Thoughts on 1MDB

As at 26 May 20115
1MDB is an enigma. At least for the moment. It is currently a jigsaw puzzle with plenty of the pieces missing.
There is plenty that can be learned from 1MDB, but in order to do our learning, the picture must be complete. The good thing is that the saga is unfolding, slowly but surely. And in this post, I would try to put the pieces together in order to show the picture that played in my head. It is going to be a work in progress and as and when we have new information, I would put my thoughts here for all to discuss, objectively. If you have any information or find any here as positively incorrect, then I would be more than happy to be corrected.

WHAT WE SEEM TO KNOW

The borrowings:

1. RM42 billion is the total debt of 1MDB (often said out and no one disputed this)
2. USD3.3 billion (RM11.55 @RM3.5) 6.6% indebtedness program by an SPV of 1MDB is part of the RM42 billion total debt above. The debt paper is technically guaranteed by the Government via a letter of Support.
3. RM4 billion was 'borrowed' from KWAP via SRC, a subsidiary of 1MDB.
4. The government is said to only 'guarantee' RM5 billion in debt.

Known lenders

1. Tabung Haji has an RM920 million bond in 1MDB's real estate development Bandar Malaysia and last month bought 0.63ha from the TRX financial district, which is another 1MDB development. - See more at: http://www.themalaysianinsider.com/malaysia/article/tabung-haji-yet-to-sell-trx-land-says-azeez#sthash.LJJyXkWl.dpuf
2. Deputy Finance Minister Datuk Ahmad Maslan (pic, right) said EPF had purchased RM200 million in bonds from 1MDB in 2009, which was completely guaranteed by the government, and invested RM1.52 billion in two other power assets that were eventually taken over by 1MDB - See more at: http://www.themalaysianinsider.com/malaysia/article/now-finance-ministry-says-epfs-investment-in-1mdb-slightly-risky#sthash.tVj8W8Ar.dpuf

The utilization of proceeds:

1. Nothing much, except some power plants and a couple of government owned lands with totaled around RM15 billion at historical acquisition cost.
2. That RM27 balance of the RM42 billion debt is unknown to us and it is causing a lot of suspicion.
3. Some USD2.32 billion was deposited / invested in Caymans Island. The balance RM1.103 created controversy. "BNM Governor Tan Sri Dr Zeti Akhtar Aziz said the Monetary Authority of Singapore (MAS) had furnished its report on its investigations into the account, which recently caused controversy here when it was revealed that the US$1.103 billion kept in it was in “units” and not cash as previously claimed."- Malay Mail Online. The suspicion heightened when the current and former CEO failed to attend the PAC proceedings (due to some reasons).
   
   The US$1.103 billion is the second tranche of funds in 1MDB’s Cayman Islands foray, which totaled US$2.32 billion. - See more at: http://www.themalaymailonline.com/malaysia/article/bank-negara-confirms-told-about-1mdb-bsi-cash-issue-by-singapore#sthash.cjLmJyaK.dpuf
4. The responses with regards to the utilisation has been very slow, causing suspicions.

WHAT WE NEED TO KNOW, AND WHY:
The borrowings:

1. The detailed breakdown of the RM42 billion total debt at historical cost. We need to have this information for accurate money trail and asset-liability matching. We would then be able to answer if the decisions on borrowings was made on sound borrowing/funding practice or not.
2. The historical costs of assets purchased / matched with the funding. We need this information to ensure that the utilization of borrowings proceeds are all in order. It is not accurate to equate the RM42 billion with the current value of the project as the RM42 billion is a historical cost while the current value of the projects are revalued figures. We need to match the historical costs.
3. Is the government really going to just guarantee RM5 billion debt? Or is the government going to ensure that there will be no default of the RM42 billion,  in other words effectively guarantee all the RM42 billion? We need to know this so that we can effectively gauge the level of exposure by the government.

The utilization of proceeds.

1. Details on the utilization of all cash inflow from the borrowings, again at historical cost. It is incorrect to give the revalued figure as a substitute for the utilization as it is not a cash flow. We need this information to ascertain the balance RM27 billion which are not known above.
2. Details on the existence of the assets purchased with the proceeds. We need to now this to ascertain if there was any element of fraud.
3. Was the USD1.103 billion (balance of) investment in the Cayman Island's units / assets an approved and permitted investment for the proceeds? Was it approved by the Board? When it was redeemed, was the Board notified of the details of the redemption. We need to know all this as we need to know if there was any breach of trust in making the investment in the first place and was there any intention to mislead the parliament (and kept the parliament misled until the correction). "Prime Minister Datuk Seri Najib Razak has also been accused by Tun Dr Mahathir Mohamad of "lying" about the redeemed investment, which he said was in cash form totalling US$1.103 billion (RM4.08 billion) in March. - See more at: http://www.themalaysianinsider.com/malaysia/article/bsi-bank-in-singapore-lodged-complaint-against-1mdb-says-bank-negara#sthash.qihaQDHI.dpuf"
4. What happened to the balance RM1.2 billion of the money in Caymans?
   
