Ep. 11: Is Sustainable Investing Dangerous?



This episode of the Portico Podcast features a conversation with Tariq Fancy — the former CIO for Sustainable Investing at the ~$10 trillion asset manager BlackRock.

He’s also the author of the delightfully thought-provoking essay The Secret Diary of a ‘Sustainable Investor’.

I reached out to Tariq after reading his essay because it raises some uncomfortable truths about the explosion of ESG-related products across public and private markets. 

While I agreed strongly with his writing about the nonsense of ESG-related investments in stock and bond markets, I maintained that sustainable- or impact-focused investors in private markets could drive meaningful change.

I also wanted to think through whether the so-called ‘greenwashing’ effect changes with scale.

I know managers whose investments are driving positive environmental and social change in some of the most underserved markets — indeed, some have been featured on the Portico Podcast.

And honestly, I worry that the asset-gathering activities of large-cap firms will not only crowd out the earnest players trying to increase human dignity, but also tarnish the idea that private markets investing can be a positive-sum enterprise.

I also worry about the proliferation of service providers bilking people with asinine accounting and compliance solutions — a phenomenon that famed corporate finance professor Aswath Damodaran refers to as the ESG Gravy Train

I remember reading an article in the FT over the summer about PwC looking to hire 100,000 people to provide ESG advice and thought the madness must stop — we’re creating entire categories of jobs that inhibit the flow of capital to productive users of financing.

And we all know that scale providers can absorb these costs, thereby entrenching their market position and reducing competition from new entrants and smaller firms.

So, you can see why I was keen to speak with Tariq about these issues, as well as the roles the public and private sectors can play in solving the structural environmental and social challenges of climate change and inequality.

But we also talk about Tariq’s nonprofit, Rumie, which should resonate with listeners of the podcast. 

Rumie provides free digital education to learners in over 176 countries, including Afghanistan where one of their big initiatives is to create more content in Dari and Pashto so that women and girls can continue their education despite the return of the Taliban.

I’d encourage listeners to visit Rumie’s website. And, if you’re a fund manager or institutional investor who’s interested in supporting the growth of a nonprofit in the edtech space, reach out to Tariq and say hello.

This podcast was recorded in October 2021.


Read The Secret Diary of a ‘Sustainable Investor’.

Learn about Rumie and sample some of its bite-sized lessons.

Donate to support Rumie’s mission.

Follow Tariq on Twitter

Read Aswath Damodaran’s post on The ESG Movement: The “Goodness” Gravy Train Rolls On!

The Mission & The Model

Portico’s recent digs at KKR and Blackstone generated some rousing feedback.

I considered taking on Apollo or Carlyle this month to pump the engagement metrics.

Alas, one reader suggested that — in addition to pointing out market failures and emperors wearing no clothes — I should consider profiling lesser-known managers that are attaining success as well.

The Portico Podcast is an attempt at this — a channel where I recede into the background and shine a spotlight on individuals who I find to be bright and entrepreneurial, and who either employ a differentiated investment strategy or have a fresh view on an important topic.

So far, these have included:

And yet, I can’t shake this reader’s comment …

… because it tells me that I’m not channeling enough of my energy toward Portico’s mission: closing the finance gap through the creation and dissemination of knowledge.

* * *

I recently participated in a two-week strategy course, which revealed an inherent tension between our mission and our business / revenue models.

In part, the tension is a function of the long sales and project cycles, which impinge on our ability to create knowledge. But it’s also because we customize our engagements for each client — solving one pain point for one firm.

Specific knowledge is hard to productize and scale.

I’ve been considering a pivot that would have us recommit to Portico’s mission in a holistic manner — creating and disseminating knowledge on the full array of market intelligence, financial, operational, and human capital pain points that individuals and firms face.

But candidly, I wonder whether our stated mission is work that no longer needs to be done.

Is it the case that new knowledge is needed to close the finance gap? Do information asymmetries constitute the critical chokepoint?

I have my doubts. 

The information landscape has diversified in important ways over the last five years, making it easier than ever for people to glean knowledge on new markets.

But I’m also chastened by a statement that an LP recently said to me, “most investors aren’t very bright.”

What’s the point in producing content for people who don’t want to think too hard or act independently?

If scale providers are what global capital seeks, it’s silly to create knowledge when the demand is for advertorials.

And yet, I get the sense that there are humans who are eager for insightful perspectives on global private markets, and useful knowledge that will help them build their businesses.

So, I am asking for your feedback.

I’m exploring the idea of a subscription offering that provides a fulsome menu of differentiated, interactive content (audio + text + visual).

