NBA index fund! I myself have never given much thought to the possibility of buying a National Basketball Association team, but I assume that the main reasons one might want to do that are non-financial. Like you get to go to the games and sit in the front row and mingle with the players and have them laugh at your jokes and make trade decisions and call up the coach and say "I would like you to find a way to score more points" and just generally be involved in a lot of basketball-y stuff, which presumably you enjoy, if you are the sort of person who is in the market for an NBA team. Lots of professional sports teams are not profitable, on just a boring old more-money-coming-in-than-going-out basis, for exactly this reason; owners are interested in the non-financial benefits and don't worry about the money. Apparently many NBA teams are profitable, not even counting the extorting-cities-for-new-arenas opportunities, but the same basic analysis applies. You'd have to pay much more for an NBA team than for, you know, a ball-bearings manufacturer with a similar net income and revenue growth profile. The NBA team is only incidentally an operating business; it is mostly a status object and a luxury fan experience. Being a minority owner is much less appealing from those perspectives, but it's fine, I guess, especially if it is one of those cool owners' consortiums like the Golden State Warriors where everyone gets to be like "this is venture capital but for basketball." But there is a pretty steep drop-off. If you own the majority of a team the players will all say hello to you by name. If you own 5% they'll give you a polite nod. If you own 0.02% you'll pay retail for your tickets. At that level it is just a financial investment, or perhaps an ordinary fan experience.[1] What about owning 0.02% of multiple NBA teams? The National Basketball Association, seeing the valuation of its franchises soar, is mulling the creation of an investment vehicle that would buy minority shares of individual teams. In a memo sent to owners, a copy of which was reviewed by Bloomberg News, the league says it's exploring the potential formation of "a new capital vehicle that could purchase passive, minority ownership interests across multiple NBA teams." … "This vehicle would provide additional liquidity for the sale of team ownership interests, including by providing access to a new pool of long-term investors that do not currently have access to team ownership opportunities," the league said. ... When the NBA's limited partners, or LPs, want to sell their holdings, it can be hard to find interested parties -- especially since the stakes usually come with limited power. LPs have recently put holdings up for sale and pulled them back because they didn't fetch the terms the owners wanted. Five percent of a $2 billion team would be worth $100 million, though LP stakes are often discounted 10% to 25% because most don't include a board seat or any say in team governance. The weird thing is that it's not even a bad investment idea, really. You're not buying it for the cash flow. The fact that NBA team ownership is largely a luxury status item doesn't mean that its price won't keep going up. You buy a tiny slice of a bunch of NBA teams, the status value of NBA ownership keeps going up, and those slices keep being worth more, even though you don't really get any of the status benefits. So you (well, the pooled investment vehicle that buys the slices for you) eventually sell the slices for a profit to someone who can consolidate them into status. You're a pure financial investor in other people's status games, but if you are bullish on status games then that could make sense. There are art funds, etc. Isn't "across multiple NBA teams" weird though? We talk sometimes about the theory that common ownership of multiple firms in the same industry by the same group of institutional investors might give those firms less incentive to compete vigorously against each other. People are very skeptical about how this could work. But it's very easy to see how it would work in basketball! If a large chunk of every team ends up in the hands of a universal basketball ownership syndicate, that universal owner would not care all that much about which particular team wins. And the main way that teams try to win, besides tanking, is by offering big contracts to the best players, an approach to competition that is clearly bad for the owners' collective wealth. It would be pretty easy for the universal owner group to try to limit that. More than the owners already do I mean. Burning Man is over, hedge funds are over, life as we know it is over, goodbye Aaaaaaaaaaaggggggggghhhhhhhhhh: Aaaaaaaaaagggggggggghhhhhhhhhh! Aaaaaaaaaagggggggggghhhhhhhhhh! Right now, at Bridgewater Associates LP, hundreds of brilliant hardworking people