Tonight:
5°c
Warren Buffett's comment about finding out who is not wearing swimming trunks when the tide goes out, is so telling because it finds the most unlikely people exposed. Latest to suffer are some of the most respectable investing institutions in the world, funds that for so many years seemed to do exceptionally well out of private equity.
We now discover that in the boom years these private investors were overallocating. They would promise a private-equity fund manager they would invest £150 million in a new fund when they only had £100 million to spare.
They could do this because the pe managers took four or five years to draw down all the committed money. By the time they called the last lump they had already paid back the first tranche with profits. Thus the outside investor could meet the final cash call by recycling the proceeds of the first tranche back to the private-equity house.
They did this because it was a way of gearing themselves up, allowed or not. They were getting £150 million of profits for only £100 million deployed. It made their performance, and possibly their performance fees, look very good. But now the tide has gone out and that early money has got stuck inside the funds. It is no longer returned so when the private-equity managers ask the overcommitted investors for the balance of the subscription owed, they find the cupboard is bare. Much angst ensues with much gnashing of teeth from private-equity houses who want the money so they can charge their management fee on it. Hence also the quiet dumping of private-equity portfolios at a loss by the investors as they try to raise the ante.
None of which will surprise Warren Buffett.
Anger without a cause at Barclays
The Barclays board was subjected to its ritual lashing at yesterday's shareholder meeting called to approve their refinancing with Middle Eastern money. But more than 85% of the votes were in favour — albeit with a fair number of abstentions.
There were a lot of angry people and a lot of low-key but angry speeches, yet what has never been quite clear in all this is what Barclays was supposed to do instead.
The shareholders did not like the deal, which sees their holdings massively diluted. And it is deeply alarming to see a bank the size of Barclays ignore pre-emption rights that are supposed to give existing shareholders the first opportunity to subscribe to new capital, which is what happened when they turned to these new investors.
Against that, it has been obvious for months that the existing shareholders were not willing to put up the amount of capital the bank needed — they might have stretched to a couple of billion, but there was no way they were going to stump up the £7 billion put up by the Middle East.
They may not like this pointed out, but the reality is the shareholders had in effect already voted with their feet to waive their pre-emption rights. Given the amount of capital it needed, Barclays had no practicable choice but to look elsewhere.
The other complication is that, with bank share prices sliding round the world, the Gulf investors realised they were the only game in town and drove a suitably hard bargain — one which in the end turned out more expensive than the earlier Government offer Barclays turned down.
That was unfortunate, but it was the board's belief that it should do everything possible to keep out of Government's clutches. Bearing in mind the threats against the banks which Chancellor Alastair Darling uttered at the Despatch Box yesterday, that it may yet turn out to have been a wise decision.
It is perhaps slightly ironic, too, as chairman Marcus Agius revealed yesterday, that Barclays is the biggest lender to small businesses in the UK and it is lending 4% more in this area than it did last year. If that is indeed the case, it will probably do a lot more for the economy than 2.5% off VAT.
No logic in these higher tax rates
Amused is the wrong word, but I was certainly intrigued by an email from David Rothenberg at London chartered accountants Blick Rothenberg shortly after the Chancellor sat down yesterday afternoon.
In it he pointed out that the increase in top rate of tax, coupled with the clawing back of tax allowances, had made tax rates for higher income earners wholly illogical.
See for yourself. For incomes above £43,875 to £100,000, the rate of tax will be 40%. For incomes from £100,000 to £106,475 the rate will increase to 50%. For incomes above £106,475 up to £140,000, the rate drops to 40% again.
For incomes of £140,001 to £146,475 the tax rate is again 50% and for incomes above £150,000 the rate will be 45%.