The subscription would also offer opportunities for subscribers to engage directly with industry leaders and subject matter experts, and to shape Portico’s research agenda.

I’m being deliberately light on specifics, but what do you think? 

—Mike


Simon Clark on Arif Naqvi, The Key Man

In the latest episode of the Portico Podcast, I speak with Simon Clark, a reporter at The Wall Street Journal and the co-author of The Key Man — the summer’s must-read book about Arif Naqvi and the downfall of The Abraaj Group.

The Key Man is an absolutely riveting book. It has the pace of John Carreyrou’s Bad Blood, but with an unbelievable cast of credulous characters who fell for a fantasy.

I had four pages of questions for Simon, and while we clearly don’t get to everything on my list, I think you’ll agree that this is an enlightening conversation that tells us much about the manufacture of social capital, and the failures of the world’s most prestigious firms to do an ounce of work.

Check it out on Apple Podcasts | Google Podcasts | Spotify


Ray Dalio, Sage, Says: To Understand China, You Need to Understand China

Two years ago, Bridgewater Associates Founder and co-CIO Ray Dalio took to The YouTube to impart his thoughts on why you should probably invest in China.

I shared it at the time because I thought his analysis was stupid, notably his theory about investing behind rising ‘Reserve Currency Empires’ (i.e., Dutch, British, American, and Chinese).

Back then, I wrote:

[O]ne of these empires is not like the other.

Hint: in three of these, the batons were often brought out to protect the interests of capital. In the other, they’re often brought out for other reasons. 

It’s such an obvious point that I didn’t think it needed to be said.

Well, after the recent DiDi hubbub and CCP decision to outlaw profits for education companies, Ray took to LinkedIn to share some incisive commentary:

To understand what’s going on you need to understand that China is a state capitalist system which means that the state runs capitalism to serve the interests of most people and that policy makers won’t let the sensitivities of those in the capital markets and rich capitalists stand in the way of doing what they believe is best for the most people of the country. Rather, those in the capital markets and capitalists have to understand their subordinate places in the system or they will suffer the consequences of their mistakes. For example, they need to not mistake their having riches for having power for determining how things will go.

Look, Ray’s stating the obvious after the fact.

But you need to understand that what Ray’s telling you — even if he’s not saying it — is that China has become uninvestable.

Forget about past performance.

The direction of travel has changed.

There are opportunities elsewhere, in countries where your capital is valued, and where you can finance infrastructure, products, services, and technologies that increase human dignity and wellbeing. 

Adapt and go find them.

As the sage, himself, says:  

[Y]ou need to understand that the global geopolitical environment changing leads to some changes.  


Stablecoins, CBDCs & ZK Proofs

Around the time Ray was saying investors should probably invest in China, this newsletter explored the possibility that a digital currency might replace the dollar as the world’s reserve currency.

Gary Gorton (Yale) and Jeffery Zhang (Federal Reserve) have written a fascinating paper on the systemic risks of ‘stablecoins’ and the prospects for a central bank digital currency (‘CBDC’). 

I believe a U.S. CBDC is inevitable.

The questions that follow are:

  1. Does the CBDC take the form of (i) a token, or (ii) a citizen’s deposit account at the Federal Reserve?
  2. How do you protect privacy?

On question 1, the deposit account could enable new, powerful tools for the Fed to achieve macroeconomic objectives (e.g., helicopter money), but at the risk of totalitarian-level control over who can spend how much on what, and where and when they may do so. Not ideal!

On question 2, you could imagine a spectrum from the digital yuan (where the state sees all) to a cryptographically secured, anonymous digital cash. The key unlock for the latter is the advance of zero-knowledge (ZK) proofs.

If you’re keen to learn more, you should read this piece by Aleo co-founder Howard Wu, and Ben Laurie’s paper Selective Disclosure.

#cryptoisthefuture


Things to Watch

Nasdaq Private Market
Very interesting development in the secondary market for shares of private companies: Nasdaq, Silicon Valley Bank, Citi, Goldman Sachs, and Morgan Stanley announced a joint venture to spin out Nasdaq Private Market and create a standalone liquidity venue. 

If you know anyone at Nasdaq who would like someone to help build this out across EM, please send them my contact info. I have data. Thx. 🙂

EM SPACs
The Wall Street Journal reports that the number of blank-check companies targeting EM has tripled to reach 60 (⁓12% of the U.S. total).

As someone who put forward the idea of a super-SPAC as a liquidity solution in EM private markets, I must say that the prospects for disastrous governance outcomes are legion.


Wall of Shame

Advent International SPAC faces $800M loss (Bloomberg).