   (The US$1.103 billion is the second tranche of funds in 1MDB’s Cayman Islands foray, which totalled US$2.32 billion. - See more at: http://www.themalaymailonline.com/malaysia/article/bank-negara-confirms-told-about-1mdb-bsi-cash-issue-by-singapore#sthash.cjLmJyaK.dpuf)
5. Whether is it true that RM3.8 billion (USD1 billion) was invested in an open fund, as alleged by Rafizi. If it is true, then we will move it up to the known section.
6. Is it true? 
• Sarawak Report on UBG deal: "The company had received a working capital of USD$300 million from the deal with 1MDB and the documentation shows that at least two further tranches of USD$500 million were drawn from 1MDB later in July 2010 and September 2010 under the Murabaha Loan Agreement, which had been set up after the original Joint Venture was dissolved in March 2010 (a day before it would have been necessary to disclose the terms of the JV agreement including the $700 million “loan repayment” in the accounts). So, the money to buy out UBG looks to have come from elsewhere and the evidence, in fact, shows very clearly how that the $700 million “loan repayment” was channeled into the company PetroSaudi International in the Seychelles, which eventually acted as the buyer for UBG."http://www.sarawakreport.org/2015/02/from-1mdb-to-the-ubg-bank-buy-out-how-the-usd700-million-was-managed
• Sarawak Report detailed in an expose earlier this year how USD$700 million was siphoned out of a Joint Venture, in which 1MDB invested an initial USD$1 billion into a company named 1MDB PetroSaudi International in 2009.

To be updated.

"Creativity in Business", a review

I sincerely believe that in order to be successful in business (and in life in general), it is vital to be creative. We need to be creative to overcome obstacles in businesses and in life, we need to be creative to make our business and lives better, make more money, have more time, more happiness. The list just goes on an on an on.

And that was a problem to me. I was not creative, not stupid, but not creative. In our younger days, we used to measure the creativity with how well people draw and do in art classes. And I sucked at it (unlike my younger brother who was born with the natural talent to draw). I was a very logical left brain person, and pretty good at it. I can find reason and logic easily and I can easily understand things in a logical way but if you ask me to draw a cat, it would probably look like a house to everyone else. An exaggeration, but you get what I mean: I was not creative by the benchmark then.

But I observed that while many logical persons become successful managers, it is those creative ones that made it as entrepreneurs, business owners and tycoons. Being extremely logical is simply just not good enough, not sufficient. I felt that I needed the skill to be creative to give myself the best possible opportunity to succeed. And if I am not born with it then I would need to learn it, develop it as a skill. And I ahve been doing that since I was young and while I still could not draw any decent shape or figure, I found that I was able to creatively find 'out-of-the-box' solutions to many of the problems that faced my vocation, my business and my life.

The quest to be and remain creative is a lifelong exercise and my latest endevour matched me with a book  written by Michael Ray and Rochelle Myers titled Creativity in Business. The book "was based on the famed Stanford University course that has revolutionized the art of success", it says on the cover. It was a combination of their ideas and the revelations made by (over sixty) creative business leaders that spoke at the Creativity in Business class. And these speakers are big names in business.

After reading the book, I found that I would agree with almost 90% of the content (there I go again being all logical and left brained) as it either makes common sense or I personally have gone through what they wrote in the book. I believe that when we intend to achieve something, like in my case where I consciously wants to develop my creativity and ability to be successful, we will be thrown with a series of obstacles and problems that in the end would enable us to learn achieve what we set out in the beginning. That was exactly what happened with me, peace in life seemed like pauses between problems back then but each problems helped me learn the skill of creative thinking and applying the same to whatever issues I had in hand at the time. And when I read this book, all the experiences I had seemed to lend credence to the notions set forward by the writers, hence why I decided to do a review of the book adding to it my experiences, reasoning and logic.

