March Reads … Late, But Worth It

I know it is a month old, but there are several interesting reads.

FINANCE + TECH

1. JP Morgan is coming for the lawyers

Highlights

  • COIN (Contract Intelligence) analyzes commercial-loan agreements.
  • Started in June.
  • This work took about 360k man-hours.
  • JPM spends $9.6 B on technology (9% of revenue).
  • Has a cloud computing project called Gaia.
  • The bank has 20k developers.
  • 1/3 of its tech budget is for innovations, going to 40% in the coming years.
  • Works on 12k new wholesale contracts annually.
  • X-Connect is a CRM tool that determines prospects from e-mails.
  • Piloting roughly 100 projects.

2. GS is going further into Quants

https://www.ft.com/content/fdfd5e78-0283-11e7-aa5b-6bb07f5c8e12

Highlights

  • Quantitative Investment Strategies (QIS) oversaw $165 B at its apex.
  • The algo meltdown in August 2007 coupled with the Financial Crisis sparked massive outflows from QIS to ~$50 B.
  • QIS uses NLP to parse earnings calls.
  • The largest strategy for QIS is tax efficiency for high net worth individuals.
  • It applies ML across about 15k stocks globally to uncover trading signals.
  • I had to look up gamma scalping.
  • There is a build anxiety that a recurrence from the Summer of 2007 is in the offing.
  • Hedge Fund Research estimates that quantitative strategies manage 1/3 of the total AUMs.

3. 409a’s are a cost of oing business for private companies

Having overseen a few 409a valuations, this is true.

Highlights

  • Private companies offering a tax-exempt nonqualifying deferred compensation must abide by Section IRC Section 409a.
  • Typically, this applies to private common stock or options plans.
  • Those instruments need to be valued by an independent 3rd party.
  • Companies used to be able to price them on their own.
  • Rule of thumb was to value the options at 20%-25% of the most recent round of preferred stock price.
  • The valuation discount can be partially attributed to preferred investors acquiring a more senior security with protective provisions. Whereas, options are secured by common stock, which sits junior to preferred stock.
  • This creates a valuation arb as companies can issue options with a price that would be stepped up, if a new equity financing round at a higher valuation is in the offing.
  • If plans do not comply with this section of the code, holders of the equity instruments could face taxes of 20%.
  • NYT estimates 409a valuation can cost ~$50k. Personally, I have seen pricing ranging from a few thousand dollars to $10k. I guess it truly depends on the complexity of the capital structure and size of the company.

For more info: https://www.irs.gov/retirement-plans/409a-nonqualified-deferred-compensation-plans

4. A glimpse into Bridgewater’s operations

The virtue for radical transparency is admirable. However, there are challenges along the way.

I like how a former Bridgewater Associate asks the first question and uses BA language to phrase it.

WATCH THIS AT 1.5x

5. AirBnB details its financial reporting systems

Since I nerd out on this kinda of stuff, I was fascinated by the innovative approach. Is this FinTechOps? Also, I wonder who runs FX as they

Highlights

  • The Payments team scope has grown from local daily transactions to global, covering sales tax, licenses, etc., while reconciling to GAAP accordance.
  • Aribnb operates in 191+ countries with 70+ currencies.
  • Airbnb moved from MySQL with nightly batches to Apache Spark written in Scala.
  • MySQL did not scale with its operations as reporting logic was demanded.
  • It separates Platform events (bookings, cancellations) from Payment events and then multiplexing them into Accounting events that are feed into a Subledger with double entry accounting.
  • Nightly runs times have been reduced from 24 hours to 5 hours.

RadioShack had a mainframe that would log in a nightly batch store level transactions after it was ETLed from the stores POS. What AirBnB is doing illustrates the evolution of IT systems.

6. Mixpanel extends its option window

https://blog.mixpanel.com/2017/03/14/employee-equity

Highlights

  • Extended the post-termination window from the prevalent 90 days to 5 years for those employees who have been at Mixpanel for 2+ years.
  • Mixpanel employs 235 people.
  • It is good for morale, culture, and recruiting.
  • This move might lead to more employee turnover, while increasing dilution and administrative costs.
  • Other companies who have implemented extensions: Asana, Kickstarter, Quora, Coinbase, Pinterest, Palantir, and Square.

7. The major impact of IFRS 16

Highlights

  • According to Bloomberg Data, companies have accumulated $3 T in off-balance sheet operating leases.
  • This equates to ~1/4 of total on-balance sheet debt for nonfinancial firms.
  • Starting in 2019, IFRS 16 foreign companies that comply with the reporting standard to the capitalization of these obligations; greatly impacting retailers, telecos, energy providers and airlines.
  • Net-net, balance sheet liabilities and operating incomes will inflate. These expenses will be moved below the line, but will have no cash impact.
  • At CFSB, I was part of a valuation group that capitalized these operating leases and adjusted EBITDA in order to create a like-for-like comparison as well as for defined benefit plans.
  • FASB has a similar rule to take effect for U.S. companies.

MIXED MEDIA

8. A great podcast on diet

Dr. Peter Attia shares his thoughts and philosophies on health, diets (sugar, fasting, not all calories are the same).

I took a lot of away from this and have incorporated his recommendations into my diet. Let’s see how long a low sugar and carb regime can last.

9. Why do we live where we live

H/T to Barry Ritholtz — 10 minutes

An interesting and informative way to learn how and why European cities from their U.S. counterparts