Covid-19’s Impact on Fund Launch & Growth

The following is a summary of the panel The Outlook for Private Market Fund Launch & Growth from the Emerging Manager Forum USA. The panel was moderated by Kimberely Evan, SVP, North America Head of Private Capital Fund Services, Northern Trust and panelists discussed the following topics: What was the outlook of private equity pre-Covid-19? How has Covid-19 changed the landscape? What does it look like for minority managers? How have your due diligence requirements and processes changed during Covid-19? How has your relationship changed with investors? What actions are you and your firm taking to future-proof your business beyond Covid-19?  

Please see below for the summarized discussion:

What was the outlook of private equity pre-Covid-19? 

Ajai started by explaining that it is important to structure funds and deals rather than absolute funds. In large drawdowns, private credit suffers from liquidity. It is wise to have a longer-dated vehicle, even before Covid. One’s goal is to let most of your views run through to when the returns materialize rather than worrying about liquidity. In short, Ajai had a good outlook before Covid-19 and stated that you can’t stick everything into a hedge fund and expect success. There will always be certain liquidity events that investors can’t stomach.

Ami followed saying that he was bullish on private markets in general. He believes that it is a long positive environment and that Covid-19 has not changed their basic outlook on the strength of their strategies and managers. People are looking for earning and are not satisfied with minimal returns.  He also stated that interesting and experienced managers are looking to set up shop in the current environment.

Emanuel, in tune with Ami, said that he has an even more bullish outlook noting that 150 funds have been allocated to LA. Private equity has caught onto the secular tailwinds. We have seen a matching up of strategies in the market. He believes there is ample opportunity for traditional equity traders but with all the new entrances, they need to understand that what they were doing 20 years ago does not work anymore.

Kimberely noted that major asset allocators are looking for yields and the private markets are providing them.

Mark touched on the REPO issues and energy supply conundrum. He said that Covid-19 is to public markets what jet fuel is to a forest fire.  He claims that if we really want to achieve the ESG dream, there needs to be a marriage of natural gas and energy generations. Public markets have been a bit more difficult whereas the private equity market is going to yield a significant amount of cash. He said the central banks need a solution. He posed the following questions: How do we structure cash flow that is consistent in tax revenue, handle the migration out of urban to rural, give power to these neighborhoods, and understand the longevity of how the consumer is shifting?  We need infrastructure to get us to the next level, which will be a big player in the private markets moving forward. In short, he says the outlook is great as long as you have strategies that play well for the investors.

How has Covid-19 changed the landscape? What does it look like for minority managers?

Ajai proposed two ways to think about this issue. Firstly, consider that emerging minority managers must launch a product from scratch, a difficult process, with the added complexity of Covid-19. The second way to view this issue is that the minority angle was also very tough pre-Covid-19 and now most investors have turned their focus inward, looking to expand current relationships rather than build new ones. They have ramped up due diligence on managers they were already viewing and people they were already in contact with. The minority angle has been brought to focus lately, but a big issue is that most have AUM well below $500 million or they are not well-known and well-to-do. Investors would prefer to circumvent emerging managers for now so they can use their time more effectively and push what they can through their committee the fastest. In closing, he said it is difficult but not insurmountable.

How have your due diligence requirements and processes changed during Covid-19?

Ami articulated that there have been more difficult hurdles to attract capital. The fact that you can’t spend much time face to face has created a very different atmosphere. The challenges of Covid extend to the entire process as things are taking longer to organize such as an IPO. He is hopeful that the process will get better. The process has changed in that it has lost the personalization aspect, which is a major challenge for the family offices and high-net-worth individuals. 

Kim pointed out that investors actually need to “look into the whites of your eyes” before they can extend that trust.

How has your relationship changed with investors?

As an independent sponsor, Emanuel must run parallel functions. He claims that capital parameters shouldn’t change with time, but it is interesting that during Covid, some capital providers changed their parameters, setting the bar very high. For example, they use to be willing to look at $3 M of EBITDA and now they are at $5 million. All due diligence is assessing different blocks of risk and there are many ways to achieve risk mitigation; there is no need to create artificial barriers.

What actions are you and your firm taking to future-proof your business beyond Covid-19?  

Mark spoke to the fact that you need to feel comfortable with your projects and be confident in your strategy. Most people don’t buy pants without trying them on first, let alone give away millions of dollars. To combat the personalization issue, Mark built a Youtube channel to express his view and introduce himself to investors, showing that through him you can get an abundance of projects. He closed by stating that the manager’s main task is managing risk rather than investing capital, and that leverage kills.

Ami elaborated on their strategy of anchoring teams that they believe are going to be successful in the long-term. They do a thorough background check and at times will go out and meet with folks for a couple of days.  There is no formula for sound-proofing strategy, but they are willing to meet with anyone so that they can continue to learn and work on theirs. He finished by saying that we should all be disciplined in the kind of things you are already doing, bring expertise to round out what you need to do, and spend more time and resources to get it right.

Ajai agreed that you need to speak to a variety of people from different perspectives. He has seen opportunities beginning to spring up that would not have been possible if not for Covid-19. Segments of the market are ripe for acquisitions or partnering. During these times, he has found that valuations have become much more realistic. He said to focus on building sustainable and scalable operations.

Emanuel closed everyone off resounding the themes about sticking to your craft. He said that if you believe you are good at it, plan for bad things to happen, and ensure that your strategy can stay consistent through any market. He followed by advising that you should create a process that you can replicate and partner with others who can help you future proof. Lastly, he proposed that you take advantage of opportunities as they present themselves.

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Panelist Introduction

Moderator

• Kimberly Evans – Senior Vice President, North America Head of Private Capital Fund Services, Northern Trust

Panelist

• Ajai Thomas – Managing Director, Head of Investor Relations, Hollis Park Partners LP

• Mark Rossano – Founder and CEO, C6 Capital Holdings LLC

• Emanuel Pleitez – Managing Partner, East Los Capital 

• Ami Samuels – Partner, Gatewood Capital Partners 

Perspectives on DEI

Below is a brief synopsis of the Illinois State Treasurer’s Office’s 5th Annual Diversity in Investments Forum. Speakers included Mellody Hobson, Co-CEO & President at Ariel Investments,  Don Thompson, Founder & CEO of Cleveland Avenue (Former CEO of McDonalds), and Jose Luis Prado, Executive Advisor Partner of Wind Point Partners (Former CEO of Evans Food Group). The discussion was led by Michael W. Frerichs, Illinois State Treasurer.