The first topic the book set out is that Business is an Art. Well, if that is true and business is mainly just art, that just sucks for us non-arty people. We logical non-arty people needs the cause and effect of science to work and make decisions and if this is no longer true, then we are done for.  To many, we seemed to think that business is a science, where one dollar plus one dollar equals two dollars. Everything about business is numbers, the accounts are numbers, the sales are numbers, the discounts are numbers, the losses are numbers, the salary are numbers. Everything that I seemed to know about business revolves around numbers. To accept that business is an art creates a conflict, a denial within self as we may believe that art is elusive, too non-definitive, too fuzzy for a business, a source of income to be.A business should be as how we draw the cash-flow model to be like. A Series of numbers flowing down to generate the profit. Unfortunately, as I discovered much later, business is indeed more art that science. Nothing in business is certain, just as in life. Business is a continuous work in progress, it is never complete. It is not to say that there is no science in business, but to ignore the art aspect of business is to prepare ourselves for failure. Therefore, as a conclusion, while I agree that business, to a large degree is art, it is not all of it. It is a combination of both.

However, for the purpose of seeking creativity in business, we need to focus on the art aspect of the business. That part, I totally agree.100%

Creativity does not come naturally to some people, especially extremely logical left-brained people.

4. The next topic is titled "If at first you don't succeed, surrender". As a Muslim, I find this fascinating.

5. Next the book talks about destroying judgement and replacing that with curiosity. In a nutshell, the book says that "..". To put this into our local perspective, this basically meand that you have to remove your strereotyping of yourself and others, in Malay it means "sangka buruk". My mom has always tought me to not have "sangka buruk". The key word about this phrase is "sangka" meaning that your are making assumptions which are not based on facts or full set of facts. And that you are assuming the worst. "Sangak buruk" is not only towards others, but towards yourself too. When you doubt your capabilities, presuming that you cannot take on a task or opportunity, you are having "sangka buruk" on your self. You made a judgement on your capabilities. As a muslim, we are thought that there sangka buruk are the ways of the Syaitan, and there is a speficic one that would whisper doubts into you, or "was-was". Therefore, as a Muslim, we are taught to stay away from this bad behaviour and seek Allah's refuge from Syaitan and its evil ways. They way to approach doing business is to replace that "sangka buruk" with curiosity. Curiosity of how does the task look like, curiousity of what would happen if you succeed, curiosity of what would you need to do to get it done, who do you need to meet. If we replace judgement, sangka buruk, with curiosity, we would be making ourselflved and our business closer to being creative and one step closer to success, Insya Allah.

6. The other thing that the book says about building creativity is to pay attention and ask dumb questions.

7. The previous 4 topics basically sets your up, mentally, preparing you to be creative. Making your mind conducive for creativity. Once that has been established, once you are prepared, the book goes on to give ideas on how to conduct yourself in business. It listed 5 ideas which would at least remove the creativity block when you are managing your business.

8. The first idea is  the EEE, meaning do what is Easy, Effortless and Enjoyable. This does not mean party all day long, but rather to find out what comes natural to you. As a Muslim, this too makes perfect sense, as our religion taught us that Allah made us different, with different sets of skills. Allah has also removed the burden of guarnteeing our sustenance because Allah had said that substance is his prerogative. We are commanded to search for sustenance but as to how much we are going to get, don't worry our little head with it. This basically means that if we are stuck doing a business that is not easy, effortless and enjoyable; we can switch to another with full faith and peace of mind that Allah has set our sustenance. DO NOT MISTAKE this is an explanation to say that we can do nothing! We have to do something and be smart in making our moves, but when push comes to shove, we as Muslim should find strength in Allah's promise and go forth to make the necessary change.

9. The second idea is "Don't think about it". The book said that " ...". Well, the phrase "paralysis by analysis" always comes to mind whenever I read about people who think too much before making any decision. I don't believe in not thinking, but not thinking too much. And in a way, intuition is also thinking, but in an auto and unconscious way.

10. Next is the notion to as yourself simply Yes or No. Well this is an extension of the previous chapter about leaving it to intuition. As a muslim, we have an added method that we can applly, which is called Solat Ishthikarah. It is how we are taught to seek for divide guide in making a tough decision (actually any decision for that matter). However, even after we have done all this, made the decison based on our best thoughts and intitution, things could still go wrong. And in this situation, we have to go back to the "if first you don't succeed, surrender". Surrender to Allah and know that he knows what lies in front of you that you do not and Allah will give you what is best for you.