are carrying around iPads with a proprietary app that allows them to rate each others' credibility in real time. And then there's that! I would like to … well, look, I would like to go back to bed and forget that this ever happened … but failing that, I would like to read more about how Ray Dalio acquired that outfit. (Dalio is not the one in the black jeans and T-shirt. He's the other one.) Did he go to his usual tailor and say "bit of a different assignment this time"? Does he have a personal shopper whom he called up one day to say "hey remember the early 1970s, bring me all of it, but trimmed in blue fur"? Did he walk into a shop? What shop? Did they recognize him? Did he bring the shopping bags back to his desk to finish the rest of the workday? Did his colleagues stop by and notice the bags and say "hey Ray what's that" and he said "oh those are my groovy threads for the playa, man" and their iPads spontaneously exploded? Separately, my impression is that Bridgewater's recruiting process is fairly structured and intense, but I am constantly reading about other hedge fund managers who take a shine to their tennis coaches or their sons' camp counselors and hire them as portfolio managers, and I hold out some hope that Bridgewater's next chief investment officer will be a guy who offered Dalio a hit of molly outside the orgy dome. You never know what hedge fund networking opportunities you might come across at Burning Man! We I have talked a few times about how the We Company, aka WeWork Cos., is in the business of financial arbitrage, so I should point you to my Bloomberg Opinion colleague Chris Bryant's argument that it is actually in the business of accounting arbitrage. The idea is that, until recently, normal operating leases did not affect companies' balance sheets: Each year you'd make some lease payments, and those payments would be expenses, and that would be it. But recent U.S. and international accounting rule changes require companies to include leases on their balance sheets, with a liability to reflect future lease payments and a corresponding asset to reflect the future right to use the leased property. This grosses up balance sheets and makes companies look, for accounting purposes, like they have more debt. It is also just complicated; here is a story about how "many U.S. public companies underestimated the difficulties of complying with a new lease-accounting standard." But the new standard has an exception for leases of less than 12 months, which can be accounted for in the old way. So if you have some people and need to put them in offices, doing a month-to-month WeWork doesn't just increase your financial flexibility and give your people access to beer at work, it also makes your financial statements more attractive and easier to prepare. "The downside" for WeWork and its competitor IWG Plc, writes Bryant, "is that they have to take the accounting hit themselves," but that is not so much a downside as it is a service they are providing to their clients. They are real-estate companies—oh fine WeWork is a tech company whatever—and so their investors ought to be able to figure out the lease stuff on their balance sheets; investors in WeWork can be bothered to understand the financial implications of WeWork's future lease obligations in a way that investors in normal non-real-estate companies can't. WeWork can take illegible lease accounting away from lots of clients' balance sheets and package it tidily on its own balance sheet, where it becomes legible through sheer concentration. It's a good trick! I doubt it's especially important: Lots of WeWork customers are not public companies, lots of public companies will either want longer-term leases or will account for their short-term renewable WeWork leases as long-term ones anyway, and even for public companies that do take the accounting benefit from WeWork, the benefit is not likely to matter all that much. Still, Bryant notes that WeWork and IWG have been discussing "the potential boost to demand for short-term leases triggered by the change." If you just think of WeWork as a collection of financial arbitrage opportunities, it makes sense that this would be one more. HSR We live in interesting times for antitrust law. Scholars and politicians are questioning the "consumer welfare" standard that has long been the basis of antitrust thinking. The gig economy is raising new questions about why antitrust law allows coordination of economic activity only within firms and not within groups of individual workers. Lots of people think index funds should be illegal. Everywhere you look there are novel cases that get at deep fundamental questions of antitrust law and theory. Except here, here's the silliest and most trivial antitrust enforcement action imaginable: Investment advisor Third Point LLC and three funds that it controls have agreed to settle Federal Trade Commission charges that the funds violated the premerger notification and waiting period requirements of the Hart-Scott-Rodino Act, or HSR Act, after they acquired the voting securities of DowDuPont Inc. The FTC alleges that on Aug. 31, 2017, the shares of Dow Inc. held by the three Third Point funds—Third Point Partners Qualified L.P., Third Point Ultra, Ltd., and Third Point Offshore Fund Ltd.