The main focus of the event was a discussion surrounding what the Illinois Treasury has been up to in the DEI space and talking with key leaders on how 2020 accelerated conversations on diversity. 

Views on the State of DEI

The speakers started off by discussing their own point of view on diversity. Mellody brought up the importance of a diverse portfolio and the irony that many seem to miss the point when it comes to team composition. Jose foresees a major paradigm shift in people embracing DEI and pointed out that having diversity in an organization can be a selfish initiative to improve results. Don spoke to the issue of the necessity of intentionality in your diversity initiatives if you want the best solutions. He stated that people that have intentionality in their DEI initiative will not run into the “it is difficult to find them” cop out, stating “you just aren’t looking if that is your issue”.

Trade-offs in working with diverse owned firms: a cop out

Panelists claimed that the “trade-offs” are just a ruse and a new form of Jim Crow. Two barriers people tend to claim are that there are not any diverse candidates and that they are losing found talent to the big companies. In response to the first problem, panelists suggest that if you are intentional with your search, you will find great candidates that will bring additional success. To the latter claim, panelists say firms owe it to themselves to try to seek diverse talent because otherwise they are missing out on a major opportunity.

Emerging Managers: not a great term

Mellody, in a strong rebuff of the term “Emerging Manager”, provided the example that you wouldn’t hire an “emerging doctor” to take care of your very sick child.  She said the term is usually used to label capable black and brown folks to give off a misconception that they are lacking in skill. The term should be a diverse manager rather than emerging.

What it takes for a minority to be successful in the investment space

Mellody pointed out that, as a minority one has to will one’s self, work hard, be extraordinary, and literally be able to outwork everyone else. She said that is no issue for us as we tend to be scrappy. She discussed the entertainment and sport industries, explaining how once we were able to make it in, “we dominated”. She went on to describe how the business world is last to realize “our” untapped potential.

On Relationships

A recurring theme of the forum was that Financial institutions need to understand that actions speak louder than words. Panelists suggested that they want diverse vendors but don’t work at understanding what their past actions have been. The panelists offered that the institutions “do the math”. In each area where you spend money, how many diverse candidates do they have? Why? Afterward, once looking at the numbers, evaluate whether your process is fair and work to make it more inclusive.

Don brought up the recurring theme that there are many who say they can’t find diverse vendors. He challenged the audience to think about how people tend to build relationships with ‘similar’ people, and at times one’s social circle is lacking in diversity. He moved to discuss that the level of scrutiny for POC is very high in banking and that institutions need to reevaluate their processes.

Jose closed in saying that diverse candidates know how to make decisions and take decisive action when needed. He stated that the way to break the inertia within the system is to give your toughest problems to small firms and minority players.

What actions do firms need to take who want to expand their diversity initiatives?

In short, Don said to do more in the way of incentives to get the entire firm involved in the process. Jose suggested that DEI needs to be a central initiative and not given to one “Diversity Officer” because it doesn’t work; everyone needs to be involved. He said making an intentional scorecard to gauge your success would be helpful along with disclosing the make-up of your company. Lastly, it is powerful to have diverse candidates that match a diverse client base as it makes better business sense.

General Advice

Jose claims that you have to be a leader, a professional, very good at what you do and able to take risks in your career, as it tends to lead to better results. Expand your circle and help in your community.

Mellody advised that if you are going to be an entrepreneur, it is important to differentiate yourself by having original ideas, so you are not another ‘me too’ company. Have perseverance and also have people in your company that you can depend on.

She also quoted Colin L. Powell who said, “Never walk past a mistake”. From that quote she spoke on how everything you do matters and projects an image. You want that image to be excellence. 

Don suggested to intensely study the industry you are a part of and consumer reactions, especially today. You need to study the game enough to be able to have a decent conversation about the industry. He also said don’t get down on the closed doors. Seek out support from people that believe in you and who tell you the truth. Lastly, he strongly encourages all not to attend pity parties because we are too good for that. Be intentional and don’t let anything stop you.

The State of Tech Investing – Insights from Investors in and out of Silicon Valley

Below is a brief roundup of SuperReturn’s panel, “Land of the free home of the VC: where are the new hubs of innovation in North America?” The panel was moderated by Wan Li Zhu, partner at Fairhaven Capital, and panelists discussed the following topics: Which cities are providing the next wave of VC? What sectors have pockets of untapped potential? How can a manager unlock a new pipeline of talent and ideas?

The summarized discussion is below:

Boston Wan Li Zhu, a partner at Fairhaven Capital, proved that Boston is set up for success in the world of AI. It holds some of the world’s top universities including MIT, Harvard, and Boston University. MIT announced that it will create 50 new faculty positions dedicated to AI. The new additions make MIT’s computer science faculty the largest in the US. Boston thus provides a diverse pool of top-quality talent for early stage companies to pull from to thrive and grow. Furthermore, Amazon recently moved to Boston with 2,000 new corporate jobs. Google followed them in a similar capacity. They will lead the way by training the next generation of product managers and business leaders who will have the tools they need to build successful and innovative companies.

Silicon Valley Lu Zhang, a founder and MP at Fusion Fund shared that despite the COVID-19 pandemic, there is still a lot of capital in the market. Investing slowed during the first couple months of 2020, but as investors’ expectations around the longevity of the pandemic shifted, they began to adapt. Now there are many active investors in the market who have created innovative ways to connect with founders and to continue making investments. The pandemic has accelerated the growth of several industries including tech and pharmaceuticals while also pushing others to improve overall efficiency. Healthcare accounts for roughly 20% of the GDP and yet is still with many issues including availability, accessibility, and overall quality. Implementing and integrating healthcare technology into the industry can help dramatically improve many of its shortfalls. However, there are mounting concerns about the digital transformation in healthcare, as in any other industry, because of data privacy. Data privacy is a major risk for many companies and there has been an uptick in companies solely focused on protecting the many layers of data. Lastly, a new sector that has seen some growth, especially during the past few months, is tech surrounding mental wellness. Lu is hopeful that growth in this sector can help support the many individuals who are struggling with the current times.