11. Nest is about being creative all the time. making creative being an ordinary being to yourself. That means to apply the "no judgement onto yourself rule"  and not let the environment stop you from being your creative self. Not to worry about looking stupid or nosy or difficult when being curious about something.

12. Lastly, "bring your creativity to bear with your organisation"; meaning....

There you have it.

SPAC as a blind (private equity) fund

This is a continuation of the " How to Evaluate SPACs" series. You might want to read the preceding article here " Introduction to evaluating SPACs"

Due to the absence of any operation in the SPAC, some have defined and described SPAC as a blind fund (which would also explain why the retail investors generally greeted the Hibiscus' pending IPO with apprehensions). Blind fund are commonly equated to very very risky investment and we would have thought the regulators' would not have allowed such risky investment to be made available to the retail public. But before we delve deeper into the nature of a blind fund, let's look at what might have led people to say that a SPAC is a blind fund.


In an article on titled FROM BLANK CHECK TO SPAC: THE REGULATOR'S RESPONSE TO THE MARKET, AND THE MARKET'S RESPONSE TO THE REGULATION by DEREK K. HEYMAN, it was stated that the origin of SPAC could be traced back in the 1980s where the market in the United States were issuing blank check funds. However, the blank check funds were frought with fraud and deceits that it was severely regulated by the regulators in the United States (Rule 419). "The regulations may have been so limiting that no one would bother to do a blank check offering as a legitimate way of raising funds  public capital markets. The numerous restrictions made the blank check structure so limiting that it would be difficult to find investors for these vehicles, despite the investor protections that the regulations put in place." "Thus, in 1992 the SPAC was developed as a way to do blank check IPOs that would not be tarnished by the reputation of the 1980s blank checks, nor limited by the most oppressive features of Rule 419."

And there are plenty of literature out there which also defines and describe the SPAC as a blind fund (which focus on the absence of operation), for example:

• “Special purpose acquisition companies (SPACs) are blank-check companies that raise funds from investors through a public offering of shares and warrants (known as a Unit IPO) for the purpose of buying a private firm” – Special Purpose Acquisition Companies, Fordham Business Student Research Journal
• "A SPAC is a publicly traded shell corporation that has no operating business (current or previous) that must use the money raised from its initial public offering (“IPO”) to finance an acquisition of an operating business" – Guide to SPAC, Goldman Sach
• “means a corporation which has no operations or income or generating business at the point of initial public offering and has yet to complete a qualifying acquisition with the proceeds of such offering” – Equity Guidelines, Securities Commission Malaysia
• "In this context, blind cash pools, which are financing vehicles that take growth enterprises public, may well come into broader use.
• Blind cash pools have been adopted increasingly by stock exchanges around the globe. Generally, they involve shell companies that are created to raise money publicly and then use the funds to track down and acquire an undetermined business or asset.
• The shell companies are formed solely for this purpose; they contain no prior assets or existing operations.
• The Toronto Stock Exchange currently offers two forms of blind cash pools – the Capital Pool Company (CPC ) program on the TSX Venture Exchange (TSXV) and the Special Purpose Acquisition Corporation (SPAC) program on the TSX itself - Blind Cash Pools: Expanding Role in Business Financing? by Nadim Wakeam.
• "Although they have been around for many years, the period in the run-up to the financial crisis saw an explosion of special purpose acquisition companies (SPACs or ‘blank-cheque companies’). - FINDINGS, LONDON BUSINESS SCHOOL, ISSUE 9 winter 2013/14

Therefore, based on the above, if you think that a SPAC is a blind fund, you are not alone. The definition and description of a SPAC seem to focus on the fact that the company is blank, no operation, no income. Investing in such a company would require a 'blind' faith; hence a blind fund.

CONFLICT WITH THE STATUS QUO
But wait, this cannot be! We are not accustomed to regulators allowing such uncertainty, such high risk, to the general investing public. This does not make sense if we were to look back at how the regulators have been handling the stock market, things like prudence, informed investment decision…we cannot achieve all that with a blind fund. Well, these were the conflicts that would have greeted those who saw SPAC as purely a blind fund.

CONFLICT ASIDE, WHAT CAN WE DO WITH THIS?
Anyway, for the sake of discussion and analysis, lets assume that this is indeed the case. A blind fund has indeed made its way to the stock market. We stop the definition of SPAC at this stage, and assume that this is the nature of investment in a SPAC. What then?

Well, then we need to ask ourselves " how do we go about evaluating a blind fund". How do we check if a blind fund is a kind of investment that is worth investing and if so, which one should we invest amongst all the blind funds (assuming we have limted resources -- so true in my case).

