Gordian Perspectives for February 2020

Each month members of Gordian Group team pick articles, posts or current news events that we found interesting and worth sharing with Gordian clients and our growing network . We provide some commentary and context and where applicable how Gordian Group can help.

The Rise and Rise of Family Offices

I think it is fair to say that capital markets have been changing for placements of risky investments.  The UK magazine, Finance Monthly, recently published an interview with Ian Borman of Winston & Strawn entitled “Why Are Family Offices Engaging More in Direct Investment“.

Borman described a UK reality pretty much in line with what we are seeing in the US – as institutions pursue increasingly large opportunities, many of them appear to be leaving risky middle-market deals behind.  And they are being replaced through capital being provided by the Family Office sector. Borman suggests that Family Offices are being driven to make these direct investments due largely to the lack of sufficiently attractive investment opportunities elsewhere.

He may be right, at least in part.  But that might imply that Family Offices will retreat back to their polo ponies and yachts when interest rates go back up.  We strongly disagree with that implication. Family Offices are sophisticated, well-advised and astute with tremendous wealth-building experience to draw from when considering new opportunities.  This is a broad experience base they can use to leverage their capital. Unlike their institutional counterparts, Family Offices typically don’t have a defined mandate or time horizon that drives their decision process. They are strategic and opportunistic capital providers, and are here to stay as an integral part of the capital markets. 

We have certainly been seeing the trend towards heightened Family Office involvement in our deals, and have bolstered our business to serve these increasingly important Family Office capital sources. Learn more about this below.

Commentary by Gordian Group CEO Henry Owsley

Does Big Oil Have a Do-Or-Die Decade Ahead Because of Climate Change?

The Economist recently published a column (registration required to view article) setting forth an interesting view of the future of oil and gas companies in a world headed to “net zero” emissions. 

The thrust of the column is that the next several years will be determinative for the oil and gas business, as well as its renewable alter-ego.  Trillions of dollars of capital expenditures will have to go into the renewable sector if the US gets really economically serious about climate change.  How this expenditure (if made) is allocated among various constituencies (including the government) is yet to be written.

From a corporate restructuring standpoint, this means that more capital will need to be restructured in energy over the next 50 years than probably any other.  In a world of fighting climate change, existing “carbon-heavy” production will decline and there will be hyper growth in the renewable sector. Both roads can lead to corporate difficulties (fast growth produces both winners and losers).

If the column is correct, a lot of this transition will likely occur relatively soon.  That is a jarring, profound thought.

Contact me if you’d like to discuss this further.

Commentary by Gordian Group CEO Henry Owsley

Double Bubble

For those of us financial types that need to worry about valuations, the years of super-low worldwide interest rates have been puzzling.  This compressed-rate regime has had the direct effect of inflating valuation multiples – lower interest rates translate into lower corporate costs of capital, which translate into higher values.  In other words, many people believe that we are in a valuation “bubble”.

Some pundits argue that the bubble is about to burst.  Others say that the world is now governed by Modern Monetary Theory (MMT), which allows the government to continue to borrow ad nauseum, and to print money to cover the tab.  MMT holds that the low interest rate environment – and high valuations – will continue.

The article “Stocks Rise As Zombie Companies Proliferate” touches upon these issues.

Nonetheless, I think it more than likely that we end up in a bad place here – with the odds going up after the 2020 Presidential election.  Everything else equal, if real interest rates increase, valuations should fall significantly. For many overleveraged companies, this may mean they are virtually shut out of the capital markets, with an arm’s length corporate valuation below that of the company’s debt.

And if that happens, junk bond credit spreads are likely to widen, with a bubble bursting in that sector of the capital markets as well.  In other words, a double bubble.

Commentary by Gordian Group CEO Henry Owsley