Remote Teppei Tsutsui, a MP at GFR Fund who is focused on the gaming industry, is currently interested in virtual companies for two reasons. For one, virtual companies have an edge as they have the capacity to hire talent from a global pool of individuals rather than being restrained to hiring in select locations. Hiring from global talent also provides the benefit of potential cost savings. Secondly, virtual companies are better able to focus on their product development as they are not burdened with the same challenges that non-virtual companies face.

Los Angeles Emanuel Pleitez, a partner at East Los Capital, explained that LA represents a major part of the total US economy and yet it is still lagging in venture dollars compared to other rising VC hubs. However, LA’s proximity to Silicon Valley gives it a leg up in potential growth. Individuals only need take a 45-minute flight to commute between the two locations which gives the sense that LA is simply part of the broader Silicon Valley Community. In addition, LA investors are global in nature and there is a lot of positive to come from their presences. For example, big names like Elon Musk, Peter Thiel and David Lee live within the region and are helping the VC community grow by bringing their expertise and direct investments. A perfect example is the recent addition of SpaceX to Los Angeles. LA has also housed many successful bootstrap companies including ZipRecruiter, Grindr, and Onica.  A major recent win for LA was the $4 billion dollar sale of Honey to PayPal, which shows the promise of the region’s future success. Like Boston, LA holds major universities such as UCLA, USC, & CalTech (who holds a consistently ranked computer science program) which provide a wealth of talent to inspire growth and innovation to further LA’s ability to become a major VC player.

New York City Brian Schuman, an Investment Professional at PepsiCo Technology Ventures shared that the food and agriculture tech space is experiencing a dilemma. The industry is growing, but the dollars just aren’t there. Investors are seeing huge multi-billion dollar exits, but not from this segment — which is discouraging them from investing in the industry. There is a hope that investors are beginning to see that companies in this space have real world impacts and that this realization will drive more dollars into food and agriculture tech. He named Impossible Foods and Beyond Meat as two recent success stories to show the potential in the industry. As for NYC as a whole, investment activity has been slower, but in other locations where agriculture is more main stage to the economy like the Midwest and New Zealand, food and agriculture tech has been experiencing growth.

Emanuel Pleitez Speaks on “How To Grow Your Money” at The Trend Talk Show:

Emanuel Pleitez Speaks on “How To Grow Your Money” at The Trend Talk Show: Upskilling and Investing

The Trend Talk Show is hosted by Bel Hernandez and Marabina Jaimes. In their latest episode, Emanuel Pleitez joined the conversation and led a “How To Grow Your Money” segment that highlights the importance of building wealth by upskilling and investing. During the interview, Emanuel shares a bit about his upbringing in East LA and how it impacts his work and diverse portfolio, as the co-founder of East Los Capital.

Listeners can learn more about companies like Sabio, who live at the edge of education and technology, as well as international companies like Glitzi, who are the tech-leaders within the wellness and beauty services industry.

Find the full interview at: https://www.facebook.com/emanuelpleitez/posts/10105694380038553.

To learn more about East Los Capital, Sabio, Glitzi and the Trend Talk Show check out:

https://eastloscap.com/

https://sabio.la/

https://glitzi.com.mx/

https://www.instagram.com/thetrendtalkshow/

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Summary Keywords: East Los Angeles, Glitzi, East Los, Stanford, Sabio, upskilling, code, money, capital, community, investing, impact, grows, salary, wealth, education, technology, opportunity, investors, pay, mayor, investment, career

Marabina: Coming up next, one of our special interviews on money with Emanuel Pleitez from East Los Capital. 

Bel: He will show you “How To Grow Your Money” like magic, so don’t go away we’ll be right back. 

Marabina: Today we welcome a Stanford Graduate, former Goldman Sachs man, who was candidate for mayor of Los Angeles in 2013. He didn’t become mayor but he did join forces with our Mayor Eric Garcetti serving on his team. All this from someone raised in East Los Angeles, and the first to graduate college from his family is the chairman of the Hispanic Heritage Foundation, and a founding member and partner of East Los Capital private equity firm. Please welcome Emanuel Pleitez. 

Bel: Thank you for joining us, Emanuel. I’m on why we’re so excited to have you.

Emanuel: Thank you so much Bel and Marabina. I am excited to be here, thank you so much for inviting me.

Bel: Of course you’re such a success story. Tell us about the beginnings of where you decided you wanted to go off to college and you chose Stanford or Stanford shows you, and then you decided to get into the financial world. Tell us about that. 

Emanuel: I appreciate that so I am a product of East Los Angeles, mainly in the neighborhood of El Sereno, and went to public schools in the South Central and the East LA area. Up until high school, and then at that point I was one of the lucky ones to excel, I think, playing sports and kind of staying busy allowed me to spend more time on campus instead of on the streets. And that allowed me to apply to a bunch of schools all over the country the Harvard’s and Princeton’s of the world and and Stanford and I thought Stanford just offers the best opportunity to not just excel academically but also provide student life and and other opportunities I was a big basketball player and cross country runner and they were you know one of the best basketball schools in the country at that point Final Four, and cross country they were the best in the country so that was sort of what what what kind of closed the loop for me. But, you know, I was, my, my goal was to go to Stanford and come right back and be a teacher. That’s, that’s what I wanted to do and get back to the community and Stanford allowed me to kind of broaden my horizons and say you might also want to try other things and see what what else could fit and and over time I learned about not just education which is what I studied or in education but also politics and how policy impacts education impacts our daily lives, but also then what moves, sometimes politics, which is not always, always pretty but there’s money involved. And so I started following the money trail and said, “Who makes the money and who makes the decisions?” And that’s what led me eventually to finance, and I got on Wall Street and did other things and, you know, but that was sort of the transition from the do-good community, Get involved in politics to kind of think about policy but then realize, who’s really behind the scenes pulling the strings, and there’s a lot of people in finance that get involved behind the scenes, I see him living there.

Marabina: Right, well that’s so important. I mean we touched a little bit on the fact that you ran for mayor of Los Angeles, and ended up working with our mayor in their car setting, but I want to turn to what you’re doing now, I want to turn to EastLos capital. I mean looking over that portfolio of companies that you hold you have some very interesting companies, you know, technology and others in education, and one company that stood out for us is Sabio. Tell us a little bit about how Sabio works and how people can find out more about it.