What I did was to look at other types of blind funds and discovered that the closest in definition would be a private equity fund, one which has not made any investment yet. Both the SPAC and the private equity fund have no business nor income, both are a form of collective investment scheme and both rely on the ability and expertise of the management to generate values through acquisitions.

Do people invest in private equity funds? The answer is yes, and these investors invest in private equity due to many reasons, The first reason quoted by many is the higher expected return from peivate equity investments. An article titled "Why and How to Invest in Private Equity" published by www.venturechoice.com stated that: "The long-term returns of private equity represent a premium to the performance of public equities. This has been the case in the US for over 20 years and also in Europe, following an increase in the number of private equity funds, for over 10 years. For many institutions, such a premium over more conventional asset classes justifies the different risk profile of the asset class."

Therefore, as a matter of rule, if the SPAC is similar to a private equity, then the investment consideration must also be similar. And now that we have established that people do invest in private equity, lets see what would be the considerations.

I discovered that there are a systematic way on how to evaluate a private equity investments, but due to the absence of operations and with it the financial figures, most of the evaluation (pre-IPO) would be subjective in nature.

The article titled "Eight Steps for Analyzing Listed Private Equity Companies", written by Tim Spence of Graphite Capital Management & Monique Dumas, Electra Partners LLP (www.LPEQ.com) which neatly sums up the considerations for listed private equity funds. In summary, the eight steps comprise

• Take time to understand what you are intending to buy
• How experienced is the private equity company and what sort of track record does it have?
• How strong a board of directors does the listed private equity company have?
• Cash drag, over-commitment and leverage
• What about the dividend?
• Discounts and valuations
• Look at the Portfolio
• Transparency

In the article titled "Why and How to Invest in Private Equity" published by www.venturechoice.com, it was put forward that prior to making an investment in a private equity fund, it must be made relative to our existing portfolio, as mode of diversification. For a start, we need to filter the options by looking at the following variables:
"Stage There is negative correlation between returns from different stages of private
equity. Diversification can therefore reduce risk within a private equity portfolio and
this should be an important consideration.
Geography. Geographical diversification can be secured in Europe through the use of
country-specific, regional and pan-European funds. Non-European exposure is also
widely available, in particular through US funds, but also for example through Global,
Israeli, Latin American and Asian funds.
Manager. Selecting a variety of managers will reduce manager 3. specific risk.
Vintage year Timing has an impact on the performance of funds, as opportunities for
investment and exit will be impacted by external economic circumstances. For this
reason it has become a normal practice to compare the performance of funds against
others of the same vintage. There may be marked differences in performance from
one vintage year to another. In order to ensure participation in the better years, it is
generally perceived to be wiser to invest consistently through vintage years, as
opposed to "timing the market" by trying to predict which vintage years will produce
better performance.
Industry. In venture investing, most of the focus tends to be on technology based
industries. These can be subdivided, for example into healthcare / life sciences,
information technology and communications. Buyout funds tend to focus on
technology to a lesser extent, providing exposure to such sectors as financial
institutions, retail and consumer, transport, engineering and chemicals."

POSSIBLE ANSWER
Anyway, based on the above, it is clear that the evaluation of SPAC Pre-IPO is going to be very subjective. The absence of operations and defintive financial data basically took away all objective means of calculating the risk and expected value for the fund. In general, we would be left with the following areas of evaluation:

• The general industry that the SPAC is going to be in;
• Which area within the value chain would the SPAC be venturing into
• The governance of the SPAC (Board of directors)
• The management of the SPAC

In trying to understand what we are buying, the evaluation tend to always start at the macro level. This means that evaluations were done on either the industry focus, geographic focus or size of companies. In Malaysia, currently we only have one industry issuing SPAC, namely the oil and gas industry, but if other SPAC were approved for listing, for example the SPAC operating in mining, foodstuff, plantation and others, we would be able to evaluate the risk and expected reward of the SPAC by looking at the industry in general. This is because we would assume that a growing / table industry poses less risk of failure for any business that the SPAC might end up owning.
But, since we were only given the choice of companies within the oil and gas industry, we could also assess the risk based on the type of business they are planning to venture into. i.e where in the value chain is the SPAC going to end up in after they completed their acquisitions. Because the all are targeting the same business segment, it is difficult to differentiate them. In other words, under a blind find, these four have the same risk profile based on intended scope of business
Then we would need to evaluate the board composition of the SPAC and make a judgement call on the level of governance that the SPAC will be under. This is highly subjective in nature and there is no general rule as to how do you measure the expected governance level based on the experience of track record of the board of directors. However, it is a mean, a way, to differentiate one SPAC from the other if you have any knowledge about the characters of the directors who are going to be governing the SPAC and keeping the management in check.

