Uber Investments and Personal Time

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Uber, but for diversifying an oil-dependent economy.

Saudi Arabia is a country that gets a ton of revenue from oil. This can't last forever; the Saudi government is worried. So it plans to do an initial public offering of its massive state-owned oil company, Aramco. This will, overnight, transform Saudi Arabia from a country dependent on oil, which is bad, to a country dependent on investing, which is fine. Day one the investments will be mostly in oil, but still. "IPOing Aramco and transferring its shares to PIF will technically make investments the source of Saudi government revenue, not oil," said Deputy Crown Prince Mohammed bin Salman a while back, in a touching statement of belief in the power of financial structuring.

But diversifying from oil to investments-in-oil only takes you so far, and eventually Saudi Arabia has to do stuff with its massive sovereign wealth fund. (Other than just owning Treasuries.) And so yesterday it did ... the most predictable thing imaginable? Like, a parody version of what you'd expect it to do?

Saudi Arabia’s sovereign wealth fund made its highest-profile deal, investing $3.5 billion in U.S. ride-share company Uber Technologies Inc. as the country seeks to diversify its assets with more overseas acquisitions.

Yasir Al Rumayyan, managing director of the Public Investment Fund, will take a board seat at the San Francisco-based company after the deal, which values Uber at $62.5 billion, the company said in a statement. It’s also the biggest investment Uber has received to date and in line with the company’s previous valuation.

Aramco is generally thought to be worth about $2 trillion. Imagine if Saudi Arabia decided to diversify by putting, say, 5 percent of its value into venture capital investments. That's $100 billion. The U.S. venture capital industry invested $58.8 billion last year. Saudi Arabia just has too much money to move quickly and sensibly into venture capital. So it wrote the biggest imaginable venture-capital check -- "the largest single investment ever made in a private company" -- to the biggest and most prominent venture-backed private company in the world. "The one thing I would remind anybody who's thinking about getting into late-stage unicorn investing right now: You are the lender of last resort," said Bill Gurley, on television, shortly before the Saudi Uber deal was announced.

Though that is perhaps too harsh a term for investing in Uber. It doesn't exactly seem to need the money? It has now raised $11 billion. Maybe it should buy an oil refinery. Meanwhile Saudi Arabia's advisers on the deal -- JPMorgan and Skadden Arps -- are probably happy to be involved:

While such a deal is not likely to yield a huge payday for the two companies, it lends them some bragging rights. And it could position them for plum advisory positions for Saudi Arabia down the line, including the forthcoming initial public offering of Saudi Aramco, the country’s gargantuan state-owned oil company.

Can you imagine being an investment banker covering Saudi Arabia right now? How much do you think you'd charge for advising on the Uber investment? I feel like "nothing" might be the right answer. Saudi Arabia is going to get just so much free work out of its advisers until that IPO launches.

Work-life balance.

A couple of years ago, a bunch of the big investment banks announced formal time-off policies so that their junior bankers wouldn't have to work absolutely all of the time. These policies all sounded pretty sad, honestly. Goldman basically gave its bankers Saturdays off. Credit Suisse upped the stakes to Saturdays, plus Friday evenings. JPMorgan offered a whole weekend, but only once a month. It all just drives home how bad the lifestyle is, if working six days a week was a revolutionary concession.

Yesterday Reuters reported that "Investment bankers at UBS can now take at least two hours of 'personal time' a week in the latest attempt by a bank to retain staff with a better work-life balance," which is ... possibly the saddest thing I've ever heard? There are 168 hours in a week! You get two for personal stuff? Up from, what, zero? Use that luxurious new freedom to, like, go to a doctor's appointment, or get your dry cleaning, or move your car for alternate-side parking. Or, hilariously, "for family events or activities like marathon training," though I don't really know how you could train for a marathon or have a family in just two hours a week. Realistically you should probably use those two hours to interview for a better job. 

Meanwhile some senior bankers will be getting plenty of unwanted leisure time: Goldman Sachs has "eliminated dozens of managing directors, executive directors and vice presidents across the mergers and debt and equity capital markets teams."

Should hedge funds be allowed to ask people questions?

Here's a fun thought experiment courtesy of Tom Watson, the deputy leader of the U.K. Labour party:

“Hedge funds who commission their own private exit polls stand to make many millions of pounds learning the likely outcome of the referendum hours before the UK government and the British people find out if we have voted to leave or stay in the EU,” Watson said.

“Information about a historic vote that will shape the future of our continent should be made available to everyone at the same time, not shared among a privileged few whose only motive is to gain financially by attempting to predict the outcome. I hope the government will put measures in place to prohibit this avaricious plan by financiers to benefit from information that belongs to every voter.”

What could it mean that the information belongs to every voter? Presumably each voter owns the information that she voted for or against Brexit. If a hedge fund's pollsters ask her, she can tell them. It's her information, after all. (She can also decline to tell them. Presumably she could also lie. Why not?) If the pollsters asks enough people the same question, they can get a statistically useful sample and make a prediction about how the vote went. And then they can trade on it. 