Emanuel: Absolutely. So I’ll start with the fact that we created this new firm East Los Capital, my partner and I, Anthony Valencia and myself. Anthony also was actually born in the East LA area right by Cal State LA, similar similar to me, so we have that story and so just by starting with the name East those capital, although we are a mainstream private equity fund that’s going to, you know, drive the best returns for our investors, we thought, what better way to kind of represent where we come from and quite frankly, the history of East Los Capital was, which is plenty of people from various ethnicities and races have arrived into East Los Angeles, now’s a good way to the Greater LA area and so we thought that there’s a lot, a lot of symbolism a lot of story there. Even in our investments. While we are not a quote on quote impact investment firm or a diverse investment firm, even though we’re 100% diverse owned. We look for really good businesses. And we believe that we need to rely on our strengths, which is our networks where we’re from how we understand businesses and how we look at good businesses that maybe the rest of the market is undervaluing. And quite frankly, a lot of times that ends up being folks of color, building companies and so kind of bridging to Sabio being one of my favorite investments is that Sabio is founded by a Latina and Latino couple. They are both immigrants one from Colombia one from Mexico, but they’ve come to this country and have already had personal success, but they have decided to build this company that actually started as just, I just want to help people of color, people, women folks that come from underrepresented backgrounds and help them get into technology. That turned into a real business model that actually could be used by anyone, not just folks of color, not just women, but anyone that wants to get into technology and so right now it’s it’s essentially one of the best technical training platforms to get folks into technology, and if I drill down even more specifically, full stack web development, which is essentially the software engineer profession, which is one of the fastest growing professions in the country. And if you add salary on top of that it’s actually the best profession because it’s top the fastest, and it makes six figures. After a few years in that industry but in that profession. So, so that’s what Sabio trains people to do, is to get that entry level software engineer job, the live salaries about 20 to 23,000, on average for someone, based on their prior job to their first job as a software engineer, and they have great results so it’s one of these things where it’s like, it just so happens to be founded by someone of color and a Latina, nonetheless, but it’s just taking advantage of the secular tailwind in this market and the, and it’s looking forward to where this economy is going

Marabina: Well I mean, since we’re experiencing, of course, you know the pandemic and people are reevaluating where they are and, you know, interesting things that they could do especially, I mean, as you know, I have an 18 year old who would get into USC, but there are many people think, trying to figure out what to do next. And I love, I love the model of Sabio which is, it’s kind of a subscription service to education… 

Emanuel: Yes! 

Marabina: … With a huge payoff. In the future, and so you subscribe to learn. And when you start hitting a certain number, then you pay the tuition. Brilliant. I really believe in that and I also. I mean I have to congratulate you and of course, the couple you mentioned because it’s a brilliant idea. You know, if you have time to just think a little bit about how things could be done in a better way. I mean this is the perfect example, instead of, you know, just focusing on “Oh no, I won’t be able to get that future I want,” how about, “let me learn what’s available to me right now, that has asked me, probably as much as you know, going to a fast food restaurant this week.”

Emanuel: Not exactly. And I say, I like to say this was a great idea. In February of this year, but it’s even a better idea today because of COVID-19 quite frankly it’s hurting, it’s impacting our families, especially families that come from underrepresented groups, low income groups, right i mean the Federal Reserve is put out there how the folks that have 40% of income levels or below are had the highest unemployment rates like 40% of unemployment even more so. So, we are hurting the most. And so Sabio kind of hits that trigger we said it’s affordable, we’ve tried to lower the barrier where we’re de risking it as much as possible where we try to say, Netflix until at $8.95 or Sabio and Code at $8.95. And that’s all you have to pay. Now, when you get a job, then we say, Okay, we got to that job that’s not paying you $22,000 more for some people, even a lot more if you’re making minimum wage, it could literally triple your salary. After you finish Sabio that at that point will charge the kind of what it really costs to deliver that instruction because you get hands on instruction. But if you never get a job, you don’t have to pay. So, Sabio takes the risk upfront. And you won’t, you pay $8.95 right so you pay $8.95 a month. But then you don’t have to pay anything else outside of that and you can just stop doing it if it’s not working for you. And the one thing is that there’s, there’s been a lot of in the last seven years talk about like how there’s free content out there for for education, right free learning MOOCs massive, yeah, massively open online courses, but a lot of folks see, they still need someone to ask questions to right and so for some people open free content could work right but for the average person having an instructor having someone there and so Sabio is the only one that before you even start paying the $8.95, we have two courses — one that’s intro to web development, and the other is intro to JavaScript which is, you know, it’s one of the most important things that you should be learning today for free. And so you join the slack community of Sabio you learn that for free and you can actually ask questions and instructors will respond and get back to you so that’s basically how a lot of folks, learn about it, and then they’re like, “Oh, I could do this if I have an instructor,” and they move forward so anyway I’m excited as an investment opportunity but I’m also excited it’s just like a company that is needed in this day and age given COVID-19 given the unemployment rate given the opposite the lack of opportunities from a job perspective but it’s also the opportunity for you to say you know what, let’s switch careers or maybe let’s, this is my entree into the future of my career.

Bel: This is a great segway because I wanted to ask you about building wealth within our community. We as a community and Latino community we need to start learning about money. We need to start being comfortable with ways of saving and investing, and I believe what Sabio is doing is investing in our communities so investing in wealth within our community. So, what would you say to people who and how important is it to build wealth within the community? Now this is an example that Sabio is doing well. What other ways can companies or individuals build wealth within our community?

Emanuel: Yeah so, so I say there’s sort of three things. The lowest hanging fruit is upskilling your career so you just get higher pay right because you can have it if you’re in one career. Over time, you get experience you might get some pay raises right but usually those pay raises are actually pretty small. And quite frankly, you’re missing out on what the rest of the world the, the billionaires out there that people that own assets they’re they’re appreciating a lot more right so you’re actually not building any wealth by just staying in your career and allowing your company to just give you a little pay raises. So upskilling is number one right because that could be a demonstrable difference in a year’s time all sudden you go from whatever you are to 20% more that’s immediately wealth building better than the stock market. However, that’s sort of the easiest and easiest to understand that everyone can do. However, if you really want to make money, then you need to put your money to work right and you hear the adage is there’s a lot of YouTubers out there that’s like that let your money work for you and I’m not so much on like there’s, there’s a lot of schemes out there right, but the tried and true the truism out there is diversification. Right, and actually own something, own something where that thing has some intellectual capital and is and is growing. Sorry, there’s a train,

Bel: If you don’t get on the train, you’re gonna lose out.

