Pot Court Case May Be Pot of Luck for Investors: $Billions At Stake

potBrokerdealer.com blog update is courtesy of Karen Gullo from Bloomberg Business.

About a month ago, the Brokerdealer.com blog profiled Peter Thiel’s Founders Fund, a venture capital firm best known for backing tech companies including Facebook, SpaceX, Airbnb and Spotify, making a multimillion-dollar investment in Privateer Holdings, a Seattle-based private equity firm focused on pot. Now the further success of this private equity firm hangs on the outcome of a current pot court case in California.

A federal drug enforcement agent turned private-equity manager at a firm backed by PayPal Inc. co-founder Peter Thiel is watching the trial of a garden-variety pot grower with high hopes for the nascent marijuana industry.

It may sound like an only-in-California story — and it is, for now — but a win by the defendant may move the entire nation toward legalization of a business some value at more than $50 billion a year.

Patrick Moen, head of compliance and chief lawyer at Privateer Holdings Inc., an investment firm focused on cannabis, is following the case of a man described by prosecutors as the “go-to” guy at a sprawling marijuana plantation in the mountains of Northern California.

The defendant’s lawyers won the right to challenge the government’s treatment of marijuana as a controlled substance, as dangerous as heroin. They’re making their final pitch Wednesday for a federal judge to declare the government’s position unconstitutional in light of evidence of pot’s medical uses and steps the U.S. has taken to recognize legalization efforts in several states.

A defense win would boost the legal market for cannabis-related products and confirm for investors that the times for pot are changing.

‘Enormously Significant’

“It’s pretty obvious that a positive outcome would be well-received by policy advocates and the markets,” Moen said in an interview. “Just the fact that the judge has agreed to consider the issue is an enormously significant event.”

Moen, who in November 2013 became the first agent to leave the U.S. Drug Enforcement Administration for a job in the cannabis industry, according to the Privateer Holdings website, said he wasn’t alone at the DEA in believing that banning marijuana “was foolish and a waste of resources.”

While most of his cases involved crack cocaine, heroin and methamphetamine, his team busted medical-marijuana growers in Oregon, he said. Moen said he came to the realization that “this whole policy is just wrong.”

Some DEA colleagues were disappointed with his new career, though most were supportive and share his feelings, Moen said, adding that he’ll be looking to hire former agents in the next year as part of his effort to professionalize the cannabis industry.

Marijuana Investments

Thiel’s venture capital firm, Founders Fund, last month announced its investment in Privateer. The Seattle-based holding company owns marijuana-related businesses, including the information website Leafly, Canadian medical marijuana company Tilray and Marley Natural, a cannabis brand venture with the family of singer Bob Marley that will offer Jamaican marijuana strains and cannabis- and hemp-infused topical products and accessories.

Founders Fund didn’t say how much it contributed.

“This is a multibillion-dollar business opportunity,” Founders Fund partner Geoff Lewis said in January.

Voters in Alaska, Oregon, Washington, Colorado and the District of Columbia have legalized recreational marijuana, and medical use of the drug is allowed in 23 states.

Pot smokers and investors are tracking the Sacramento, California, case of Brian Pickard, one of 16 people charged in 2011 with growing almost 2,000 marijuana plants in a national forest and in gardens off a dirt road in Hayfork, a town of 2,000 about 100 miles south of the Oregon border.

U.S. District Kimberly Mueller, an appointee of Democratic President Barack Obama, decided last year to allow Pickard’s lawyers to argue that classifying pot as one the nation’s most dangerous drugs is irrational.





PE Firms Raiding BrokerDealers in Battle for Young Bankers

young bankersBrokerdealer.com blog update courtesy of the New York Times Deal Book section.

Young bankers fresh out of college are in high demand for private equity firms. Firms what the brightest and best that show great tenacity and enthusiasm for Wall Street. Firms are so aggressive about finding the best candidates that recruiters are interviewing potential employees up to 18 months before the start of the actual job.

They are only in their early to mid-20s, but some young bankers on Wall Street are the most sought-after financiers around, with lucrative pay packages dangling before them.

