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Today's Top News1. Private equity LP, GPs battle over taxes
Thanks to Mitt Romney, the private equity business model has been in the line of fire since the bruising battle for the Republican presidential nomination. Recall that it was Republican Newt Gingrinch who called the business model "immoral", but the fear of tax law changes remains palpable in the industry. According to the Financial Times, private equity managers are so fearful of possible changes, which might end some very favorable treatment, that they are trying to rewrite their agreements with limited partners, to make sure that in they will be compensated in the event that they are asked to pay more taxes. Five LPs told the paper "that many GPs were introducing general clauses into partnership agreements that would give them power to change the terms if there was any change in the tax regime. The clauses are usually general, giving reasons why partnership agreements can be changed without the consent of limited partners, rather than mentioning carried interest specifically. In its offer memo before listing this year, Carlyle warned potential investors that if such taxes were implemented, the business might come up with arrangements to compensate its executives, with those arrangements then cutting into returns for investors." Ouch. This will not go over well with LPs, hence the willingness to talk with the press. The battle ultimately may all be for naught. The push to tax carried interest at the higher income tax rate may not amount to much. It certainly hasn't so far. And the idea of management fee waivers seems to be less widely used. Still, no LP likes to be pushed around. For more:
Read more about: Limited Partners, General Partners
2. The future of Morgan Stanley
Morgan Stanley CEO James Gorman sat down with the Financial Times for what seems to have been a wide-ranging conversation. Among the most interesting of his responses was the one about bond trading and whether the bank will scale back. "I don't think it's an option and I don't think it's wise. You can fire your revenues by firing your people. Unfortunately the assets didn't leave. Now you don't have the revenues. You still have the assets so you still have capital. Congratulations, you've now taken a business which is earning 5 per cent to negative 10 per cent. Well done, now what's your next trick? We can't be that weak-kneed. We've got to have a little conviction. And my conviction is there are parts of fixed income that we are very good at, that are very attractive and that are suited to the rest of our businesses: they have connectivity with investment banking, with wealth management, with equities; those are predominantly the flow pieces of fixed income. We actually have some convictions, we still take a lot of risk, we have an $800bn balance sheet." And on the banks' competition with Goldman Sachs, Gorman said that, "What was once an industry of five to 10 investment banks is now two and they are radically different in the way they are approaching it. We are unambiguously business not as usual and have dramatically changed the shape of our firm." One of the biggest stories going forward will be whose model emerges victorious. Morgan Stanley seems to have had the bigger transformation. We'll see if that ultimately works out. For more: Read more about: Morgan Stanley 3. SEC to add high frequency trading data capability
This summer, I noted that the SEC had inked a deal with high-frequency trading powerhouse Tradeworx to provide the agency with the ability to finally observe the modern stock market in real time. It's hard to believe that the SEC had been relying on the consolidated tape to keep up with the action all along. According to the New York Times, the deal has moved forward to the point that Tradeworx will send very soon a team of employees to the SEC to train staffers on how to use the software. Some have suggested that the SEC has taken the wrong approach, "a fox guarding the henhouse approach," by using the software of the one of the preeminent high frequency trading firms to help monitor high-frequency trading. But this would appear to be misguided. There's no way the SEC could've built the software from scratch, even with the help of legions of financial IT consultants. And what they're really getting are private data feeds that every other high-frequency outfit gets. "The analytical tools it is providing have not been sold before, and are the same ones its trading desk uses to analyze market patterns. The data will be stored in Amazon's cloud network, and Tradeworx will not see how the government is using the system." It would take a real conspiracy theorist to think that Tradeworx would mess with the feeds to throw the SEC off. In the end, the SEC had no choice but to enter an agreement with a private firm. I'm sure lots of other companies bid for the project. The SEC's efforts to get modern in its oversight will be closely watched. The consolidated audit trail is another example of its ambition in this area. I wish it well. For more: Read more about: Data Feeds, SEC 4. Banks latest Walmart worry: New prepaid card
Walmart has long inspired fear in banks, as it has long sought to make inroads in consumer banking. There were sighs of relief when the retail giant gave up on its latest attempt to acquire a consumer banking license a few years ago, but no one ever thought the company would simply give up on its designs to provide more financial services at lower cost to its millions of customers. The company's latest attempt is its new Bluebird prepaid card, which it has launched with American Express and which is obviously moving downstream. While those without a bank would appear to be the natural market for such a card, both companies are aiming it also at Walmart customers who may be less inclined to see value in their traditional bank. There will be no account minimums or overdraft charges and customers can use the card at ATMs and wherever American Express cards are accepted. At some point, customers will be able to write checks against the account. The funds of course are not FDIC insured, but that likely will not be a detriment, as it hasn't held back other prepaid cards. You would have to wonder if Walmart might try some interesting discount and rewards-type marketing programs around the card. Other retailers have also targeted banks with such cards, aiming to play off the general displeasure with banks and the perception that fees are going up. Broadly speaking, this is an attempt to disintermediate banks at the low-end of the consumer market. Banks will have to figure out just how much these accounts mean to them. For more:
Read more about: Prepaid Card, Walmart 5. IPO market continues to slump
Well ahead of the ill-fated Facebook IPO, the market was brimming with excitement. People were even warning that a new bubble was brewing. The media was filled with commentary about how the dotcoms in this round of IPOs were different and so on. Most assumed that a banner year was in the making. But despite a strong stock market rally in the U.S., the banner year never materialized. Bloomberg reports that "The $21.3 billion raised through IPOs globally in the July- to-September period was the second-lowest quarterly amount since the American economy ended its longest recession since the Great Depression in June 2009. Only the $16.4 billion raised in the first quarter of this year was lower. Initial share sales in the U.S. last quarter plunged 84 percent to $3.5 billion from $22.7 billion in the previous three months." The knee-jerk reaction would be to blame the disastrous Facebook IPO. The argument is that the disappointing deal and subsequent underperformance in the aftermarket has given the entire market reason for pause, as would-be issuers and potential investors rethink valuations. One banker was quoted saying, "One of the biggest reasons companies aren't moving forward is that the discounts buyers are demanding are high. Otherwise, if discounts were at traditional levels, it would be wide open." That said, many expect a pick up soon, and certainly higher volume in the first quarter of 2013. Ernst & Young says the industries that will likely be the most active are technology, industrials and consumer products. For more: Read more about: IPO Also Noted
SPOTLIGHT ON... New breed of shareholder plaintiffs There was a day when plaintiffs lawyers in class action shareholder suits had a somewhat dubious reputation. The perception was confirmed when Milberg Weiss was indicted for fraud back in 2006. Since then, a new breed of lawyer has stepped forward, and in the wake of the several multibillion dollar settlements with banks, they have rescued the profession from its infamy. The New York Times takes a look at the leading player, Max Berger . Article Company News:
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Tuesday, October 9, 2012
| 10.09.12 | Private equity LP, GPs battle over taxes
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