Emanuel: The train is emblematic. Get on the train right.

Marabina: Get on the train!

Emanuel: Get on the investing train.

Emanuel: And so if you don’t get on the investing train these assets will continue growing with or without you. They don’t need you. But if you put a little bit of money in, then it grows right and you know some people talk about real estate is good. You know I don’t, I am not a real estate investor but real estate grows a certain percentage right. And because the bank is willing to let you borrow a bunch of money, you can, what’s referred to as leverage or basically juicing your return, your equity returns. That’s a little bit more technical, but whether you’re making your dollar worth really a lot more in a fast rate but if the market goes down that the dollar could literally disappear right that’s when you use debt that’s what happens if on the upside, you actually make a lot of money on the downside you literally can lose all your money. So that’s what happens. And so I say, proceed light you know lightly with real estate but it did but it makes all the sense in the world especially we’re gonna live in that house. But then you needed to diversify the biggest investors in the world the pension funds that the insurance companies, they do this all like that’s what they do and they usually have about 10-15% real estate, they have about 60-70% in equity broadly that means public stock and private stock, and then they had maybe have about 20% in fixed income which is bonds, right bonds and essentially loans. And so when you think about that and you’re like, well, what the best investors in the world are doing this and they’re the ones that are holding this money for decades. I should be doing it as well. And so I say at minimum, you should be trying to diversify that way and there’s various ways you can do it I, I can get into the details, but the main thing is best in a number of things that look different than each other and the magic number that the theory and the academic say is you have to buy 30 different things that may be a little too much for some people, maybe just buy 10, maybe buy eight or so, as long as they look different right so maybe one is your house, and then you know the other seven or so are other things other types of companies that kind of come in different industries. And that’s just the best way to diversify. So the first is upscaling and getting your salary up. The next is, is, is investing and I would say there it’s two different things you could either just put your money in the stock market. Right. However, if you really are sort of forward thinking, then you put money in companies like Sabio other private market companies. Now that is obviously way more riskier because you have to understand the business and I’m happy to be available for the future for any of your guests to talk about that, but that’s what I specialize in is how do you analyze a private company where no one tells you how much it’s really worth. And you can still invest in it and that’s still equity, and that usually gets a much higher return. If you’re investing at a, you know, at a fair market value so those are sort of the three ways. 

Bel: So, invest in your own community, maybe businesses like you do. That’s what you’re exactly.

Emanuel: Exactly, yeah.

Marabina: What are some of the other companies that you hold?

Emanuel: So, my partner and I have 23 portfolio companies so East Los Capital based on Anthony and my investing even before we created the firm. And so we sort of inherit those companies. I personally, the ones I’ve invested in the last few years, one a Sabio. The other is a company called Glitzi, which is based out of Mexico City. It’s in the wellness space beauty services and massages on demand. Now obviously impacted by COVID-19 but because of its technology, A lot of beauty salons are actually calling that company to help them book appointments online.

Bel: We want to know where people can find you, Sir, and tap into your knowledge, and then they can learn about all of the other websites that you mentioned,

Emanuel: Absolutely. So my name is Emanuel Pleitez, it’s very unique name, “P-L-E-I-T-E-Z.”It’s actually Salvadoreño. Emanuel with one “M”, almost all my handles whether it’s, Twitter, Instagram, or anything else you could find me on Snapchat. It is my full name, and my latest tech talk, everything. And then on LinkedIn I’m the only one notice on LinkedIn so you can you can find me there or if you know, East Los Angeles if you know how we say when we grew up in East Los Angeles, East Los, even simpler. Lookup two syllables, East Los Capital, and you’ll find me. You’ll find all about me and I write, I do, I do blogs and I you know I love to just share knowledge because I think that’s the only way we’re gonna allow more people in, and my big vision is that the more people that get access to this information, the more people are invested, the better the investors actually going to be because you’re going to have more capital, hopefully making good investments.

Marabina: Well we have really enjoyed having you and when we thank you so much, and everyone else don’t forget to follow him and like this, and follow us, The Trend. 

Marabina: Thank you for watching the trend talk, and we leave you with a special trend talk trendsetter shout out to Sabio.la, a virtual coding boot camp that doesn’t charge tuition until you land your first computer programming job. For more information go to Sabio.la.

Bel: And remember to follow us on Instagram, at the Trend Talk Show, because you know if it’s trendy

Bel and Marabina: We’re talking!

Cut out the payments middleman – let Finix empower you to include payments in your software stack

I’m excited to be part of the Finix journey to cut out the payments middleman for software companies. I’ve been there from the very beginning as an investor hearing Richie Serna break down payments infrastructure for me to now helping Finix develop partnerships with private equity and venture capital firms — especially those that may have missed my outreach back in 2017. Don’t worry it’s not too late to be part of the Finix journey. We can help your portfolio companies increase their revenue now and we can all still win together.

Today, we announced that Lightspeed Venture Partners and American Express Ventures has officially joined the Finix team, which includes another $30M raised bringing the total raised to $96M. Lightspeed and AmEx joins our earlier investors Act One Ventures LP, Class 5 Global, Homebrew, Insight Partners, Bain Capital Ventures, Inspired Capital, Precursor Ventures, Activant Capital, Acrew Capital, Village Capital, Visa.

Finix is creating a new financial services category of payment facilitation and we’re on a path to disintermediate payments infrastructure. It doesn’t have to be that complicated and there’s no need for a middleman taking a cut of the revenue from your customers. You’ve earned it and Finix will help you keep it.

Here are a couple examples for how Finix customers are using Finix technology to provide better products for their own customers and in record speeds during this COVID-19 pandemic:

• Kabbage, a small businesses cash flow provider, used Finix to launch a digital gift card solution for small businesses in a matter of days.
• Passport, the mobility management platform, has spent the pandemic helping cities like Austin, TX and Atlanta, GA migrate to mobile payment solutions built on our payment facilitation platform as they embraced contactless parking.

