Running Money: Hedge Fund Honchos, Monster Markets and My Hunt for the Big Score

323 Pages·2005·0.88 MB·English

by  Andy Kessler

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Hedge Fund Honchos,
Monster Markets and
My Hunt for the Big Score
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Andy Kessler
For Nancy
and our bookends, Kyle and Brett,
and our books, Kurt and Ryan
> > > C ontents
Ssangyong Sweat 1
Part I Raising Funds 7
Part II Revolution 37
Part III Searching for Scale 87
Part IV IntellectualProperty 115
Part V The Next Barrier 173
Part VI Burst 221
Part VII The Margin Surplus 231
Part VIII Epilogue 285
Acknowledgments 297
Index 299
About the Author
Other Books by Andy Kessler
Credits
Cover
Copyright
About the Publisher
> > > Ssangyong Sweat
This market really sucks. It’s the fall of 1998, and things are bang-
ing around so much, my head hurts. Just like that, our gains from
the last few years have vanished. Poof. You can’t ever forget how
precarious and humbling running money really is.
Some funny currency crisis is going on in the Far East. I’m not
sure if this makes any difference at all to Silicon Valley, where
most of our investments are based. We didn’t need this shit, as
we’re still scrambling around, raising money. Without decent num-
bers, we’re just two nobodies above an art supplies store in Palo
Alto. I desperately need a day to sort out what is really going on
and to figure out which way is up.
In reality, I’m looking forward to a day of doing absolutely noth-
ing. It’s midmorning, and just as my Monday-Night-Football-at-the-
Oasis-Bar–induced throbbing is beginning to fade, the phone rings,
making my head hurt even more.
After fifteen years as a piece of Wall Street meat—first as a
research analyst, then as a lousy investment banker—I find my-
self running a real live hedge fund. It has been two years since my
partner, Fred Kittler, and I started scraping together a tiny sum of
money, mostly from old friends and a few moneyed folks willing
to take a risk on a pair of refugees from Wall Street. It’s not a lot—
hardly enough to make us respectable, despite our first-year num-
bers being pretty good, up 50 something percent.
Until two weeks ago that is. Korea and Russia and Malaysia
have just collapsed under the weight of their respective foreign
debts, and they took our gains down with them. Now we’re break-
even for the year—all that hard work down the drain in a few ticks
of the tape.
No wonder I’m in such a foul mood.
2 Running Money
“Can you make it down to the company for a lunch today?”
the voice on the phone asked. “We have something of mutual
interest to discuss.”
Andy Rappaport was a partner at August Capital, a B+ ven-
ture firm in the valley. A few months earlier, our fund had invested
in a private company where Rappaport sat on the board, keeping
an eye on August’s stake. The company sold chips for $5 that cost
them $1 to make in Taiwan, which allowed LCD monitors to dis-
play sharper images and disk drives to connect faster. Pretty neat
stuff.
“What’s it about?” I asked.
“I can’t tell you.”
“I’m kinda busy.”
“This is important,” he said with a half-pleading, half-excited
tone in his voice. “Trust me.”
“Who’s going be there?” I asked.
“Myself and another board member. Just us, not management.”
There was that tone again. (I didn’t know him well enough—maybe
he always sounded this way.) “There’s an interesting opportunity
here.”
I happened to like the management team, a big reason why
we had invested in the first place. But “interesting opportunity.”
Hmmmm. Those are always the magic words.
“OK, fine, see you at noon,” I said.
I made Fred come along. We were running our fund out of
a dumpy office above an arts store in Palo Alto (low overhead).
Anyone who visited probably thought we were running some
investment-scam bucket shop instead of a hedge fund. I dunno,
some days I wondered if we weren’t. Our fund was different from
most. We were buy and hold—stocks only. I’d rather eat pork bel-
lies than trade them. We invested mostly in small public companies
and a few interesting private companies.
I wasn’t so sure about this one. I’d had no plans to go anywhere
