sciences · New York City

NY BIO’s Annual Meeting

I recently attended NY BIO’s annual meeting in New York City.  This was my first time to this event but I have attended other Life Science events that were focused on New York City and I do my best to keep up with how they are developing the ecosystem.  For those of you that don’t know, both the city and the state are making big investments to develop the life science sector and become a hub with I am guessing the goal of being in the same class as Boston and San Francisco.

From an outsider’s perspective looking in it would seem like the Life Science sector would be a natural fit for the city.  A key ingredient for the industry is money and in New York City there is plenty of it.  Another natural advantage the region has are its world class research facilities and hospitals.  Big pharma has a presence across the river in NJ so there should be plenty of talent familiar with the full life-cycle of drug development.

The meeting featured speakers on the front lines and I learned that you can’t always judge a book by its cover.  Let’s start with money, yes, there is a lot of money in New York but it is not necessarily the type of money that invests in biotech companies.  A fascinating point was made by the CEO of Alexandria Real Estate, in Q1 2018 there was $1.6 billion invested in Boston, $1.7 billion invested in San Francisco and less than $150 million in New York.  The general consensus was that despite this disparity between Boston and San Francisco the trend is going in the right direction and money is not as big of an issue as it was just a few years ago.  In addition, the state and city seem to be stepping in and putting serious money into growing the sector.  How easy or difficult it is to access the government money I cannot answer.

The biggest problem that I heard from virtually everyone was the lack of space.  Everyone complained that there was just not enough lab space in the city.  Again, inroads are being made but it seems like this is the biggest impediment.  JLABS has opened up space and BioLabs NY is about to open a huge new facility in Hudson Yards with NYU, so progress is being made.  Whether these new labs will be enough to curb the demand we will need to wait and see.

Finally, a somewhat surprising issue was the lack of depth when it comes to the talent pool.  A shared belief is that there is plenty of talent at the research level but it seems to dry up when companies mature and need the C-level and mid-manager types.  This was something I heard a few times and I would have thought with the big pharma presence so close it would not be an issue.

Overall, the trend is going in the right direction for New York, but it takes time.  You need to have some companies have success before you can really build a hub.  You need to have companies mature and build a sizable employee presence.  Someone said it takes 25 years and a couple of generations of companies before you really have a sustainable and robust ecosystem and New York is not even in year 10.  I know the people in New York are doing what they can to accelerate it so I will be anxiously watching to see how it turns out.