Why Should I Care?

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Something odd happened to me yesterday morning. At 9am I was at the gym, doing my thing on the elliptical trainer. As I flipped channels, I saw the same thing again and again. With varying levels of hysteria, every station had a talking head describing the carnage occurring in the stock market. At one point the Dow Jones Industrial Average was down over 1,000 points or 7%!

Once upon a time, most of my adult life, I would have been consumed by this event. It would have likely dominated my day, week, month, etc. This morning, I found myself thinking “big deal” and wondering why I had spent all of those years actually caring.

I spent twenty years in finance, the last nine with a large hedge fund. I remember the currency crisis of 1998 when I worked weekends for months straight just to figure out what our positions actually were, debating in 2001 who should go to work in the shadows of the World Trade Center the day AFTER the worst terrorist attack in US history, most of all I remember spending a beautiful weekend in Venice in my hotel room on an endless conference call during September of 2008 while my family saw the city.

You see finance is all consuming to those who are involved. Its not just the money, it’s the action, the importance of what people in finance think that they do. We thought that every action we took had broad and deep consequences. So at a time like this we would be obsessing about what we should sell, what we should buy. What can we sell? Who wants to take their money out? How can we convince them not to? Will the banks call our loans? What will the FED do?????

Now I could speculate about why we are having this sell off. It’s a marginally interesting topic and I still do have an investment account or two. But the reality is that there are too may others wasting space on the topic, I am not nearly as well informed as I once was, and the cynical side of me is pretty convinced that this is just another example of market players bullying the FED into keeping rates low. For those of you who don’t realize it, that is good for asset owners, not the rest of us, especially those on fixed incomes.

In the three plus years since my departure from the world of finance, I have learned many things. People in finance are smart, hard working, and focused. Of course they aren’t the only ones. In every walk of life I meet people who share those attributes. Many of them are involved in matters much more pressing than the price of a share of Apple or how to sell a basket of loans. They work in environments that are much more complicated and have diverse constituents with vastly different incentives.

It’s why I ultimately turn off the talking heads, finish my workout and head off to work on building a social venture that hopefully will make a difference.

When Diverse is Homogenous

Warning to those of you who are tired of my negativity around all things America. Im at it again!

I am always reminded that I am a citizen of the most diverse nation in the history of mankind. Occasionally,  the reminders are positive, frequently they come with a negative context.

The question of the day therefore is, why as an American do I have to shop for clothes at Banana Republic, The Gap, or J Crew while I eat at some crappy chain.

I am on the end of a twelve day journey to Greece and Italy where I am constantly impressed (even in Greece) with the diversity of options for shopping and eating. It is important to note that the diversity is not just in the brands of the shops but in the items for sale in the shops. It is so refreshing to see so many different styles in so many price ranges.

Now I understand that my view is likely skewed by the fact that I live in Boston, the worst dressed city in the free world. Where else could you eat a gourmet dinner in the comfort of your sweats and Red Sox cap? 

But even when I go to New York, Chicago, or San Francisco, I am comforted (bored?) by the fact that I see the same stores and restaurants that I see everywhere else in the US. Of course, I havent been to Phoenix, Atlanta, Cleveland, or Buffalo any time recently. Maybe that’s where I need to shop.

So why is this? I can only think of three possible reasons:

1- The price advantage of less choice and therefore larger production runs appeals to that obsessive American desire to have more of anything at a lower price, regardless of quality, style or other factors.

2- Americans just don’t really want to have choice in the way they look or eat. Perhaps they arent risk takers in this regard, or they just don’t care all that much. 

3- Landlords are able to extract such high rents (and favor large corporate chains) that sole proprietors can not survive. 

I’d love to know your thoughts. Am I missing something?

Maybe it’s just me and my desire for choices in style. Maybe, I want to be able to wear shorts at the beach,  a linen jacket for dinner, and a stylish slim cut shirt to a meeting.  

Perhaps, I should just pretend that the world is my couch and dress accordingly. Or, Ill just need to keep on traveling…..

Where is the Anger?

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As I sit watching the umpteenth hour of the coverage of the Charleston shooting, I find myself becoming numb. I am NOT becoming numb because of the sheer sadness of the event, that happened twenty shootings ago. I am numb because every single person being interviewed from the man in the street to Al Sharpton does nothing more than express their sadness. Which is nice but quite frankly, f’ing useless!

What I want to know is where the hell is the anger? I know that I am angry. Is anyone else? Perhaps, we have all become so used to this that we have developed a conditioned response to express sadness and solidarity! It almost seems choreographed. Big deal!

