Saturday, August 09, 2008

James Enck 3.0, beta

Dearest mega-uber-value readers, the last time I wrote anything serious here was in April 2007, as I was embarking upon an amazing journey into the world of principal investing within a major Wall Street bank. Recently you might have noticed that I started posting again, albeit in a fairly sparse, cryptic and non-committal way. This was because I wanted to prime the pump for a return in a non-controversial way while waiting for the paperwork to be signed off and final paychecks not to bounce (attention lawyers - the foregoing was a joke). Well, this has all come to pass without a hitch now, so the muzzle is off, for the most part, and I can do a bit of explaining, to the extent that I am able.

I think a number of you seemed to work out that a job-imposed hiatus from blogging, followed by a sudden return, probably pointed to impending unemployment - and you were right on the money. In July I was "right-sized", along with much of the rest of my team. Many of you have sent me some very kind messages welcoming me back to the blogosmos, and while I share your sense of enthusiasm, it is far from a straightforward thing for me emotionally, as I feel intensely frustrated and disappointed at the ultimate outcome of my "reinvention" - not to mention the fact that I now find myself unemployed for the first time ever.

No matter, I will resolve this in time. For now, perhaps I should try to paint a picture, for those who are interested (I must assume that most of you who seek this site out are to some extent interested in the person behind it), of what has transpired (to the extent that I am actually free to speak) in the past 16 months since we last met. I have spoken with or corresponded with a number of you during that period, and I have frequently encountered confusion as to the precise nature of my role, such that I eventually determined that the best way to answer questions was in the form of - duh - Q&A. So, I hope this helps to give some useful background. Apologies to those with a more sophisticated knowledge of the financial markets - I have assumed a very low level of knowledge in this regard.

Q: Why did you stop blogging?

A: I was hired in April 2007 by the Principal Credit Group of Merrill Lynch (a.k.a. Merrill Lynch PCG - typically a low-profile group, though some limited internet footprint exists), and while my bosses and colleagues there seemed to be hip to the value of blogging and the ensuing potential network effects in the investment process, Merrill Lynch has some very clear policies which prohibit this. This is entirely understandable, given the potential abuses which could arise across the firm, but I guess this also illustrates the extent to which a firm-wide dragnet internet policy is also potentially counterproductive in terms of its effects on individual business units. In any event, the blog had to die.

Q: What was the Principal Credit Group of Merrill Lynch?

A: This was a unit set up in 2002, to look for investment opportunities in the distressed end of the market, i.e., good companies with troubled finances, or bad companies with valuable assets which were undervalued due to the lack of market confidence in the management or market dynamics. For those of you too young to remember, 2002 pretty much marked the nadir of the post-dot.bomb era, and Merrill Lynch made a financial commitment to allow this group to invest the firm's own capital to focus on this space to maximize returns in its favor. In other words, it was an internally-funded hedge fund, or in Wall Street parlance, a "balance sheet group," "principal investing group," or "prop desk". At our peak we had just over 40 people onboard and just over $3bn in assets under management, and our portfolio covered all parts of the capital structure. Our Chief Investment Officer was a great guy named Boris Ehsani, and I reported to the fabulous Mark Devonshire, who was an absolute joy to work with. While the group started out as a primarily credit (i.e., corporate debt)-focused unit, as pricing in the credit markets became more questionable, and the credit market became more crowded with newcomers who further exacerbated these distortions, the group gravitated more towards public and private equity situations, which is where I came into the mix.

Q: So, how did you end up as part of this team?

A: In the summer of 2004, I got an email from a great man named Tim McDonald, from Merrill Lynch PCG, who expressed an admiration for my humble bloglet and expressed an interest in maintaining a dialogue. Tim had previously written his own extremely impressive blog, and seemed to understand what I was trying to do as a sell-side analyst. We continued to speak regularly, and when I ended up in NYC as a presenter at a Columbia University event in autumn 2004, I had a chance to meet him and Boris in person. Beyond the ongoing dialogue and friendship which developed between Tim and me, there were a number of informal meetings which took place over the next two years, all of which culminated in a formal interview process in late 2006, and finally a job offer at the beginning of 2007.

Q: Why you?

A: You'd have to ask the individuals involved, to be honest. However, if I had to make a guess, it would be that I had/have a network of contacts which could/can deliver interesting and funky proprietary investment opportunities, independent of a major investment bank advisor or private equity sponsor. As things were starting to unravel a couple of months ago, I went back and looked at the transaction pipeline, determining that my own personal network alone delivered over $300m in investment opportunities during my time in the group, roughly 1/3 of which I would describe as "high conviction".

Q: So, how was it?

A: I loved every minute of it, apart from the getting fired bit. I genuinely loved working with my colleagues (respect, people, if you're reading this), our bosses were great, the atmosphere was one of mutual respect and intellectual rigor. It was a fundamental research-driven approach, at heart, which on one or two occasions was frustrating when I could see purely speculative investment cases being compelling, but that was the DNA of the group, and its track record (as portrayed in this article) was hard to argue with. As my bosses used to chant at opportune moments, we were investors, not traders.

Q: So, what did you actually do?

A: I had a beautifully wide mandate. While I was brought in to diversify investment opportunities on the private equity side of things, as one of the team of global sector analysts, my other duty was to identify and analyze opportunities in the public credit/equity markets. In practice, >85% of my time was spent developing investment opportunities in the private equity space from my own network, and the remainder was spent looking at secondary public market positions in credit and equity, as well as a handful of primary deals (keep in mind that, of course, the primary markets were closed within a few months of my arrival on the scene). Opportunities I focused on (please note that I am under NDA with a wide range of companies) include, generically: energy-efficient datacenters with a bias towards managed services in the virtualization space; datacenter virtualization OS developers; WAN optimization solutions for financial trading platforms; next-gen satcomm; P2P-assisted CDNs; wireless towers; 4G wireless; a variety of FTTH deployments; P2P video platforms; targeted ad-insertion platforms for telco IPTV deployments; enterprise 2.0 voice and messaging platforms; a couple of take-private scenarios for busted (i.e., zero liquidity) tech IPOs; one activist take-private of an operator (we were waived off for policital reasons); and one broadband roll-up vehicle in an unnamed European market.

Q: What did you enjoy most about it?

A: Apart from the people I worked with, the thing which really impressed me was the extent to which being associated with a credible brand could open doors and command people's attention. What I personally liked most was getting interesting young companies/entrepreneurs in through the door and spending hours talking about what makes them tick. Yet, the job was not the clicheed typical role of skeptical VC - in fact, for companies we found promising, we usually presented ourselves as an alternative safe haven from the VCs, which, in my experience, many young companies often view as being arrogant and aggressive. Most of all, I viewed the eclectic nature of the role, ranging from quasi-venture to traditional private equity, as well as public equity and credit, as being an exciting and fulfilling mix.

Q: So what now?

A: Good question. I'm having a number of interesting discussions with a number of interesting people, as you might expect. My ideal scenario would be to resume the sort of role I had within PCG (i.e., free reign across the capital structure, globally, public and private), but with a properly funded, understanding, and supportive structure behind me. However, I remain open-minded overall - the point for me is to find THE job, as opposed to A job. Any ideas/suggestions would be warmly welcomed. For now, I'd like to extend thanks to the good people from the defunct PCG - I loved working with you and wish we'd gotten to where we had hoped to go.