From the Bookshelf

“You’ve come to us just in time Scheisskopf. The summer offensive has petered out, thanks to the incompetent leadership with which we supply our troops, and I have a crying need for a tough, experienced, competent officer like you to help produce the memoranda upon which we rely so heavily to let people know how good we are and how much work we’re turning out. I hope you are a prolific writer.” 

“I don’t know anything about writing,” Colonel Scheisskopf retorted sullenly. 

“Well don’t let that trouble you,” General Peckem continued with a careless flick of his wrist. “Just pass the work I assign you along to somebody else and trust to luck. We call that delegation of responsibility. Somewhere down near the lowest level of this coordinated organization I run are people who do get the work done when it reaches them, and everything manages to run along smoothly without too much effort on my part. I suppose that’s because I am a good executive. Nothing we do in this large department of ours is really very important, and there’s never any rush. On the other hand, it is important that we let people know we do a great deal of it.”

— Joseph Heller, Catch-22 (Scribner’s: 1996)

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The information presented in this newsletter is for informational purposes only. Portico Advisers does not undertake to update this material and the opinions and conclusions contained herein may change without notice. Portico Advisers does not make any warranty that the information in this newsletter is error-free, omission-free, complete, accurate, or reliable. Nothing contained in this newsletter should be construed as legal, tax, securities, or investment advice.

Copyright © by Portico Advisers, LLC 2021, all rights reserved.

Ep. 10: Simon Clark on The Key Man



This episode features an interview with Simon Clark, a reporter at The Wall Street Journal and the co-author of The Key Man — the summer’s must-read book about Arif Naqvi and the downfall of The Abraaj Group.

Most listeners and followers of Portico will be familiar with the background of the Abraaj story. But if you’re not, I’d recommend that you go back and listen to Episode 8.

But even more, I’d recommend you purchase a copy of The Key Man for yourself (USAUK). It’s an absolutely riveting book; it has the pace of John Carreyrou’s Bad Blood, but with an unbelievable cast of credulous characters who fell for a fantasy. 

In today’s conversation, Simon and I discuss:

  • The origins of Abraaj, some of its early transactions, and the oft-asked question: where did they get their money?
  • Abraaj’s acquisition of Aureos and how it unlocked the firm’s ability to scale.
  • The manufacture of social capital — the people and firms who testified to the greatness of Arif and Abraaj, seemingly without conducting an ounce of due diligence.
  • The Karachi Electric deal.
  • The $6B mega-fund.
  • The promise of impact investing.
  • The necessity of greater transparency in private equity.
  • And much more.

I had four pages of questions for Simon, so we clearly didn’t get to everything on my list — and candidly some of the unasked questions may be better over a pint.

But do yourself a favor and grab a copy of the book.

I hope you enjoy the conversation.

This podcast was recorded in July 2021.


Buy The Key Man |  USA  |  UK

Follow Simon on Twitter

Ep. 8: The Abraaj Fiasco



I wanted to experiment with a different format for this episode and share my writings on the Abraaj fraud scandal as they were happening in real time a few years ago.

Now, for those who don’t know Abraaj, it was one of the largest — and probably the flashiest — private equity firms dedicated to investing in emerging markets. It was spearheading a big push into impact investing and was marketing a $6B fund when it collapsed in insolvency under allegations of fraud.

There are a few reasons why I wanted to revisit my articles:

  • First, the founder of Abraaj — a man named Arif Naqvi — had been fighting a battle in UK courts to avoid extradition to the United States. He lost that fight earlier this year.

  • Second, there’s a book coming out in July called The Key Man: The True Story of How the Global Elite Was Duped by a Capitalist Fairy Tale by two reporters at The Wall Street Journal — Simon Clark and Will Louch. I’m keen to bring them on the podcast to discuss the book and I wanted to provide some context in the hopes that one or both of them will join me in a few months’ time.

  • Third, the Abraaj story is a useful prism for seeing the world as it is — unvarnished. As you listen, I encourage you to think about how social capital, branding, and reputation are manufactured; how an industry that talks about due diligence did little to none; and the credulity that money buys.

So, there will be four parts to the story I share today. The first three were from the FebruaryMarch, and April 2018 editions of Portico’s much-beloved, monthly newsletter, Portico Perspectives.

The final part comes from the July 2018 edition.

As noted, this is an experiment, so please let me know what you think about the format and content. 

This podcast was recorded in April 2021.


Sign up for Portico Perspectives.

A CDO for Secondaries?

A year or so ago I floated the idea of an index fund for EM private assets.