I have at least two reasons to be angry. First, is BLACK LIVES MATTER! We do a lot of talking about equality in America but, really!!! Imagine if a black man walked into a white church and killed nine white people! There’d be a hell of a lot more than sadness, you can be assured of that. These were regular, hard working, family loving, citizens of our nation. Gunned down by a lunatic who thought that they were less worthy of living than he was.

That brings me to my second reason. Clearly the shooter “had issues”.  Multiple arrests in the recent past, including one for drug possession. As a parent, I would be concerned if this was my child. But the father of the shooter thought that it would be a good idea to buy his son a gun for his birthday. Terrible echoes of Newtown here. Why can’t we throw this fine citizen in jail too? If people want to buy and own guns then we as a society must be able to hold everyone responsible for their actions.

Here’s the main reason for my anger. A student of history should know that real change only occurs through anger and fear. The civil rights movement only gained traction when people took to the streets and the federal government feared widespread unrest. Then there’s the case around inequality. Inequality in the US was at its lowest point during the period 1945-1980. Not surprisingly, this period coincides with the peak of the fear of communism. It isn’t hard to believe that this fear led politicians and business leaders to “play nice” with labor which led to the greatest period of prosperity in American History. This is probably the best reason to keep Bernie Sanders around, but that’s another blog.

Felling and expressing sadness in light of horrible events is a normal and important emotion. I feel it too. As long as we all understand that just doing this will change NOTHING then it’s fine. For those of us that are just sick of this crap and the absolute lack of reaction to it, get angry, channel that anger, and do something!!!

Feeling a bit of Deja Vu or Oops I did it Again

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As I watched the amazing finish to last nights Super Bowl, I had a flashback to a night just over nine years ago.

I spent most of the time leading up to the game conflicted. As a Jet fan living in Boston, I want to hate the Patriots but find myself loving the fact that although you may hate them, its likely because they are simply smarter than the other 29 NFL teams.

Lets face it the Pats just won their 4th Super Bowl in 14 years. During that time that have had one, count ’em one Hall of Fame player. If you think of the rosters of teams like the 70’s Steelers, 80’s 49ers, or 90’s Cowboys, they were loaded with great players. The Pats? Just Tom Brady and some guy named Bellichek.

My other conflict is that I really like the Seahawks coach Pete Carroll. Even though he dissed the Jets big time back in the mid-90’s, who could blame him for leaving that house of hell. He then went to coach my favorite college team, USC where he was minutes from winning three consecutive national championships. This is where the Deja Vu comes in.

The match up at the 2006 Rose Bowl was Number 1 USC  what Matt Leinhart and Reggie Bush vs. Number 2 Texas with Vince Young. Additionally, USC and Texas entered the game with winning streaks of 34 and 19 games respectively. I was taken by a certain bank along with a bunch of other finance geeks to Pasadena for the game. A beautiful day and a game that lived up to the immense hype.

The game was an offensive battle with a close game morphing to a USC lead of 38-26 with 6:42 to go in the game. Vince Young then led the Texas Longhorns on a touchdown drive to cut the USC lead to 5. On the ensuing drive USC drove to midfield where they faced a fourth down and two situation with just over two minutes left. Carroll could have chosen to punt, he could have chosen to hand the ball off to Heisman Trophy winner Reggie Bush, or he could have had last years Heisman Trophy winner throw a pass.

So what did Carroll choose to to with immortality on the line? Leinhart hands off to the immortal Lendale White, remember him? Unless you are a member of his immediate family, likely not. White rushes for one yard and Texas gets the possession with plenty of time to drive down the field.

Vince White of course runs in for the winning touchdown with 0:19 remaining. Final score Texas 41- USC 38. Drive home safely.

I was crushed. Of course, the entire state of Tennessee should have been more upset as Carroll’s mistake only made the intellectually challenged Young look better and the Titans drafted him. That was a mistake.

So in 2006, Pete Carroll looked at the biggest situation in the biggest game of his career, looked at his stud running back and said, “Nah, let me roll the dice”.

One could argue that Pete Carroll is two incredibly poor decisions away from arguably being the greatest coach in football history.

Last night, I sat on the couch and said to my wife, I feel like Ive been here before. It was just 40 degrees warmer.

 

 

Shhh. The American Dream’s Dead

Many people view last night’s State of the Union Address to be the kick off of the 2016 Presidential Campaign. If that is true than it will be very interesting to see if a major political party can win the Presidency by admitting that the American Dream is dead or at least needs an assist from government.