If you think that this is bad -- and Watson probably isn't alone in thinking that it's bad -- then it seems to me that you have to identify which part is bad. Is it asking someone how she voted? Is it asking lots of people how they voted? Is it making a prediction about the Brexit vote? Is it trading based on your prediction? Which specific thing would you make illegal?

Watson goes on to criticize opinion polling, so maybe he'd ban asking questions about votes. But the problem is more general. The business of investing is largely about getting an informational edge. You go out and ask people questions and do research, and the investors with more time and money to spend on research tend to do better research, and then you end up in a world where hedge funds can predict the Brexit results -- or Apple's earnings, or whatever -- before everyone else. And there is a temptation to say that that is bad, or "insider trading," or even "front-running," even when it is just research, just going around asking questions of outsiders. Why should hedge funds know things before other people know things? So there is a temptation to restrict research, or at least research at some level of hedge-fund fanciness. But research is how we learn things, and restricting it seems dangerous.

Elsewhere in insider trading, or whatever, "Phil Mickelson said he was disappointed to get caught up in a federal investigation that linked him to an insider trader scheme and that he needed to be more responsible for the company he keeps off the golf course," though he is otherwise fine. But poor Billy Walters, the gambler at the center of that alleged scheme, won't be allowed to "ease his pain with medical marijuana as he waits for trial on insider-trading charges." (He has a legal prescription, but for some reason laying off the pot is a condition of his bail.) The U.S. criminal justice system is just pointlessly cruel. What harm does it do anyone if Billy Walters smokes pot while waiting for his trial? And if he needed to smoke pot for his pain before being charged with insider trading, surely he needs it that much more now?

Bill Gross Investment Outlook!

Classic Bill Gross Investment Outlook notes begin with a weird personal anecdote before moving on to economics. Today's Investment Outlook begins with a quote from an economist, but don't let that deceive you: Coming from a deposed Bond King, it is obviously very personal.

The economist Joseph Schumpeter once remarked that the “top-dollar rooms in capitalism’s grand hotel are always occupied, but not by the same occupants”. There are no franchises, he intoned — you are king for a figurative day, and then — well — you move to another room in the castle; hopefully not the dungeon, which is often the case. While Schumpeter’s observation has obvious implications for one and all, including yours truly ...

I'll cut him off there. It goes on to talk about economics. I hope he is not calling Janus a dungeon? Anyway he's not especially cheery about the investment outlook either:

Returns will be low, risk will be high and at some point the “Intelligent Investor” must decide that we are in a new era with conditions that demand a different approach. Negative durations? Voiding or shorting corporate credit? Buying instead of selling volatility? Staying liquid with large amounts of cash? These are all potential “negative” carry positions that at some point may capture capital gains or at a minimum preserve principal. But because an investor must eat something as the appropriate reversal approaches, the current penthouse room service menu of positive carry alternatives must still be carefully scrutinized to avoid starvation. That means accepting some positive carry assets with the least amount of risk.

Internet messaging.

I hope someone is writing a book about AOL Instant Messenger. (Here is a good article.) In the days before Facebook and Twitter and Snapchat, AIM felt, for a little while, like perhaps America's best social network, or whatever it was. (No one thought to call messaging services "social networks" back then, but more of my friends were on AIM than MySpace, anyway.) It also had surprisingly strong penetration in the financial industry; I remember visiting hedge funds back in the day and seeing traders with screens full of AIM windows. Today I feel like people would recognize what a gold mine that could be. Back then it was just a weird free product, and no one cared, and it eventually sort of faded from the popular consciousness, as did, really, AOL. I see that AIM still exists.  

Yahoo, though, same deal:

Yahoo! Inc.’s Messenger has for almost 18 years been the default communication tool for the men and women who each day move billions of dollars’ worth of crude oil and petroleum products around the planet.

That's a good niche! ("Bloomberg LP, the parent of Bloomberg News, includes an instant-messaging service in the Bloomberg Professional Service that competes with Yahoo Messenger.") But now with Yahoo putting itself up for sale, oil traders are worried that Messenger will also disappear, and Yahoo just really could not care less:

“It’s great to hear positive feedback around Yahoo’s legacy messenger product,” Yahoo spokeswoman Ana Braskamp said in an e-mail in response to questions about the trading industry’s reliance on Yahoo Messenger and concerns about its future.

That is about the least enthusiasm imaginable from a spokeswoman.

Elsewhere in troubled internet messaging services, how's Twitter? Here's a Nick Bilton story about how the company is betting everything on Jack Dorsey's third (!) stint as chief executive officer, with the focus now apparently on just saying the word "live" a lot, really loudly, and pretending not to hear Facebook saying it even louder. 

Jumbo loans.