Junior investment bankers who graduated from college only last year are being madly courted by private equity firms like Apollo Global Management, the Blackstone Group, Bain Capital and theCarlyle Group in a scramble that kicked off last weekend. After back-to-back interviews, many are now fielding offers for jobs that won’t start until the summer of 2016.

This process has become an annual rite by private equity firms, which raise money from investors (like pension funds) to buy entire companies. But it has grown more frenzied since the financial crisis, and it started this year weeks earlier than many in the industry had expected. Fearful of missing the best talent being developed at investment banks, the giants of private equity have turned Wall Street’s white-collar entry-level workers into a hot commodity.

Private-equity firms are pushing earlier than ever to lure Wall Street investment banks’ most promising talent.

“It’s as if these were star athletes,” said Adam Zoia, chief executive of the recruiting firm Glocap Search, who helps private equity firms hire young workers. “The irony is they are professionals six, seven months out of undergrad. It’s hard to imagine you can tell if someone’s a star or not.”

For the young bankers, who are known as analysts, the recruiting race is an important step on a journey to becoming a Wall Street tycoon who can command a seven-figure (or more) pay package. These workers, graduates of elite colleges, often hope to spend two years at investment banks, learning the basics of corporate finance, before leaving for private equity firms, where they can use those skills to make investments. That career path makes them prime candidates for an elite business school, or something even more financially rewarding.

Even though these youthful analysts are starting at big Wall Street firms, the sector’s reputation has lost some of its sheen since the financial crisis. At the same time, Silicon Valley is luring away talent.

But private equity firms can offer higher pay to young bankers. A private equity associate — one who is just three years out of college — can earn as much as $300,000 a year, including salary and bonus. That is roughly double what a second-year banker might earn at Goldman Sachs. “Private equity is the preferable place to be in terms of compensation,” said Jeff P. Visithpanich, a managing director at the compensation consulting firm Johnson Associates.

While data is hard to come by, a December report from Vettery, a start-up recruiting firm, said that private equity was the single most popular destination for Wall Street’s junior workers. Roughly 36 percent of junior bankers with two-year contracts in 2012 have now joined private equity firms, compared with 27.5 percent who stayed in the same division at their bank, Vettery said.

It may seem surprising that these untested financiers are being so heavily courted when the overall unemployment rate of workers between the ages of 20 and 24 in January was more than twice as high as the rate for those 25 and older.

But the process of hiring these workers has grown only more frenzied since the crisis, as financial firms increasingly believe they must work harder to attract ambitious graduates. The banks, from which these workers are being poached, are raising salaries or offering additional days off in an effort to retain them.

To read the complete article from the New York Times, click here.


Private Market Valuations Exceed IPO Valuations: Is This a Bubble??

private-company-valuations-temp-112614-4Brokerdealer.com blog update inspired by 2 Jan WSJ column by business news journalist Liam Denning

For broker-dealers, investment bankers, and those following the investment strategies of private equity and venture capital firms, this is one of the better plain-speak summaries profiling the current climate of investing in private companies. The recent outsized valuations during 2014 have caused greybeard investors to scratch their heads…as the outsized pre-IPO valuations are counter-intuitive to traditional investment analysis of private companies, particularly given the assortment of “lower-than-last-private round” post IPO valuations that these same companies are being given in the public marketplace.

For private companies that wish to network with deep-pocketed angel and/or institutional investors, Brokerdealer.com provides an investor forum that connects start-up entrepreneurs with those who can see the forest through the trees.

Below please find excerpts of Liam Denning’s reporting..

Buying a stock, with all its attendant filings, analyst coverage and forecasts, still can be a gamble. So imagine getting excited about one isolated price signal on a private company with all the disclosure of the Air Force’s Area 51.

Yet that is what is setting pulses racing as 2015 dawns. Xiaomi, a closely held Chinese smartphone maker, recently raised $1.1 billion at an implied valuation of more than $46 billion. That puts it ahead of Uber Technologies, the unlisted ride-booking application developer that got new funding in December valuing it at $41 billion. Both numbers also are higher than the market capitalizations of roughly three-quarters of the S&P 500’s members.