Also, the Finix team continues to grow as we recently announced some power hires in:

• Kavita Jiandani as Director of Product, Gateway; Former: Director of Product, Payments Product and Engineering at PayPal
• Adam Hollis as Enterprise & Strategic Business Development; Former: Business Development at Infinicept
• Jonathan Sousa as VP of Customer Success; Former: Head of Customer Success at Scoop

They’re joining an already incredibly talented team with unique payments experience, including team members such as:

• Girish Balasubramanian as VP of Product & Data; Former: Payment Methods Product Management, Stripe
• Billy Chen as International GM; Former: Director of Payments, Uber
• Austin Spires as Director of Technical Solutions; Former: Senior Director, Customer Incident Response, Fastly

Our team is now at over 80 people while at 15 only a year ago. Don’t hesitate to be part of this payments revolution Finix is leading, join us here: https://learn.finixpayments.com/jobs. We’re looking for the best and most motivated payments talent on the planet.

In terms of recent results, Finix customer transaction volume grew 4.5x from Q2 2019 to Q2 2020 giving us even more confidence that we—and our customers—are on the right track. That’s some of the fastest transaction volume growth in history. Our early customers understood the value right away and are now seeing the results in revenue growth and an increase in their valuation. Read more about all of Finix’s recent news on the Finix blog: https://blog.finixpayments.com/.

As a reminder for what Finix does, read my post here: Finix is doing for fintech what AWS did for web services. Finix empowers vertical software companies to create a superior payments product experience while holding onto 50 to 100 basis points (bps) per transaction instead of letting yesterday’s payments companies act like unnecessary middlemen and take that revenue from the software companies. The software company can now reinvest that revenue into better customer experiences and product development.

We’re on a mission to empower software companies to include payments in their product stack. While fintech is full of folks acting as middlemen taking a slice of each transaction, Finix allows you to facilitate payments without the middlemen. Finix can empower you to take back the payments stack!

Round up of the last few months; COVID-19, CARES Act, Treasury, Federal Reserve facts/figures; portfolio company news

As we move toward the end of the 3^rd month since most of the largest U.S. cities went on lock down, we are seeing the market hit an 11-week high and the fear of missing out kicking in with more and more investors. While the $2.9 trillion of fiscal relief and $4 trillion of liquidity along with an expectation for more fiscal stimulus has supported the market, we must recognize that the Fed policy has drawn a line in the sand for which companies will survive and which we are okay if they do not.

The distressed sector is diverging from the rest of the credit market. Central bank policy is driving the market. According to Mike Swell, Goldman Sachs Asset Management Co-Head of Global Fixed Income Portfolio Management: “Policy is easy and the Fed is buying corporate credit for the first time. Very very significant support for the market, which gives companies the ability to be able to access markets and to be able to term out their debt and that is the most critical factor to a company’s ability to be able to survive…People are comfortable that there is a backstop from the Fed…U.S. market is the high yielding market in the globe…People have to go somewhere and they’re going to the U.S. credit markets as that safe haven. And the Fed now is looking at credit as a very very important policy tool….Global demand for yield as well as support from the Fed is a very very supportive backdrop for credit.”

Remember:

2008 amount of BBB rated bonds: ~$700 billion

2020 amount of BBB rated bonds: ~$3.4 trillion

We still do not know how everything will shake out as we do not know how the re-openings will do and no investor has ever been through a pandemic like this. What we do know is that the digital transformation of society just got accelerated these last three months.  

At East Los Capital, eastloscap.com, we are watching our thesis play out in real-time. The pandemic environment reinforces our belief that companies optimizing their businesses around technology will be the most agile and best poised for growth in all market environments. We will continue to look for opportunities consistent with this thesis and at reasonable valuations.

Below are some quick updates from my portfolio companies, commentary on the markets and other ideas, and a summary of key facts and figures from COVID-19 related government actions. And before reading on, remember George Floyd and too many others: https://newsone.com/playlist/black-men-boy-who-were-killed-by-police/.

Finix Payments

Learn about the payments layer cake from Richie Serna and the Finix team:

https://blog.finixpayments.com/payments-layer-cake-questions-answered

Passfolio

Passfolio’s mission is to democratize investment opportunities by creating a unified, global, and borderless investment market. Today people outside the United States often need hundreds of thousands of dollars to invest in the U.S. stock market. Passfolio reduces that minimum to $1 to invest in U.S. stocks such as Tesla (TSLA), Apple (APPL), and Amazon (AMZN). We are now building a unified global investment marketplace with the goal of offering investments from all over the world, to anyone in the world, through a fast, easy, and secure mobile app. See a note from Passfolio’s founder: https://www.passfolio.us/posts/o-compromisso-da-passfolio-com-voce-hoje-e-sempre

Sabio

Article from my associate, Claudia Diaz: “Rethinking the value of higher education? Go from learning to earning, Harvard or Sabio coding bootcamp”

https://blog.sabio.la/rethinking-the-value-of-higher-education-b91668346f

Sabio became 1 of about 7 total preferred training providers nationally for the VET TEC Program in the Summer of 2019. We enrolled our first students in September 2019, and graduated our first cohort in Dec 2019. Within a month, our first VET TEC Fellow secured a job in January 2020. Those are results and what is going to drive this country forward. Thank you Liliana Aide Monge and Gregorio Rojas for your leadership.

I’m excited for all my fellow veterans showing courage in taking the plunge to learn a new career. We show it through bootcamp and our military schoolhouses, we show it in combat zones and while training other countries, and we have no issue showing this economy how to move forward.

See Liliana’s informative post for U.S. Veterans, which is one of the reasons Sabio is a leader in technical training for Veterans: https://blog.sabio.la/vet-tec-status-update-all-the-details-military-veterans-need-to-know-5ee4e373f277

Harrison Tang, founder/CEO of Spokeo and our East Los Capital Advisor, on importance of attitude in crisis: https://www.starterstory.com/spokeo-people-information-search-tool

Hispanic Heritage Foundation

As Chairman of the Hispanic Heritage Foundation, I was thrilled to announce we were partnering with Northern Arizona University to promote academic cooperation and human capital development, through research and education. Thank you to Dr. Joseph Guzman and our President/CEO Antonio Tijerino for the leadership and vision.