that day, so I was wearing jeans and, I’m pretty sure, a clean shirt.
Fred and I hit Sunnyvale and parked close to a nondescript steel-
Ssangyong Sweat 3
and-glass box like those that house every company in the Valley.
We were ushered into a conference room that could probably seat
20, with the standard fare of slightly smushed multicolored tortilla
wraps sitting uninvitingly on a platter. After almost 15 years in the
investment business, I had learned never to trust anyone or any-
thing (let alone eat wraps), so my cynicism was busting out today.
Rappaport didn’t waste any time. “There is a group who in-
vested in an earlier round, and they want to sell their shares.”
“So?” I blurted out. “Wouldn’t we all.”
“Well, there seems to be a sense of urgency here.”
Now my ears perked up. “Urgency? Who is it?”
“Well, the investor is Ssangyong . . .”
“Who?” I interrupted.
The other board member, a guy from VentureStar, a fund with
money mostly out of Taiwan, jumped in, “Ssangyong. They are a
Korean company that makes everything from diesel engines to
cement. They are spending a lot on LCD monitors, and invested
here, hoping to get a jump on some of the technology that could
add value.”
This was starting to make sense. Korea was drowning in a sea
of foreign debt built up in the ’90s, but Korean companies didn’t
make enough profit to pay back the debt. As other Asian coun-
tries began defaulting on their debt in ’98, investors panicked and
called in Korean loans. Anything that wasn’t tied down was for
sale in Korea. Ssangyong was something like the sixth largest cor-
poration in Korea, not that I had ever heard of it.
“So let me guess,” I said. “They need cash quickly.”
“I think so.”
“Sounds like a distressed sale. Let’s lowball them.”
“Well, it’s not that easy,” Rappaport replied. “They know
things are going well here, and that CS First Boston is interested in
taking this company public in the next year.”
Our fund had just invested a slug of dough at $4, and if all
went well, we figured an IPO run by Frank Quattrone would be
priced at around $16–$18 next summer.
“Ssangyong thinks the shares are worth seven or eight bucks
today.”
4 Running Money
“Why doesn’t August just do the whole thing itself?” I asked,
putting Rappaport on the spot. “You guys have deep pockets. You
don’t need us.”
“Well, um, er, we own a lot of this thing, and I’m not sure my
partners want to add that much.”
Now I really didn’t trust him. I didn’t want Fred and me to be
the suckers here. We had invested only a few months ago, nothing
had changed really and I wasn’t all that interested in getting more
exposed. The company had a lot to do before CSFB would take
them out—not-so-easy things like doubling their sales. If it didn’t
work, we would be stuck with worthless stock. It’s the worst place
you could possibly be running a hedge fund—long and wrong.
I leaned over to Fred, and before I could ask him what he
thought, he whispered that we should take the stock. He thought
the company was going to be a home run.
I wasn’t so sure. Fred is ten years older than I am, with light-
years more market savvy. I make judgments much too quickly. But
when Fred comes up against a difficult problem, he just reaches
back into his long-term cranial memory storage and does a little
pattern recognition until he can say, “I’ve seen this before.” We
were the yin and the yang of rash and rational, which is why the
partnership worked so well.
“We’ll pay $2.50,” I said with more confidence than I thought
I had in me.
“That’s only slightly more than what Ssangyong paid a year
ago, and they know we just did a round at $4.”
“That’s why they call it distressed,” I said.
I was in completely over my head, my hangover hurt and our
fund’s performance was like an erratic yo-yo. I would have been
happy to go back to my office and stare at my screen. “They need
the money, and they’re going to make a small profit on their in-
vestment, even at $2.50. Sounds like we are doing them a favor.”
We batted it around for another 20 minutes. I watched my
untouched bean sprouts and avocado wrap wilt into itself, then
got up and took a nature break.
“OK, so we agree on $2.50?” Rappaport said as I walked back
into the room.
“Yes,” I said, then turned to go.