What if there were an asset manager that could agglomerate a sufficient pool of capital through a publicly listed vehicle (e.g., a super-SPAC) to go out and purchase — in whole or in part — scores of PE-backed companies across EM?

Would a diversified portfolio — at scale — provide better risk-adjusted returns than existing public and private equity funds? 

My bias had been toward equity.

But what if the answer is debt? 

And not just any kind of debt, but securitized debt?

 * * *

Andrew Lo — Director of the MIT Laboratory for Financial Engineering — recently gave a fascinating lecture on new funding models for biomedical innovation as part of the Markus’ Academy series of webinars at Princeton’s Bendheim Center for Finance.

Lo argues that, whilst we’re living amidst a revolution in a variety of ‘omics’ (e.g., genomics, proteomics, microbiomics), to actualize and commercialize scientific and medical advancements, we need a revolution in economics — particularly in how we finance innovation.

At first glance it might seem like an odd proposition.

Even if U.S. venture is exhibiting a ‘diversity breakdown,’ biopharma companies are sitting on $1.5 trillion in ‘firepower’ to fund transactions.

Isn’t there enough funding available already?

Lo asks us to ponder whether it’s worth making a $200m investment in something with the profile of a single anti-cancer compound (i.e., 5% probability of a positive payoff after 10 years of R&D). If successful, annual profits would be $2B / year for 10 years (a present value of $12.3B).

At a 95% failure rate, investing makes little sense.

But Lo points out that if you could invest in 150 programs simultaneously (totaling $30B of capital), the probability of 3 successes out of 150 attempts is 98.18%, and the Sharpe ratio increases from 0.02 to 0.34.

* * *

What if we translate this idea to the EM private markets index?

Would we see:

  • A lower cost of capital for EM companies?
  • Longer runways for value creation?
  • Higher risk-adjusted returns for investors?
  • Lower fees?
  • Greater liquidity (e.g., coupons)?

I don’t know.

But I wonder: maybe — maybe — the solution for the artisanal industry of EM private markets is diversification and massive scale?

— Mike


Viktor Shvets on The Great Rupture

In the latest episode of the Portico Podcast, I speak with Viktor Shvets, a global strategist at Macquarie, and the author of the deeply thought-provoking book The Great Rupture, which investigates the past and interrogates current trends to probe the question: do we need to be free to be innovative, prosperous, or even happy?

You may want to grab a pen and some paper to take notes for this episode because Viktor is a polymath who will engage your brain in some important — and at times, unsettling — thought experiments.

Viktor and I discuss:

  • Why he wrote a book that looks for lessons in the 12th to 15th Centuries to guide us through the next two decades;
  • Whether the ‘operating system’ of open markets, property rights, and open minds that generated prosperity in the past is in retreat — and even if it were, would it matter;
  • The confluence of the information and financial revolutions, and how these two forces are hollowing out the core frameworks of society;
  • The state’s usurpation of the free market and what it means for capitalism and commercial banking;
  • The prospects for emerging markets in an era of de-globalization and the importance of EMs’ non-tradable sectors;
  • Whether universal basic income might liberate people from scarcity and empower them to live lives of their choosing.

But there is so, so much more.

Check it out on Apple Podcasts | Google Podcasts | Spotify


Does PE Investment in Healthcare Benefit Patients?

No.

  • “Our estimates show that PE ownership increases the short-term mortality of Medicare patients by 10%, implying 20,150 lives lost due to PE ownership over our twelve-year sample period. This is accompanied by declines in other measures of patient well-being, such as lower mobility, while taxpayer spending per patient episode increases by 11%.”
     
  • “We find that going to a PE-owned nursing home increases the probability of taking antipsychotic medications — discouraged in the elderly due to their association with greater mortality — by 50%.”
     
  • “We find that PE ownership leads to a 3% decline in hours per patient-day supplied by the frontline nursing assistants who provide the vast majority of caregiving hours and perform crucial well-being services such as mobility assistance, personal interaction, and cleaning to minimize infection risk and ensure sanitary conditions. Overall staffing declines by 1.4%.”
     
  • A puzzle is why nursing homes are attractive targets given their low and regulated profit margins, often cited at just 1-2%. Using CMS cost reports, we find that there is no effect of buyouts on net income, raising the question of how PE firms create value. There are three types of expenditures that are particularly associated with PE profits and tax strategies“monitoring fees” charged to portfolio companies, lease payments after real estate is sold to generate cash flows, andinterest payments reflecting the importance of leverage in the PE business model (Metrick and Yasuda, 2010; Phalippou et al., 2018). We find that all three types of expenditures increase after buyouts, with interest payments rising by over 300%. These results, along with the decline in nurse availability, suggest a systematic shift in operating costs away from patient care.”