As part of the cooperation, both orgs commit to:

• Exchange of materials in education, research, publications, and academic info
• Development of joint proposals to funding entities (federal, state, institutional) for projects of mutual interest
• Joint meetings/seminars for training, education, and research
• Technical assistance, to include strategic development and consulting
• Student exchange and liaison
• Conducting research on HHF programs across US including Code As a Second Language (CSL)

We are ready to put in the work with NAU, a world-class research institution, which will help us move our mission forward in ensuring Latinos and Native Americans have a stronger path to STEM. Research is critical to better programs, strategies and services in support of the underrepresented in the STEM fields, not because of talent but opportunity.

Recruiting, nurturing and graduating Hispanic and Native American students in the fields of STEM is a priority at NAU.

Got some of my own quotes in the press over the last few months:

https://www.pehub.com/capvests-curium-shelves-potential-3bn-sale-amid-downturn-bain-capital-ventures-backed-vetsource-weighs-options-great-hills-chris-gaffney-talks-downturn/

The uncertainty in the market has also exposed which portfolio companies are better positioned to operate independently, and which tend to depend on capital markets as they burn through cash, GPs told me.

This has been especially relevant for lower middle-market and VC-backed companies, Emanuel Pleitez, co-founder of East Los Capital, a Los Angeles-based investment firm, told me.

“There are some PE- and VC-backed companies that are still comfortable burning a lot of cash. GPs are now telling them they may not [have] access to capital markets in the next two years,” Pleitez said.

According to Pleitez, those kinds of companies need to create a budget that is different from the one they had before to foster a new culture.

https://www.pehub.com/how-working-from-home-will-change-the-way-private-equity-interacts-cppib-closes-1bn-plus-portfolio-sale-in-downturn-pine-island-seals-first-deal-alongside-bain/

“Yes, the uncalled capital is unused by private equity firms at the moment, but it’s not unused by the limited partners (LPs) of the private equity firms. This “dry powder,” or uncalled capital, does not mean it’s actually cash just sitting there. LPs have this uncalled capital in other “like” securities, which means it’s likely invested in the stock market. That means it’s ~20% less available than it was on Feb 19, 2020. Yes, there will be private equity firms that will benefit greatly because they specialize in investing in this environment. And even the ones that don’t specialize will benefit from lower valuations. However, the uncalled capital:

1) Is not new cash that is uninvested. As LPs will likely have to sell stocks to finance the capital calls. Some less sophisticated LPs (usually LPs of smaller funds) are actually already missing capital calls because they don’t have the capital available. The more sophisticated ones are obviously more likely to hit their capital calls, but they still likely have to sell something to get cash and wire it to the GP. So all in all this will be closer to net neutral on the impact to capital markets and the economy

2) Could be used to make investments at lower valuations into portfolio companies of other PE firms, but it is usually not meant to save a failing portfolio company. PE/VC firms do have reserves to invest more into their portfolio companies, but an LP would want any new investment to be made at an appropriate valuation. That means the PE firm needs to at least run some sort of a process, otherwise there would be a conflict. The loss of value has to occur. LPs do not want “good money chasing bad,” they want better investment opportunities, which will likely be new investments.”

https://www.mergermarket.com/info/startups-ask-investors-waive-rights-turn-debt-stay-afloat (Nothing that insightful from my end in the article, but good article for how startups are dealing with the current environment.)

“Another option for VC-backed companies facing a cash crunch may be non-bank lenders or venture debt firms that offer minimally diluted loan products, said Emanuel Pleitez, co-founder of East Los Capital, a middle market private equity fund.”

Summary of fiscal relief/stimulus and Federal Reserve liquidity facilities – could not find this anywhere else, so decided to put it together as a reference for folks

To date: $2.9 trillion in fiscal support for households, businesses, health-care providers, and state and local governments—about 14% of GDP

Including $195 billion of Treasury liquidity for $2 trillion of liquidity; ~$4 to $4.5 trillion expected

1) Coronavirus Preparedness and Response Supplemental Appropriations Act: $8.3 billion

2) Families First Coronavirus Response Act: $192 billion

3) CARES Act: $2.2 trillion (initially reported as $2.3 trillion)

4) Paycheck Protection Program and Health Care Enhancement Act AKA COVID-19 3.5 bill: $484 billion

COVID 3.5 Act: $484 billion

– $310B for PPP

– $60B for SBA disaster assistance loans

– $75B for hospitals

– $25B for testing

CARES Act:

$497 billion to large corporations, i.e. $454 to Treasury for lending

$377 billion to small businesses – i.e. $349B for PPP

$293 billion cost of $1,200 rebate

$268 billion cost for FPUC

$265 billion in tax incentives

$150 billion to state and local governments

$146 billion for public health

$31 billion for education

$150 billion for Federal departments and other discretionary

https://www.cbo.gov/publication/56334

Organizations that employ 60% (small businesses 50% and non-profits 10%) of workforce got only ~17% ($377 billion) of funds from CARES Act.

Total CARES Act: $1.7 trillion total excluding Treasury equity; $2.2 trillion total

$454 billion in Treasury equity for $4 trillion of Federal Reserve potential liquidity through various facilities

Currently: $195 Treasury equity accounts for $1.95 trillion in Fed liquidity

• $75 billion Treasury equity levered to $600 billion in liquidity for 3 Main Street Facilities
• $75 billion Treasury equity levered to $750 billion in liquidity for 2 Corporate Credit Facilities ($50B equity for primary, $25B equity for secondary)
• $35 billion Treasury equity levered to $500 billion in liquidity for Municipal Liquidity Facility
• $10 billion Treasury equity levered to $100 billion in liquidity for TALF

https://www.federalreserve.gov/newsevents/funding-credit-liquidity-and-loan-facilities.htm

$259 billion currently retained by Treasury to expand current facilities or support more Federal Reserve lending programs

Money Market Mutual Fund Liquidity Facility (MMLF): https://www.federalreserve.gov/monetarypolicy/mmlf.htm (Treasury’s Exchange Stabilization Fund will provide $10B of credit protection)