—converted to shares of the newly formed DowDuPont Inc. following the merger of Dow Inc. and E.I. du Pont de Nemours & Company. As a result of that conversion, the Third Point funds were required to file with the federal antitrust authorities pursuant to the HSR Act. But the three funds failed to file and observe the HSR waiting period, and Third Point LLC failed to file on behalf of the three funds even though it had the power and authority to do so. After realizing that they failed to file, the three Third Point funds made corrective filings with the federal antitrust agencies on Nov. 8, 2017, and the waiting period for those corrective filings expired on Dec. 8, 2017. And here's the Justice Department's press release, which honestly seems a little embarrassed, and refers readers to the FTC one for more details. If you're planning to buy more than a certain amount of stock of a U.S. company—the amount changes each year and is now $90 million—then you have to file a form with the antitrust regulators and give them a chance to object. This has an obvious antitrust purpose: If a big company is going to buy a big stake in another big company, that might be anticompetitive, and the government should get to take a look first. But there are also a lot of giant investment firms that buy hundreds of millions of dollars' worth of stock in hundreds of companies all the time just as passive stock investments, and that is not generally considered to be an antitrust problem. (Though that's changing!) And so there is an exception for stock bought "solely for the purpose of investment," so that big mutual funds like Vanguard and Fidelity don't constantly have to file HSR forms. But for activist hedge funds like Dan Loeb's Third Point, that exception can get complicated: If you buy stock for the purpose of trying to take control of the company in a proxy fight, or trying to push the company into a merger through activism, then that seems like the sort of thing that antitrust law might be interested in. And so if you're planning to go activist, it's probably a good idea to file the HSR. Back in 2015 Third Point bought some stock in Yahoo! Inc., and later did some activism, and didn't file its form until after the activism started. The FTC objected, and Third Point settled the matter by promising not to do it again. It also agreed not to rely on the investment-only exemption for its activist holdings, basically to avoid another dispute like that. And now … uh … this? Third Point owned a bunch of shares of Dow Chemical Co. In 2017, Dow and E.I. du Pont de Nemours & Co. did a merger in which shareholders of Dow and DuPont would be converted into shareholders of the new DowDuPont. So Third Point's Dow shares turned into DowDuPont shares. It forgot to file the HSR form. I would have too! Who knew that automatically getting shares in a merger counted as buying them for HSR purposes? (I mean, I guess antitrust lawyers did, but it's not intuitive.) Third Point already owned Dow shares; the violation here is not that it bought those shares without an HSR filing, but just that those shares transformed into DowDuPont shares and Third Point didn't file a new form. Eventually Third Point noticed that it was supposed to have filed the form, and did, and told the government "oops sorry about that," and the government fined it $609,810 for the mistake. I do not really know what to tell you about this except that the antitrust authorities seem to like yanking Third Point's chain for reasons that are obscure to me. Things happen Argentina Bonds Fall, Peso Seen Steady as Capital Controls Begin. One Obscure Reason for August's Big Bond Rally: Negative Convexity. Big Bank Headcounts Aren't Budging Despite Dramatic Job Cuts. Venture-Capital Stalwart Battles Washington's Crypto Crackdown. A German Tax Case Is Putting the Entire Finance Industry on Trial. Impact investing creeps into the CLO market. Tesla Batteries Are Keeping Zimbabwe's Economy Running. Hedge fund takes aim at £9bn Just Eat merger. Guy Gentile is suing Marc Cohodes. Tennessee man sues Popeyes Chicken over 'wasted time,' no chicken sandwich. Popeyes employees held at gunpoint over sold out chicken sandwiches. US man rises to internet fame thanks to abnormally large thumb. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] Yes, I know about the Green Bay Packers, thanks. | 
Post a Comment