IPOs For The Everyman

In August I received an invitation by mail – complete with an offering prospectus and stock order sheet – to subscribe for shares in the initial public offering (IPO) of Ponce de Leon Bank, a Bronx, NY-based savings institution where I have a CD.

IPOI’ll admit upfront I barely know anything about Ponce de Leon Bank. I walked into a bank branch in northern Manhattan in 2002, specifically hoping that one day I’d be invited to participate in their IPO. My plan worked, a mere 15 years later.

In September I put in my order for PDLB at $10 per share.

The stock opened at $14.90 on October 2nd. Go me!

I don’t want you to think I normally get invited to participate in IPOs, which are generally reserved for institutions and extremely high net-worth people. Like, normally if you don’t have $100 million with a brokerage firm, it’s not worth asking about getting into the offering. The key to participating in this IPO is that I am a depositor, and Ponce de Leon Bank was a “mutual bank.”

Of the estimated 5,787 FDIC-insured banks in the United States an estimated 577 of them are mutually-owned banks , which means they were not founded by private or public investors, but rather by depositors.

That means that when the bank management of a mutually-owned bank decides to go public – as quite a few banks decide to do each decade – the first people in line with rights to buy shares are its depositors. Like me. Also interestingly, although I opened just a $1,000 CD at Ponce de Leon Bank back in 2002, the offering prospectus gave me (and every depositor) the right to order up to $300,000 worth of shares. I didn’t, but the cool possibility is that I might have. A boy can dream, right?

Normally I’m opposed to even attempting to participate in IPOs, since the information-disadvantage between buyer and seller is too great. What I mean by that is that when startup owners and private equity owners of companies decide to sell shares in an IPO, they generally know far more about the business than do the purchasers of shares. Since the insiders are selling – the very definition of an IPO – it seems illogical to be overly excited as an outsider to buy. Even Warren Buffett agrees with me. Ok, more like I agree with him, when he wrote that “It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less knowledgeable buyer (investors.)

initial_public_offeringBut at least in this respect mutual bank IPOs are different. There is no “insider-owner” who decides to sell shares, since the owners are the depositors of the bank. The management of the bank – the board, president and key executives – is a kind of insider-group, but they also generally line up to purchase shares in a mutual bank IPO. They are certainly not selling. They can’t, since they are not owners.

As always, investing involves risk, and buying shares in a bank I don’t know anything about isn’t something I’d normally recommend. And yet, mutual bank IPOs that I’ve participated in since 2002 have a positive track record overall.

Third Federal Savings and Loan (renamed TFS Financial Corporation, TSFL) popped from $10 to 11.8 on its the first day in April 2007.

North East Community Bank (renamed Northeast Community Bancorp, NECB) traded to 11.25 on the first day in July 2006.

Atlas Bank, purchased by Kearny Financial (KRNY) ended its offering on the first day 10.9 in 2015.

I managed to lose money on Sound Community Bank (SNFL) in January 2008 and Cape Bank of New Jersey (CBNJ) in March 2008. I explain those anomalies as “everything risky lost money in 2008.” Those IPOs both opened below $10 per share, and I sold shares in both at a loss.

There have been a half-dozen others I’ve participated in since 2002, all up something after the IPO except for those two in 2008.

As with all investing opportunities that diverge from my 6-word investing mantra – Buy equity index funds! Never sell! – I’m not saying you should necessarily do this. There’s a real hassle factor involved in this mutual bank IPO hack. Bank statements and privacy notices fill up my post office box throughout the year. My accountant thinks I’m bizarre, collecting and reporting tiny amounts of interest from numerous banks. If I keeled over and died tomorrow, would my wife be willing or able to track down the 31 different CDs and savings accounts I have at mutual banks scattered around the country?

For the record, I own none of these shares now, nor do I own any individual stocks in my portfolio for that matter. With mutual bank IPOs, I generally sell at the earliest possible moment because, like I said, I don’t know anything about these banks.

 

Please see related posts:

Facebook IPO

Twitter IPO

How To Invest – Keep It Simple

 

 

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What Should I Think About The Twitter IPO?

How to think about the Twitter IPO
How to think about the Twitter IPO

What should I think about the Twitter IPO?

Mostly you should think about Las Vegas, Nevada, as a number of important analogies apply here.[1]

First – The Poker Table

You know the rule that if you’re sitting at the poker table, and you’re not sure who the sucker is, then it must be you?

