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Hanson Trust

The first company I was ever asked to look at was Hanson Trust, it was a strange hybrid company with listings in New York and London, it had been founded by James Hanson and Gordon White, and it was effectively a private equity firm (founded in the early 1960s) that sought to acquire undervalued companies.  It sounds good but what they were famous for in the early 1990s was acquisition and breakup.  There were few if any regulations at the time, insider trading was not known as insider trading it was known as trading.  It was only after deregulation of the city that trading in the UK (and it was the exception in Europe) became more open and largely fair market. 

Hanson Trust had begun using convertible bonds to acquire companies, which allowed them to increase yield for their shareholders and reduce the risk of dilution.  In effect, if an acquisition went very very well the bondholder got a tiny equity kicker while the returns to Hanson Trust were "out of this world".  I was slightly offended, but I wrote in my first newsletter to our brokers and traders "  Short the bond, go long the stock"  In effect, I was telling our brokers that they should recommend the shares of Hanson Trust rather than the bond, because 99% of the time return on the shares would be a lot better than the bond, even taking into account the convertible nature of the bond. 

This first report made me!  

A few nights ago I was having dinner with friends, and we discussed my Bitcoin purchase, considering I wrote about it, I should not be surprised!  They asked if I usually took on risky investments for my portfolio, since I deemed in my newsletter and in my blog that cryptos were, in my opinion, a form of gambling.  I said to our friends that they didn't understand how investment managers looked at returns, aside from the greeks and all there is a first and fundamental analysis of the return from an asset class you have to look at the fundamentals that you will make, or lose money.  Take Facebook as an example, nowhere in their business plan was revenues from advertising ever discussed, it was not in their plan, their strategy, or even as a possibility.  When Facebook did its IPO, and you have to remember that the management was forced by the SEC to do an IPO, there were no serious revenue plans.  On the other hand when Google went public that discussion had already taken place.  The asymmetry of risk-return for Facebook didn't meet our minimum standards, the risk of failure was far greater than the potential of profit.

Another example was WeWork, basically an office-sharing startup that somehow got valued at crazy multiples when you consider the business model -- there were already well-established players in the sector.  For most, it was a real estate play with recurring income, for WeWork it was not even that, they were leasing all their offices -- there was no upside, there was no risk of upside there was no reason for the valuation, and its competitors offered a far better value proposition.

The reason I am saying this is that this acquaintance mentioned to me that his broker offered some Chinese bonds that were offering massive yields and that he could acquire them even if they were restricted to Chinese nationals.  I said to him, look your returns are capped at 20% (yeah it was a high coupon) but your risk is to lose everything because (a) the entity that sold you the risk did so "illegally without the approval of SAFE, (b) the Chinese bond market is entirely opaque in fact it is considered secrete for national security purpose and (c) you have no idea about the borrower's business. 

There are three ways you can lose everything, two of which have nothing to do with the underlying security.  If you want to flush this out tell your broker that you will consider the investment of the coupon is 30%.  Our friend asked me why he should do that?  I said because you will know then if this is a real trade or a desperation to dump the security.  At any rate, this type of investment is a good way to lose money.  That tells you everything you need to know.

This was a 10-minute conversation on a long and alcohol-fueled evening.  In reality, we spent the evening talking about cattle breeding and genetics they own a large farm (much larger than ours) in Derbyshire and they've have a problem with parts of their milking herd.  Anyway, this is how we met them years ago, at an auction where we were establishing our founding herd of meat and dairy production. 

Note:  its been 10 minutes and someone already made the comment that you could not short bonds in 1990, which is true, but you could short shares (you borrow the share and sell it...) it was not an accurate financial transaction it was meant to say in those days...forget the bond, its not a good proposition, buy the shares...


 

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