The paradox of banking is that it is about funding risky assets (loans) with apparently risk-free liabilities (deposits). Both of those things are socially good: We want risky activities to get funded, but we also want our deposits to be safe. Most banking regulation -- deposit insurance, lender-of-last-resort policies, capital requirements, prudential regulation, whatever -- is about trying to reconcile these goals, but they will always be somewhat at odds. Anyway here's a story about how the push to make banks safer has led to them making relatively more mortgage loans to richer people, and fewer to poorer people; given the racial dynamics of American wealth, that means they are also making fewer loans to Hispanic and black borrowers. 

Hair Stuff.

I am not a guy who spends a lot of time reading about blowouts, generally, but this Sapna Maheshwari article about Drybar is incredible, full of insights about marketing and economics and racial and generational differences and how our social-media culture makes new demands on people's appearances. It has all the sociology that I hope for in a story about food trends, only it is about hair trends. Also Goldman Sachs makes an appearance:

“When we talk to investment bankers, I pull up our database and see how many [customers] each has and I give them a hard time,” he said. Goldman Sachs “is by far the biggest” bank represented in the customer file, he said, and that’s just counting those who signed up with their work email. There were 385 Goldman email addresses in the Drybar customer database when we spoke in February.

Why would you sign up for anything with your work e-mail? How long does anyone last in banking? I guess once you leave Goldman you don't need as many blowouts. Elsewhere, in food sociology, Time is launching a vertical about breakfast.

People are worried about unicorns.

Mary Meeker is worried about the end of the internet boom, which can't be good for unicorns. But here is a story about entrepreneurs who grow their businesses without taking venture capital money. I would have guessed that was how most businesses throughout history have grown, but apparently the venture capital industry is more important than I had thought:

Those who buck the odds by “bootstrapping” their own enterprises are rare, experts say.

“It’s a huge anomaly,” said Mark Walsh, head of innovation and investment at the Small Business Administration. He estimated that as few as one in 50 brick-and-mortar companies and one in 10 online companies could build their businesses into $50 million or $100 million enterprises on their own.

In any case I suppose that a non-venture-backed startup that reaches a billion-dollar valuation, rare though it is, technically doesn't count as a unicorn? Should it have some other sort of cryptozoological name? I feel like most of the usual Greco-Roman cryptids are taken, but maybe it could be, what, a yeti? A chupacabra?

Elsewhere in non-VC startups, here is a story about the new equity crowdfunding rules, and about how venture capitalists are "warning that small investors risk sinking their money into high-risk deals ignored by seasoned professionals." We talked about similar claims last month, and I said that venture capital and crowdfunding seem like different models, with VC focused on financial success and 10x returns while crowdfunding is more about supporting businesses you like. But I mean, yeah, I would hope that the expected returns to venture investing would be higher than the expected returns to crowdfunding. Though I appreciate this guy who thinks that the solution is more fees:

Jon Medved, chief executive of OurCrowd, an equity crowdfunding platform, is upbeat about the funding market opening up. “If you don’t make the money in these companies when they’re private, you’re not making the real money,” he said.

But he also added a cautionary note. “Until they allow people to aggregate these investments and write a single cheque, until they allow companies to raise more than $1m, until they allow the portals to take success fees or management fees for supporting the company and for managing the investment after the money’s put in, I think this will not reach its full potential.”

People are worried about bond market liquidity.

"Liquidity: The drought continues," is the headline here. Meanwhile "Mega Bond Deals Flood Emerging Markets Before Next Fed Move." I hope some English Ph.D. student somewhere is writing a dissertation on water metaphors in financial markets; it is fertile territory. Teeming ocean. Whatever.

Me yesterday.

I wrote about the Dell appraisal decision.

Things happen.

Payday Borrowing’s Debt Spiral to Be Curtailed. The Future of Banking Is in China. China’s Latest Export: Broken Deals. Singapore Inc. Buys $1 Billion in Alibaba, Adding to China Bets. Iran Resists Saudi Gesture for Unity as OPEC Fractures Reappear. Going Broke Slowly: A Guide to Sprint’s $33 Billion Debt Dilemma. SEC can pursue Lynn Tilton fraud case, US appeals court rules. U.S. Moves to Cut Off North Korea From Banking System. Crooks Are Using an International Messaging System to Rob Banks. FDIC: Banks’ First-Quarter Results ‘Mixed.’ JPMorgan Sees Rebound for Trading Revenue in Second Quarter. Ex-BlueBay Money Managers Said to Raise $2 Billion in Hedge Fund. Goldman Says Hedge Funds Wedded to Top Picks Like Never Before. Tracy Alloway on collateral shortages. Izabella Kaminska on financial reserves and real-world inventories. Gawker's Hamilton Nolan is surprisingly neoliberal about defined-benefit pensions. Jessica Pressler on the hot felon. "She buys us stuff, and she talks on the phone a lot." Bachelor parties are expensive. "Start getting paid in Ether now because getting your salary in Bitcoin is so 2015." People call Time Warner Inc. to complain about Time Warner Cable, which is a different company. Politicians with cats. Selfie sculpture. How To Get The Cool Dog At The Party To Notice You.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net