Next we again need to make a subjective evaluation on the capabilities of the management, the capabilities to source deals, execute them successfully and subsequently operating the company successfully. We can look at the experience and number of years they have been in the industry , but assigning a success factor to the management is highly subjective. Sometimes, we tend to take comfort by thinking that the regulators would have made that assessment for us, found the management adequate. While that is fine and dandy, without the objective means to quantify the quality and quantity of the management's experience, we would not be able to differentiate one SPAC from the rest, we could not rank them objectively.

SPANNER IN THE WORKS…
So, there you go. By equating SPAC to a private equity investment, would could arrive at a certain level of evaluation or assessment with regards to SPAC. If you can evaluate and invest in private equity, albeit very subjectively, then you can also use the same evaluation to decide whether or not you would want to invest in the SPAC. But…

But is a SPAC really that similar to a private equity fund? Well, the answer to that is, in my opinion, not really. There are enough dissimilarities between a SPAC and private equity fund that making an investment decision based solely on private equity-based evaluation would be deficient.
What are the main differences? Firstly there is the trust fund and requirement for 90% of the IPO proceeds to be kept safe in the fund, until an approved acquisition. You don't have that in a typical private equity. In a SPAC, the investors gets exclusive authority to decide on acquisition; in a PE, that would be the job of the managers. In a SPAC, it acquires a business to acquire the operation; in a PE, it acquires a portion of many businesses to make capital gain and passive income (dividends); In a SPAC an investors can get their money back if they do not approve of the qualifying acquisition; in a PE, they can't do that. In a SPAC, the managers (including promoters) gets significant equity portion of the business ( 20% to 30% at nominal value) from the onset; PE managers just gets fees and performance kickers.

All these factors would affect the risk characteristics of investing in a SPAC, which in my opinion be significantly different from a blind fund private equity investment. In the end, while we might think that we now have a solution on how to evaluate a SPAC, that solution might be enough for us.
If there is no other mean of evaluating a SPAC other than this way, the too bad, we just have to accept it as it is. However, there is a still a way to look deeper into a SPAC, past the mere definition of the SPAC. That is to look at the form of the SPAC and evaluate it as a listed company that it is.
We will delve into this in the next article, where we will attempt to seek a more objective evaluation of the SPAC as a listed entity, by evaluating, amongst others, the 'total entry price' that are paid to the management through the equity stakes, the intrinsic value of the cash in the trust deed, price to book and total downside of each SPAC. It will also be our first attempt at arriving at the fair value for the SPAC.

In the article subsequent to that, we will focus on the non-ordinary aspect of the ordinary shares of SPAC to break the entire investment in a SPAc into its composite, attempting again to arrive at the fair value for the SPAC pre-IPO.

Introduction to evaluating SPACs

In a way, the introduction of the Special Purpose Acquisition Companies (“SPAC”) to the investing public at large had created a stir in the Malaysian capital market. The SPAC, introduced in 2009, was greeted with mixed views and reactions, some extremely positives and some extremely negative; unlike when the Guidelines for "Business Trusts" were introduced a few months earlier. Some investors were saying that it is a good thing for the market and some are confused as to why did the regulators allowed such risky investment.


A check on the public traders' chat rooms, when the announcement of Hibiscus' pending IPO was made included statements like

““Crap” IPO coming”
“Looks like Bursa is becoming a gambling den”
“save your money to stock up your foods better”
“’salute’ to my dear bursa… company without core business also can list!..just make me sick!”
“u dare invets in tin milo kosong?” “I only worry that the tin milo will not be filled with tin milo but wit tepung gandum”
“Awesome”
“no core business, mesti kena PN17 Mah”
“BOYCOT IPO and keep away on listing day”
“This one, no job, just want free money from public”
“If SPAC can be listed, why not allow PN17 co go re-IPO, instead of delisting? L L L L L L”


However, Hibiscus persisted and it was listed in July 2011. And subsequent to the listing of Hibiscus, another two SPACs were announced ready for listing, but this time round, the tune of the trading platform was a bit different….very…. positive...