President Obama laid out a series of policies that are directly aimed at the middle class in an attempt to help them to have a chance to achieve the Dream. These policies, including increased child credits, paid medical leave, free community college, and a middle class tax break will be paid for by tax increases on the 0.1%. Not exactly allowing the invisible hand to work its magic!

The SOTU is the latest salvo in a series that includes numerous proposals from Elizabeth Warren and even some from the recently converted to the cause of combatting inequality, Larry Summers. Many of these proposals are in response to the perceived continuing increase in inequality and the fact that Progressives believe that without significant government intervention the Dream will die.

All of this has the effect of forcing the all but anointed 2016 Democratic candidate, Hillary Clinton to embrace significant parts of this progressive agenda. While this seems to be something of an anathema to the centrist Hillary, it is becoming apparent that this is what many in the party want. But can they convince the nation that the American Dream needs to be provided with the assistance of government?

The American Dream has been part of our nations folklore for almost a century. While the story of Ragged Dick is almost 150 years old, the mention of the American Dream dates to 1931 and is attributed to James Truslow Adams., Adams envisioned not “a dream of motor cars and high wages merely,” but rather “a dream of a social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position.”

Amazingly, on overwhelming majority of Americans still believe in the American Dream. Perhaps this is the reason why Americans tolerate such a high degree of inequality and have traditionally disliked government intervention in the engine of capitalism. Americans believe that very soon they or their descendants are going to be rich. As recently as 2009, the Pew Charitable Trust found that 39 percent of Americans thought that it was common for someone to be born poor and become rich. In fact 31 percent of Americans believed that they were going to become rich in their lifetimes.

Now the truth is that the American Dream, at least from a socio economic perspective has always been something of a myth. According to Timothy Noah in the Great Divergence, the United States (along with the United Kingdom) are the two developed nations in which income heritability is highest and intergenerational mobility is lowest. In simple terms it means that birth is the greatest determinant of an individuals career and income. Across all of the “Old World, less competitive” nations in Europe, mobility is higher and in places such as the “socialist” Nordic countries socio-economic mobility is orders of magnitude greater. Does anyone other than me see a link between this and income distribution?

So how will this work. While Republicans like to state that President Obama used government largess to win votes, there is little evidence that he actually did so. In fact, the last president to campaign on reducing inequality and actually win the office was Lyndon Johnson in 1964. Lets think about 1964. The American economy was strong, the American people strongly believed that government was a force for good, the top marginal rate on personal income had just been reduced from 91% to 70% (that is not a Typo!), and the incumbent LBJ presided over the most overwhelmingly Democratic congress of modern times.

I think that the road to convincing Americans that government intervention, not just to grow the economy but also to grow economic opportunity for the largest number of Americans will be difficult. This will likely entail convincing those in the middle income and middle of the road politically that inequality is not only unfair, but bad economically for everyone. It will take a candidate whose credentials are not “Harvard Liberal” but one who is viewed as centrist. It also will take a candidate with incredibly thick skin that will be able to withstand the assault of the vested interests.

It will also take a bit of luck I suspect. The best hope for electing a Progressive minded president, Hillary isn’t a Progressive but can be pushed that way by her party, is to have the Republicans to nominate a candidate who stands in clear contrast to these ideals. Ted Cruz would be a dream but even his party knows he’s unelectable. Lets just hope that Jeb doesn’t survive the primaries.

The challenge to make the pro-government case is a daunting one. If were a betting man I’d be betting “Don’t Pass”. Fortunately, as I go to sleep tonight, I am heartened that some of us are discussing the rapidly fading American Dream. Of course Jodi Ernst is discussing Hardees…………….

Time Flies… But Should I?

So once again I find myself at an airport bar awaiting another long (but not long enough to sleep) overnight flight. Was a time not long ago that I was a regular on this circuit be it NY-London, London-Mid East, or Anywhere- Asia.

I had a job with lots of travel and lord knows, I like being efficient. Why waste a day traveling when you can try to time your food, alcohol, and general fatigue all in the name of maxing out your four hours sleep?

While there were many negatives to lots of travel, I would be dishonest if I said that there weren’t elements that I actually enjoyed. I got to see the world, I got to travel “upfront” and stay in great hotels, and traveling for business is completely mindless. You are focused on your task and all you need to to is look for the sign that says “Mr. Kushner”, to get safely to the next meeting, or flight, or hotel.