Bain’s Global PE Report

A few highlights from the year in review:

  • Global buyout deal value reached $592m (up 8% yoy) whilst deal count declined by 24%;
     
  • ~70% of U.S. buyouts were priced above 11x EBITDA whilst ~80% of deals are leveraged 6x or greater; and,
     
  • The number of global buyout exits appears to have fallen below 1,000 — the worst year since 2009.

Hugh MacArthur and Mike McKay ask: Have classic buyout funds run their course?

When I look at the data points highlighted above, I think the answer will turn out to be a resounding ‘yes.’

MacArthur and McKay point to the rise of specialist funds, carving out space for a discussion on the evolution of Vista’s strategy, among other things.

Look. Buyout firms absolutely need a differentiated value proposition.

But in a world of capital superabundance, the average buyout firm offers declining utility as an allocator of capital.


Governance

Speaking of Vista.
 
By now you will have heard that Vista’s founder, Robert Smith, struck a non-prosecution deal with the U.S. government in which he admitted to evading taxes for 15 years.
 
There are some lawsuits alleging mismarked assets and self-dealing.
 
Amidst all the talk about ESG, do institutional LPs value good governance?
 
In the case of Vista, one seems to. Several don’t.
 
But it’s a much bigger question (Abraaj: Redux 👀).

Do institutional LPs actually do their homework on larger funds?
 
Or are the investment teams too cozy with their contractors?


Zhou Xiaochuan and the eRMB

Caixin / Nikkei Asia published an important article from former PBOC governor Zhou Xiaochuan on the landscape for a digital renminbi. This is a space worth watching.


From the Bookshelf

Human history is indeed filled with endless possibilities; and the Renaissance saw this more clearly than either classicism, Catholicism or the Reformation. But it did not recognize that history is filled with endless possibilities of good and evil. It believed that the cumulations of knowledge and the extensions of reason, the progressive conquest of nature and (in its later developments) the technical extension of social cohesion, all of which inhere in the “progress” of history, were guarantees of the gradual conquest of chaos and evil by the force of reason and order. It did not recognize that every new human potency may be an instrument of chaos as well as of order; and that history, therefore, has no solution of its own problem.

— Reinhold Niebuhr, The Nature and Destiny of Man: Volume II. Human Destiny (Charles Scribner’s Sons: 1964)

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The information presented in this newsletter is for informational purposes only. Portico Advisers does not undertake to update this material and the opinions and conclusions contained herein may change without notice. Portico Advisers does not make any warranty that the information in this newsletter is error-free, omission-free, complete, accurate, or reliable. Nothing contained in this newsletter should be construed as legal, tax, securities, or investment advice.

Copyright © by Portico Advisers, LLC 2021, all rights reserved.

Ep. 4: The Rise of Kleptocracy



In today’s episode I speak with Tom Burgis, an investigations correspondent with the Financial Times, and author of two courageous books: The Looting Machine: Warlords, Tycoons, Smugglers and the Systematic Theft of Africa’s Wealth and the recently released Kleptopia: How Dirty Money is Conquering the World.

I strongly encourage you to buy copies of Tom’s books, read them, and share them with others.

Why?

Because as you’ll hear in this podcast, the themes his books cover constitute an existential threat to democratic institutions and governance — and the rule of law — globally.

They’re absolutely riveting yarns, full of intrigue and consequences.

And my hope is that if more people read Tom’s work, then we’ll stand a better chance of resisting the precipitous slide into kleptocracy that endangers us all.

Courage is contagious.

My discussion with Tom covers:

  • The dots connecting The Looting Machine and Kleptopia.
  • The story of Mukhtar Ablyazov — a Kazakh billionaire whom some say is a freedom fighter, some say is a fraudster, and some say maybe he’s both.
  • The complicity of U.S. and UK professional services firms in facilitating the activities and laundering the funds and reputations of kleptocrats.
  • Some mistaken assumptions behind the ‘convergence’ thesis.
  • How citizens can keep Kleptopia in check and revivify democracy.
  • John Kenneth Galbraith’s notion of ‘the bezzle’ and where ‘the bezzle’ is biggest now.
  • And, what the rise of Substack and the proliferation of journalists going solo or direct-to-consumer imports for the future of investigative journalism.

I’m fired up about this episode, and I hope you will be, too.

If you enjoy the Portico Podcast, please share it with friends, colleagues, and / or your connections on social media. Thanks!

This podcast was recorded in November 2020.