In theory, such startup valuations matter little to anyone but a relative handful of founders, employees and venture capitalists. The average investor doesn’t get a seat at the table or more than an occasional glimpse of what even is on the table.

In practice, news of such amazing, and seemingly unobtainable, investments stoke bullish sentiment, leaving individual investors potentially vulnerable.
Venture capitalists and other insiders usually do extensive due diligence before committing to the likes of Uber. But their basis for valuation differs from the approach of mainstream investors buying stocks, with venture funds also considering exit timelines, the cash needs of a startup to keep expanding and maintaining incentives for management and owners as equity stakes get parceled out. They also can, of course, just get things wrong.

Ordinary investors also must consider the wider context. In a world thirsting for yield amid ultralow interest rates, money has sought riskier corners of the market. Almost $24 billion of new commitments flowed to U.S. venture funds in the first nine months of 2014, according to the latest data from Thomson Reuters and the National Venture Capital Association. That is more than in each of the preceding five years in their entirety and sets up 2014 to have been the biggest year for new venture money since before the financial crisis.

This raises the risk of dollars being deployed into questionable businesses, which then eventually find their way into the wider market via initial public offerings, which are priced off the back of those high startup valuations.

For the entire WSJ story, please click here.

Private Equity Firms Now Face Up To Fee Schemes

double dipBrokerdealer.com blog update courtesy of Mike Spector and Mark Maremont of the Wall Street Journal.

For years, Private Equity firms have doubled-dipped by receiving management fees from their institutional investors, and at the same time, have pocketed hundreds of millions of separate fees from the companies they have acquired on behalf of those same institutional investors. For the first time, these firms are being pressured by investors, and in some cases, federal regulators to stop the practice of double dipping or face further scrutiny.

The investment firms usually collect the fees from companies they buy for providing services such as consulting, serving as directors and helping them make their own acquisitions. Instead of keeping some of the money, the buyout firms, in new funds they are raising, will now pass the fees on in full to investors in the funds.

The payouts being reimbursed, known in the industry as transaction and monitoring fees, have provided many private-equity firms with a steady income stream augmenting their share of investment gains on deals, which remain the key source of profits from their buyout funds. Private-equity firms buy companies using a combination of cash raised from investors and borrowed money with the aim of improving the companies’ value and selling for a profit a few years down the line.

Buyout firms often receive transaction fees from a company after completing a takeover and for other deal activities, and monitoring fees for consulting and other work while holding the investment.

The turnabout by managers including Blackstone Group LP, KKR & Co. and TPG represents a significant concession in the face of persistent clamor for the private-equity industry to do a better job sharing and disclosing their fees.

The decision by private-equity firms to essentially reimburse investors with payments that can amount to tens of millions of dollars or more, sometimes on just one transaction, shows the increased influence wielded by investors such as public pension funds that historically accepted terms buyout firms proffered.

For Spector and Maremont’s entire Wall Street Journal article, click here.

BrokerDealers Help Mint Billionaires in 2014; Greed Is Good, Funding is Fun

startup valuationsBrokerdealer.com blog update courtesy of extracts from 29 Dec edition of the Wall Street Journal, with reporting by Evelyn M. Rusli

As brokerdealers, investment bankers, institutional investors and entrepreneurs “close the books” on 2014, all will agree this has been a remarkable year in which “billion dollar valuations” have seemingly been the norm. Most notably, technological start-ups have enjoyed increasing valuations with each subsequent round of financing from private equity and venture capital firms, albeit many financial industry professionals are wondering whether those valuations can carry over when these private companies embark on initial public offerings (IPOs).

While “Wall Street” protagonist Gordon Gekko coined the phrase “Greed is Good!,” the Broker-Dealers mantra for 2014 was “Funding is Fun!”

Below please find highlights of the WSJ article.

Chinese smartphone maker Xiaomi Corp. is now officially the world’s most valuable tech startup, worth $46 billion—the exclamation point on a year of extraordinary valuations. Continue reading