“This is definitely going to be growth stock”… “at least six months time horizon”
“A smaller version of Petronas”
“Another hibiscus >> $$”
“Another small baby of Oil and Gas player” “ Will there be a repeat of Hibiscus J J J J”
“prepare ur gun for it”
“Sona petroleum spac reference price …”… “attackkkkkk”
“SOLID JACKPOT”
“Sona petroleum simply the best $$”
“Golden opportunity”
“even magnum jackpot also cannot challenge”


And by the time we get to Reach Energy's SPAC, the comments started to sound greedy and envious (in my opinion lah) when we have comments like this "only chicken feed to the retailers". And if I am not mistaken there was an open letter written to the PM asking that more allocation for the SPAC shares be made for distribution by a certain group of remisiers (presumably because it is such a hot item, macam pisang goreng panas)


There were many reasons that could have caused this change in attitude and perception, and one of the could be better understanding of SPAC and its value…. Well really?... naah...:-) Honestly I do not think so.


I think the change in attitude was due to how the prices of the SPACs have behaved, in particular Hibiscus, and how the investors have benefited from it. But then, price is not the same as value; price may rely on value as one of its inputs but price are subjected by a host of other factors which includes expectations, demand, supply and liquidity.


Therefore, the evidences do show that SPAC has created a stir in the market, drawn reactions from the investors, but there was not much information to explain why. Nothing to state if any of the reactions, positive or otherwise, are justified. Let alone the price.


But before we proceed, I wish to make a HUGE DISCLAIMER, that everything that I write here are merely for discussion purpose and MUST NOT be relied upon for any investment decision. The idea is to give you the reader, a perspective from my point of view, from how I see it and then how I might try to evaluate and value the price of SPAC. I use real companies just to illustrate my points and ideas; no recommendation whatsoever on the companies in question. You, might agree or disagree with the methodology or the inputs (which I might use sample figures). But by reading on, you have agreed to use everything here for educational purpose only :-) and will not hold me responsible for your investment decision :-)


I will begin the discussion with a claim that the root cause of the ‘stir’ is lack of familiarity and knowledge of SPAC and with that the lack of ability to evaluate SPAC as an investment. It is a classic response to an unknown where the basic instinct of survival will kick in first, rejecting all unknown; the subsequent actions were short term reactions to what one saw from output of the unknown (in this case, the share price), and when one sees share price going up, the natural tendency is to be opportunistic and starts making up justifications to grab the opportunity, although the subject is still unknown and the basis for the price movement is a blank to them. Action (share price up) creates an immediate reaction in some (buy buy buy); had it gone down, it would have been the reverse regardless of the underlying value of the SPAC. They were knee jerk reactions.


If investing based on knee jerks is not our cup of tea, then we need to dig into the SPAC and find out what is the fundamental value of a SPAC. All investment has a value; it is a question of it being subjective and objective. And in order to understand the value of the SPAC, we need to understand the fundamentals of the SPAC. Understanding the fundamentals of the SPAC would also enable us the investors to evaluate the SPAC and ultimately assist us in making the right investment decision (including resource allocation). While it is true that price is not the same as value, but value will provide an anchor for the price, a reference point that is not purely due to market reactions. In the process of understanding the SPAC, we would also be able to find the answers to some of the reactions in the market.


And by the way, by now you may have guessed the I am one of those who they term as a fundamental investor.


The first thing I found out when I was doing my research on the subject matter is that, non-sophisticated investors could easily been confused with the nature of the SPAC. I discovered that there are many ways that the market have been describing SPAC, including SPAC as a Blind Fund / Private Equity, Ordinary Listed Company, Reverse Merger instrument, Composite investment. And save for the Ordinary Listed Company, none of the views of SPAC is a commonly known subject for the general retail investors, especially in an emerging market. But that does not mean that SPAC cannot be issued, it just mean that the investors are justified to be initially confused but need to improve their know-how if they want to invest in the SPAC.


In this series of blog write-ups, I have broke down the sections into the following, based on what I think a SPAC should be understood:

• SPAC Pre-IPO, which is broken down further into mini segments that discussed SPAC from the perspectives of a blind fund, a listed company and a composite investment;
• SPAC Post IPO but before the EGM. The EGM is a critical point to me as it marks the end of an embedded option that I believe existed within the SPAC shares.
• SPAC for EGM & completion of qualifying acquistion.

In my journey of discover with regards SPAC, which I will share here, I discovered that SPAC is not what we might be accustomed to believe, and that its investment characteristics changes as it progresses through its life: from not having an operation, to having an idea of an operation to actually having an operation. And to add on to the complexity of it all, I also discovered that there ordinary shares of a SPAC are that that ordinary after all which gives a SPAC an embedded option (which is not the warrant) inside the share itself; and hence the investment characteristics of the SPAC would also change as the embedded option expires at the EGM.