I also loved traveling for pleasure. With my family it is always a fun shared experience. We get to bond with no distractions. We have seen so much together. I know that these holidays are the things that my children will remember for all of their lives.

I am also fortunate to have a spouse who is ok with me taking my occasional boondoggle on my own. Almost exactly one year ago, I sat in the same airport bar blogging. My destination was the same that night as it is tonight. Just read my post about the end of the Economic Crisis, and you will know how that turned out!

Tonight, I’m off again to see friends and my favorite band play their farewell tour in their hometown. I am excited, but on the other hand………..

I am much more reticent than I’ve been about a trip in, well I can’t remember when I’ve been this reticent.

I don’t know if its just that I’m getting older and god forbid becoming a bit of a homebody? I’m gone for an hour and I miss my girls.

Maybe I’m worried that I’ve lost my connectivity to my former home and stomping ground. Its been almost three years and even the best connections atrophy when not watered regularly. I mean how many times can we talk about what we did in 2008?

Or maybe, I have just moved on and am involved enough in the present that the past is just something that I remember fondly and revisit a but less frequently.

Maybe I should answer that on Thursday………..

There is Good News and there are Challenges

 

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It appears that the ESG market is gaining increasing traction. So why is it so hard to create an investing model for investors to invest in early stage social enterprises?

Last week there was extremely good news around the growth of the Sustainable Investing universe. According to The Forum for Sustainable and Responsible Investment (“USSIF”), the size of this market grew by an astonishing 76% over the past two years. It now stands at over $6trillion. This represents one in every six investable dollars in the US. The reasons for the increase are twofold. First, investment managers are responding to investor demand. Second, ESG assets in many cases offer superior returns AND risk diversification. This makes investing in ESG assets an obvious choice for many.

The biggest area of growth is in what USSIF calls ESG Integration. This simply means that asset managers are now looking at Environmental, Social, and Governance factors both as negative and positive screens. The latter is a change from the past. If you look a little deeper into where investment dollars are going or not going, climate change and gun safety are the two most impacted areas.

While this is certainly good news, most of this investing is focused on publicly traded companies and as such, it still belies a relatively slow trajectory for growth in early stage investment capital for what I would call non-environmental issues. These “Impact Investments” are in areas including education, workforce development, and food security to name a few. It is estimated that the amount of money available for impact investment is only between $40-60billion. Keep in mind that Bain Capital alone manages over $85billion and that charitable giving in America totals over $250billion per year.

The question is why Impact Investing been slow to develop? What are the barriers to a more robust impact investing market? While there are many ranging to investor education, building infrastructure, and types of social ventures that can support impact investing, there are other issues that while less transparent, have a major influence on the pace of growth of the Impact Investing market.

In my conversations with potential investors and investees, there are at least five impediments to raising early stage capital for impact investments.

The first is that in order for many of these investments to work some kind of catalytic capital is required. In the for profit space this capital would typically come from entrepreneurs, friends and family, or angel investors. In the social space this capital can come in a number of forms. It could be donations to a 501 © 3 entity. Or for community housing, it could come in the form of the Community Reinvestment Act, which requires banks to meet needs in low and moderate- income communities. Loan guarantees from government agencies can also act as catalytic capital. Regardless of the form, catalytic capital is risk reducing, making it easier for other investors to get involved.

The issue is that there is far too little of this type of capital, especially donations to be used for non-program purposes. Foundations typically give money for program and not for capacity building leaving this role to high net worth individuals and corporates. Additionally, mixing of donations and investments can be confusing especially to the investee.

The second barrier is size of transactions. This applies to both investors and investees. Outside of the environmental space, deal sizes are small. Many social ventures are service businesses, which require relatively small amounts of capital. These small transactions are not typically interesting to larger funds that might decide to allocate a portion of their fund to impact investments if they could source an investment large enough to pay for the diligence required. Therefore these investments typically go to dedicated impact investing funds which to date have struggled to raise significant amounts of capital.

Exacerbating this challenge is the third barrier to growth. The impact investment market reminds me of structured credit in the mid 1990’s before CLO’s, CDO’s, and ABS deals became commonplace. Every transaction not only has its own specific entity risk but also has its own idiosyncratic documentation. This increases the risk as well as the resources needed to make an investment decision. Increased liquidity and the larger capital flows that come with it are at least partially dependent on standardization of instruments. Highly bespoke instruments will work for a given transaction but may act as a hinderance to broad market growth.