That’s you, the retail buyer, in any IPO.

Why do I say that?  How do I know that?

Buying an IPO as a retail investor - You do not have pocket Aces
Buying an IPO as a retail investor – You do not have pocket Aces

The people who have the most information about Twitter are the insiders in the business.  They are the founders and the earliest private equity investors, and they know this business inside and out.  They have lived and breathed this company since its existence.  You have not.

The next most knowledgeable people are the bankers and financiers, who evaluate newish companies, in emerging industries, with swiftly changing technologies, and uncertain cashflows, for a living.  They live and breathe stories and companies like Twitter, which you do not.

Now, at the poker table, the insiders and the bankers know their own cards, and they also know your cards, as well as the next few cards coming up on the flop, the turn, and the river.  Nine out of the ten folks at the table in this transaction know more than you do.  Interestingly, they are extraordinary friendly and welcoming of you at their poker table.

You should not be thinking “Huh, this Twitter IPO looks like an Ace – Seven off-suit.  If I can hit another Ace as a table card, I might do pretty well at this table with these so-called pros.  That would be sweet!”

No.  Instead, you should be thinking: ”My what big eyes they have,” and “My, what large teeth they have.”

Remember this: The insiders – the most knowledgeable people – with the help of their bankers – the next most knowledgeable people – are all selling their ownership in this company.  They are indicating, in the clearest terms possible, that they believe the company is more valuable right now than it will be in the near future.[2]

Do you doubt this?  If the insiders believed – on a probabilistic basis – that the company will be worth significantly more 1 to 5 years from now, they would not be selling their ownership.  They would wait for it to become more valuable.  These are all rational, smart, people.

You, on the other hand, are the easy mark.  Have a seat.  Come play poker with me.

Second – Extraordinary Payouts

“But,” you are quick to think, “I’m pretty sure from watching TV that there’s a lot of money being made somewhere in this IPO.  Isn’t that what it’s all about?”

Yes, this is true.

State lotteries display big winners in their advertisements, and at press conferences.  Casinos make sure to tout all the big jackpots their customers have made in slots, or poker tournaments, or on their easy roulette wheels and craps table.

Everybody loves those goofy oversized checks
Everybody loves those goofy oversized checks

And those winners are real people, with real payouts.

But that is not your role, as a retail investor, in an IPO.  You do not get that goofy oversized check.

The people with the big payouts from the Twitter IPO are the insiders, the founders, the executives, and the early private equity backers of Twitter.  The IPO represents a giant payout for them.

The massive payouts to insiders give the Financial Infotainment Industrial Complex the equivalent of that goofy oversized check to breathlessly illustrate a big transaction like Twitter’s IPO.

Remember, that payout is real, but it’s not for you.

Third – The Flashing Lights, Whistles and Bells

If you have walked the floor of any casino, the flashing lights and whistles and beeping buffeted you.  These sounds and lights provide an untrustworthy signal that “Wow, somebody is making money here!”

The Financial Infotainment Industrial Complex goes into high gear with an IPO like Twitter’s to provide the flashing lights and beeping and sound of coins dropping incessantly.

Their goal – as always in all of this – is to capture newsstand sales, Nielson ratings, page views, and click-throughs, with emotionally gripping, eye-catching, events.[3]  The Twitter IPO provides just such an event.

A flashy score for a small group of entrepreneurs and investors is that opportunity for the clink-clank-clink-clink of Triple Cherries, just as you slip past, flushed with heightened oxygen levels, trying to navigate the purposefully crooked casino floor, on your way to the restroom.

This is not how to think about an IPO outcome for you
This is not how to think about an IPO outcome for you

 

In sum, try to buy a piece of the casino, but do not gamble

Unless you are an insider in some way to the Twitterverse, you have no business participating in the Twitter IPO, or practically any IPO for that matter.

Don’t get me wrong: Investing in public companies – with a long time horizon – is a fabulous opportunity.  I even took all of my 8 year-old daughter’s savings and invested them in the stock market to teach her about this opportunity.

To extend the casino analogy even further, long-term stock ownership is like owning a piece of the casino.  You may have short-term ups and downs, but in the long run the odds will work out in your favor because you have house-odds, and you will build wealth, almost inevitably.

