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
At JPMorgan Chase & Co., a learning machine is parsing financial deals that once kept legal teams busy for thousands of…www.bloomberg.com
- 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
- 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.
There are all sorts of supposed valuation experts - such as eShares ("the world's largest provider of independent…nyti.ms
- 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.
4. A glimpse into Bridgewater’s operations
An article in The Times on Monday detailed interviews with dozens of former Bridgewater employees who described a…nyti.ms
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.
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
At Airbnb, the Payments team is responsible for everything related to moving money in Airbnb’s global marketplace. We…medium.com
- 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
- 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
Companies have been on a borrowing binge, but you wouldn't always know the full scale of their liabilities by looking…www.bloomberg.com
- 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.
8. A great podcast on diet
My guest this week is Peter Attia, M.D., whose mission is to understand and improve human lifespan and healthspan…investorfieldguide.com
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
Macro Perspective on the Capital Markets, Economy, Geopolitics, Technology, and Digital Mediaritholtz.com
An interesting and informative way to learn how and why European cities from their U.S. counterparts