Take the example of Social Impact Bonds (“SIB’s”). This highly touted instrument for social investment is simply not scalable or replicable in its present form. It is simply too complicated for most investors to understand and each bond will be materially different. This increases fees to bankers and lawyers helping to make SIB’s the world’s most expensive bridge loan. That is not to say that the technology behind SIB’s is not useful. Its just that in order for SIB’s to be widely adapted, investors and investees will need to reach a compromise that allows for standardization of documentation. This will include, tenor, events of default and compliance, and most importantly metrics. Simply put, the perfect is the enemy of the good. This must change so investors can focus on the specific entity risk of an investment.

This leads us to the fourth barrier. Many leaders of social enterprises are not accustomed to or comfortable with the concept of taking investments. They have traditionally sought donations or grants to fund their mission. Many of these leaders are reticent to engage with “investors” out of concern of losing focus on the mission. To be fair, many social missions cannot support investing, as they do not have cash flows that can generate a return. On the other hand, many social enterprises would be enhanced by taking money from impact investors to grow to scale.

Perhaps the biggest issue with social enterprises is the need to present their businesses in a fashion that more traditional investors are accustomed to. What I mean by this is having an early focus on capacity building that allows for strong accounting and finance, business planning, marketing/development, and understandable metrics. I believe that this is where impact investors may be most useful. Many potential investors not only seek to invest their financial capital but their intellectual capital as well. Creating networks of investors/mentors is an important step in the growth of early stage impact investing.

Ahhh, those investors. Over the past couple of years I have had many conversations with individuals who might be impact investors. These individuals in all cases participate in both philanthropy and investing. They should like the idea of investing for social as well as financial gain. But for the most part they are skeptical at best. To quote a hedge fund manager that I spoke with, “When I want to do good, I’ll make a donation and when I want to invest, I’ll invest in a company that I understand”. I have heard similar comments from many other high net worth individuals whom are likely to be a significant portion of the impact investing space.

As I heard this answer again and again, I began to think about why people feel this way. My conclusion is that wealthy individuals, particularly those who made their money rather than inheriting it placed philanthropy and investing in very different realms. Philanthropy is about doing good but in many cases there is less rigor around donating than around investing. To be certain, this is in part due to the lack of or fuzziness of metrics in the social sector.

Investing on the other hand has one clear goal and one clear measuring stick It also has a not insignificant ego element attached to it. For many investors being successful in investing is not just about making money, it’s about being right! So while its fine to make a donation that doesn’t go well, it’s more than a financial problem if an investment, impact or otherwise isn’t successful.

It is this fact that keeps many potential investors on the sideline. They correctly see that measuring success in impact investing is more layered and complex. At present the measure of success is unclear.

The solution is a combination of marketing and metrics. We must do a better job of making clear what Impact Investing is, where it matters, and for what kind of social issues it works for. We also need to make the case that impact investments are part of a portfolio and investing in addition to donating can stretch the impact of money further. We must teach social entrepreneurs how to tell their story in a way that is compelling, consistent, and clear. Just like for profit entrepreneurs do it.

A couple of months back I was a panelist at the Alliance for Business Leadership’s session on Sustainable Investing. A member of the audience took me to task for claiming that all impact investing was concessionary in some way. He stated that we need to stop giving up the high ground. He is 100% right! The point I wanted to make is that if the FINANCIAL returns were the same as a traditional investment then is it really an impact investment?

The reality is that many impact investments produce greater returns than their non-impact comparable once you factor in ALL of the returns; financial, environmental, and social. Now all we need to do is create metrics that are clear, simple to understand, and comparable. If we want to attract investing capital to the social arena then we must find a way to simplify and standardize our method of communicating across the sector. The Global Impact Investing Network (“GIIN”) has gone a long way to creating metrics and disseminating the information. But still there are just too many metrics with too much information for the average investor to fathom.

I understand that highly specialized and specific information is valuable, and it must be available. I also am aware of the concern that may mission driven organizations have with being categorized and being encouraged or even pushed to engage in mission drift. I have two answers to that concern. First, as stated above, the more detailed information must be available both for investors and for the organization so that it can constantly measure its effectiveness. Secondly, it is the hope of many investors that comparative metrics will better allow everyone to put capital with the organizations that are having impact. Investors need ways of easily identifying successful social enterprises, ones that will have impact. After all, isn’t this the point of impact investing?

I welcome any and all responses, questions, and thoughts on this topic. We must find a better way.