And also, please don’t get me wrong about Twitter.  I’m agnostic about Twitter as an investment opportunity.  I would describe every other highly-discussed IPO similarly.[4]  I assume mutual funds that I own will end up purchasing some Twitter shares, and I’m perfectly fine with that, over the long run, and in a diversified portfolio.

I love public stock ownership, and I’m happy for the few folks for whom this Twitter IPO will be a meaningful event.

But the point here is that Twitter’s IPO is, and should be, entirely irrelevant to the rest of us and our financial lives.  But the casino makes it hard for us to ignore it as we should.



[1] Really, this applies to any IPO. I don’t mean to pick on Twitter, except I’m fairly sick of hearing about it and its IPO should be totally irrelevant to all but a few dozen people on this planet.

[2] Warren Buffett on IPOs “It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors).”

[3] If you have not walked the floor of a casino because you prefer to stay home and knit tea cozies, that’s cool.  I admire you.  Let me give you another analogy for the relationship between us and the Financial Infotainment Industrial Complex.  We are the kittens.  They hold the ball of string.

[4] The last high profile IPO I wrote about, Facebook, I got to combine a favorite Wall Street phrase with a favorite classic rock lyric.  And I was just as jaded about IPOs.

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If You’d Like To Understand Financial Instruments But Need A Sports Hook

arian foster stockIf you’d like to understand financial instruments used on Wall Street better, but you need a sports or entertainment hook as a spoonful of sugar to make the medicine go down, I recommend this article by Katie Baker on Grantland about the proposed Arian Foster “IPO” deal.

[Katie Baker – who I do not know personally – is a hero to me, as she quit her analyst job at Goldman, Sachs a few years ago to become a sports writer (on the hockey beat) for the Bill Simmons/ESPN-sponsored online startup Grantland.  The site combines Simmons’ patented sports-plus-hollywood formula with other great writers such as Chuck Closterman, Charles Prince, and Malcolm Gladwell.  Grantland makes traditional newspaper sports sections groan-worthy yawn-fests by comparison.]

The Houston Texans’ Pro-Bowl running back Foster announced that a company named Fantex seeks to raise $10 million for him this year, in exchange for a 20% cut of his future football earnings.  The “IPO” seems to offer investors a chance to move their fandom relationship with individual players beyond fantasy football, and into an actual investment in the long-term financial success of those individual players.  The “IPO” offers the kind of risk profile – as well as upside – of investing in a startup company.

In the article and accompanying sidebar Baker explains some of the myriad details of this new opportunity (e.g. it’s targeted to unsophisticated investors, it’s an entrepreneurial idea that Fantex hopes to reproduce with other athletes, Foster recently tweaked his hamstring, Foster’s future earnings from his children’s book are not included!).

She also makes clear this Foster IPO has plenty of risks, but that it does resemble an innovative risky investment in the upside potential of a star athlete.

arian foster runningTest case of the JOBS Act

Interestingly, to me, the Fantex offering relies on the new “Jumpstart Our Business Startups (JOBS Act),” meant to lower barriers to unsophisticated (less wealthy) investors to participate in risky start-up financing.  Passed by Congress in early 2013, as of October 2013 the SEC still is in the process of clarifying provisions of the bill.

What we know so far about the JOBS Act, however, is the following:

1. Smaller companies can limit their obligations to report financial and other information to the SEC.

2. Investors with a net worth far below $1 million (the traditional threshold for sophisticated investors) can buy risky IPOs.

3. Speculative investors such as hedge funds can now advertise their funds.

4. Smaller companies can skip provisions of the Sarbanes-Oxley accounting rules introduced after the Enron debacle.

On the one hand democratizing investment participation allows non-sophisticated folks an equal chance to get-rich-quick by participating in risky investment schemes.  In addition, I’m all in favor of entrepreneurs accessing capital more cheaply and with fewer barriers.

On the other hand, I probably don’t need to spell out the obvious opportunities for fraud, trickery, moronic investing choices, and inappropriate speculation all opened up by the JOBS Act.

All in all, we’ve reintroduced more Wild West into the system.  The Arian Foster represents the highest profile example of this new Wild West.  This will be interesting to watch.

Arian Foster

Historical celebrity-backed investments

Baker goes back in time to explain the most famous example of combining a celebrity entertainers future earning with Wall Street magic – The famous David Bowie bonds.  Bowie needed money for his divorce as well as separation with his manager, but did not want to sell outright the rights to his song.  Instead, a financier created bonds backed by the future royalties from Bowie’s existing hits.