Anyway, let's begin the journey of understanding SPAC by looking at a SPAC before it is listed (pre-IPO). At this stage, we probably have a copy of the prospectus of a SPAC that detailed out the management of the company, their plan with what they wanted to do with the money they could raise from the IPO, the outlook of the industry.


However, one thing would immediately stick out glaringly: it does not have a business! This was something new and unusual to us, where we have been accustomed to thinking that there is a certain minimum level of operational risk that a regulator would have allow to be presented to the public investors via the stock market; and that is the existence of an operation. When we looked at the all the listing requirements, the element of having an operation is a common denominator for companies that are allowed to be listed in the Main Board, the ACE market, Mesdaq previously, Business Trust, REITS and even infrastructure project companies must have a 'secured' agreement relating to how they are going to generate revenue in place.


To further add to that was the fact that the regulators would eventually delist any companies that does not have any operation (commonly known as cash company), and the reason they were not delisted automatically upon losing the operation, is mainly due to the fact that there are public shareholders still holding the shares and every opportunity must be given for them to realize the listing premium. But the shareholders are there before the operation went missing, unlike SPAC which in a way getting an investor to invest in a 'technically' PN17 cash company. This state of confusion and apprehension would be the immediate reaction to the introduction of SPAC…how can they ??!

Click here for the next segment "SPAC as a blind (private equity) fund"

Free Workshop: Troubleshooting Issues in Business

I know it has been a while since I penned down my thoughts, but things has been quite hectic lately. I have only managed to give short updates in FB only.

Anyway, at the beginning of this year, I set out goals for myself and one of them was about giving back to the society. And this year I want to give free workshop to help entrepreneurs. And to those who already know me, this is free without any gimmick. I will fork out the cost for the venue and tables and chairs, but there will be no food (bring your own biscuits, hehe). No food, no transport, no accommodation and no fee :-)

Space will be limited to between 10 to 15 max as my priority is for the group to really get something out of it. It will be a half day event only, it will be in late November, it will be interactive, intense and it will be in Shah Alam.

If you would like to attend this workshop, please fill in this simple form by clicking on the link below that asks about what is your business and what do you think is stopping you from generating the profit that you want. It is going to be FREE, so I will pick out the participants based on your reply and will contact you via email to inform you of the venue and time.

Deadline for application: 31 October 2014

Workshop Application Form, click here

As the title states, the workshop is about learning the methodology and mechanics of identifying the real issues in businesses that are stopping you from generating the profits that your desire.  I will not share with you the information about my firm (professional secrecy etc) but I will share with you the skills and insights that came with building the business.

See ya.

MDec: Building a Profitable Business Model

Great session!

How to Create a Profitable Business Model

The following is an upcoming workshop for MDeC, which is by invitation only.  I will post up some key points to be shared with all a few days later.




HOW TO CREATE A PROFITABLE BUSINESS MODEL
Defining Your Business Model
Technology does not generate profit; business generate profits. Technology is a valuable product that needs a business to generate profits. A wrong business model could render a valuable technology worthless.

What am I going to learn?
This exclusive one day program takes you through:
  • Key principles of generating profits;
 • The process of building a business model that would enable you to identify the nine key components of the business model.

Participants will be exposed on how to create a profitable business model by understanding the holistic view of IT business, how to link business segment and identifying critical areas of business. You will learn on customer understanding; the key resources, delivery channels, risks and identifying required mitigation for business continuity. It will give you hands on training, on building financial statements designed for non-finance entrepreneurs and thereafter establish the link with the business model.

You would also acquire about the common causes of business failures and how to avoid them by making the necessary pivot in the business model of your organization.

Facilitator | Muhamad Yazdi
Muhamad Yazdi is a finance professional with a vast experience as a regulator, corporate finance adviser and investment banker. Previously, he was involved in advising and structuring complex initial public offerings, restructuring and mergers & acquisition exercises in Malaysia and internationally. Currently, he is the Head of Business Development for KFH Asset Management Sdn Bhd, where he is responsible for developing new investment products, marketing and strategic planning.

Fees
Attendance is FREE and BY-INVITATION ONLY. 


Date
Thursday
21 August 2014

Time
09:00 AM – 06:00 PM

Location
Rebung Room, MDeC

Audience
CEOs, COOs, CFOs, and CMOs.