As an investment, Bowie bonds represented a safe, limited-downside opportunity from a well-defined revenue stream.   An insurance company – a typically risk-averse investor – bought all $55 million Bowie Bonds in the late 1990s.  Following payment of the bonds, Bowie retained future royalties and any excess beyond what the bonds required.  Presumably he still owns those songs, while Prudential got paid a modest return on its bond investment.

The Foster deal, by contrast, only works as an extremely risky start-up type investment.  We really don’t know what kind of future earnings Foster will have.  Fantex retains discretion to make payments, or to convert Arian Foster stock into general stock in Fantex.  Foster ‘stock’ will trade on a Fantex exchange, with Fantex earning 1% per transaction.  Practically anything can happen to a football player’s earning potential, many of them bad.

I’m sure there has to be some situation in which investors make money, but I’m equally sure Fantex depends on the ‘fantasy-football’ fun aspect of this to attract investors, rather than the correct pricing of investment risk.

“You own Tom Brady in your fantasy team?  Bro, that’s nothing!  I own a piece of Arian Foster’s future earnings, Bro!  I’m CRUSHING IT Bro!”

That kind of thing.

Concluding thoughts

If Fantex finds enthusiastic investors, Foster gets upfront money, and fans have a good time with the opportunity to gamble with real dollars and at least some probability of upside.  All this sounds cool to me.

To be clear, as an investment I find this an absurd idea, and even the ambiguous morality of it also deserves attention.

I appreciate, however, the opportunity to talk about securitization – of David Bowie royalties or any other cashflow – in reasonably complex yet digestible ways.

Most importantly, I’m interested to see how the JOBS Act turns out.

Unleashing capitalist potential – Pandora’s Box!

pandora's box

 

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Facebook IPO Bust? Not To Your Banker!

A friend of mine who bought Facebook shares in the IPO complained last week about its miserable performance post-pricing, and I began to get flashbacks to my time on Goldman’s bond sales desk on new issuance days.  I wanted to tell my friend our old bond sales new issuance motto,[1]  But, to spare his feelings, I kept my cynical tongue firmly in check.

A not-uncommon new issuance timeline went like this:

10:00 AM: Goldman’s bond syndicate desk would issue hotly oversubscribed bonds to our institutional clients, who would yell at us for not giving them more securities at issuance.

10:01 AM: Sample Dialogue

Favorite Institutional Client: “I’m a *&^% BIG SWINGING [client], and you gave me this *&^#$% allocation?  You guys suck!”

Me: “Um, ok.”

Favorite Institutional Client:  “Seriously, you @#$%-Heads, lose my number!”

Me: “Would you like to sell them back to us?”

Favorite Institutional Client: “No way, I’m buying more on the open.”

10:05 AM:  Quite frequently, the flippers who obtained hotly oversubscribed bonds sold immediately[2] after issuance, driving the price down.

10:20 AM: The same institutional clients who didn’t get enough bonds would then yell at us for selling them such a terrible piece of shit in the first place and why didn’t we support (i.e. commit Goldman’s capital to prop up) the newly issued bonds in the aftermarket?

In the face of such mental artillery fire, we built blast-resistant concrete bunkers around our consciences.

The senior bond salesman would turn to the junior salesman having pangs about his clients losses.

“You know,” he’d say, “Today the issuer made money, and Goldman made money, and clients lost money.”

…beat…

“But hey! Two out of three ain’t bad!”

That always made us smile.

Look, I’m not saying my friend deserved to lose money for participating in a hot IPO.  I’m also not saying, as some have, that the issuing bank’s only duty is to pump the new issue price to its maximum saleable level, investors be damned.

In fact, issuing banks know they have both an implied ethical duty to their purchasing investors, as well as long-term financial incentives, to issue new securities at a compromise level that satisfies the issuer’s need for capital yet allows long-term investors to also earn a return on their capital.  As is quite nicely articulated here.

But, let’s just say that in the heat of battle and the excitement of a new issue, ethics and long-term interests occasionally take a back seat.  To say the least.

To my friends who lost money in the Facebook IPO, Meatloaf said it best:

Your banker wants you, and he needs you, but there ain’t no way he’s ever gonna love you.  But don’t be sad, because two out of three ain’t bad.

 


[1] Hint: It’s in the Meatloaf graphic above

[2] Seconds.  Sometimes minutes.  Rarely hours.

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