Primary Market Corporate Credit Facility (PMCCF): https://www.federalreserve.gov/monetarypolicy/pmccf.htm ($50B Treasury equity for ~$500B in liquidity)

Secondary Market Corporate Credit Facility (SMCCF): https://www.federalreserve.gov/monetarypolicy/smccf.htm ($25B Treasury equity for ~$250B in liquidity)

Term Asset-Backed Securities Loan Facility (TALF): https://www.federalreserve.gov/monetarypolicy/talf.htm ($10B Treasury equity for $100B in liquidity)

Municipal Liquidity Facility: https://www.federalreserve.gov/monetarypolicy/muni.htm ($35B Treasury equity for $500B in liquidity)

Main Street Lending Program: https://www.federalreserve.gov/monetarypolicy/mainstreetlending.htm ($75B Treasury equity for $600B in liquidity)  

Main Street New Loan Facility (MSNLF)

Main Street Priority Loan Facility (MSPLF)

Main Street Expanded Loan Facility (MSELF)

Other facilities:

Primary Dealer Credit Facility (PDCF): https://www.federalreserve.gov/monetarypolicy/pdcf.htm 

Central Bank Liquidity Swaps: https://www.federalreserve.gov/monetarypolicy/central-bank-liquidity-swaps.htm

Temporary Foreign and International Monetary Authorities (FIMA) Repo Facility: https://www.federalreserve.gov/monetarypolicy/fima-repo-facility.htm

Municipal Liquidity Facility to issue Upskilling or Future-of-Work Bonds

The Fed expanded the Municipal Liquidity Facility on April 27 by lowering the population threshold to include

– counties with at least 500,000 residents and

– cities with at least 250,000 residents.

Also, the maturity of the notes could be up to 36 months. It was 24 months when they first announced it on April 9.

https://www.federalreserve.gov/newsevents/pressreleases/monetary20200427a.htm

My idea is that municipalities and states should consider issuing something like Upskilling or Future-of-Work Bonds to provide funding for technical training. Use this crisis as an opportunity to support the transition of the workforce. As there are more unemployed folks out there, there might be more interest in career switching into more technical roles with higher longer-term potential income. Might as well use the Fed backing for good.

Animal Spirts

In case you’re wondering why more talking heads on financial news are calling on “animal spirits,” Keynes: spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. I feel like “animal spirits” has replaced “bespoke” as a more common Wall Street term.

Hertz case study

HTZ is a great case study for any aspiring investor. HTZ was a Wall Street darling in 2006 through mid 2007, then went almost straight down over a year to bottom at under ~$5.50 in Nov 2008…then you could have made a over a 19x return in less than 6yrs (take that VCs) riding it up to over $105 in 2014. However, as investors smelled competition, impact of ridesharing services, some divestitures, and balance sheet deterioration, the stock went nowhere but down.

Lots of takeaways, including the impact to the auto industry as last year, car rental companies bought ~10% of the US auto industry production (1.7 million automobiles). “Smart” investors get it wrong sometimes — Carl Icahn owns almost 40% of HTZ and was buying through at least March. HTZ was not “essential” enough to get bailed out like Boeing and the airlines. Debt takes down brand. And, even all the Fed’s programs couldn’t save it. Oh and for the consumer looking for a car, get your discounted purchase at hertzcarsales dot com 🙂

Bankruptcy (Chapter 11-type) doesn’t mean liquidation, so the brand will still survive for now, but creditors will have to eat some as equity holders are almost (should be) at zero. Equity holders still in are holding out for some leniency from the bankruptcy process and the ability for Hertz to survive.

No, $2 trillion of private equity “dry powder” will not save economy

There is anywhere between $1.5 trillion to $2 trillion of private equity “dry powder,” however, there is a misunderstanding on the potential impact of the dry powder getting finally deployed.

First, we should all get on the same page of what is private equity “dry powder.” It is simply uncalled capital by private equity firms. It is not a “cash pile” or “unspent cash” as some reporters and “experts” like to speak about it.

Second, there is a flawed assumption that private equity firms have the ability to call all their capital at once. Without getting into the mechanics and difficulty of just getting one transaction done in the private markets, we just need to consider that most private equity firms have a 5 year investment period. That means that most private equity firms expect to deploy the capital over 5 years. In fact, the private equity firm’s general partnership (GP) in charge of one fund takes pains to explain to limited partners (LPs) during the fundraising process of that fund that they will adhere to a particular investment cadence. The GP takes great care in explaining how they are really good at what they do and that they have a plan for how to deploy over the 5 year investment period. Once the fund is set up, the closest thing to a governing body of a the fund is a Limited Partner Advisory Committee (LPAC). LPACs are there to ensure the Limited Partners have the means to do something about the fund if the GP does not do what they said they would do. LPACs would not be happy if all of a sudden a private equity firm decided to call all their capital at once. So no, “dry powder” is not going to get called all at once to save the economy.

Third, while the “dry powder,” which again is simply uncalled capital, is technically “unused” by private equity funds, it is not “unused” by the LPs of the private equity funds. The capital is actually not cash just sitting there. LPs have this uncalled capital in other “like” securities, which means it’s likely invested in the stock market. That means it’s ~20% less available than it was on Feb 19, 2020. To all my reporter friends whose sources say this dry powder will benefit the economy or will prop up companies, please ask follow up questions.

Yes, there will be private equity firms that will benefit greatly because they specialize in investing in this environment. However, the uncalled capital:

A) is not new cash that is uninvested as LPs will likely have to sell stocks to finance the capital calls, so net neutral on impact to capital markets and economy, and

B) could be used to make investments at lower valuations into portfolio companies of other PE firms, but it is not meant to save a failing portfolio company (that would usually be a conflict) – an LP does not want “good money chasing bad,” they want better investment opportunities, which will likely be new investments.

In sum, “dry powder” is not new cash for the economy. And, private equity firms will likely benefit because they will be able to buy new companies at lower valuations than 45 days ago. However, that does not mean the economy will benefit. The value has already been destroyed.

Commercial eviction moratorium references — extra focus on some cities including Los Angeles, Irvine

I did this summary with references on eviction moratoriums in California due to COVID-19, with a focus on small businesses renting commercial property in the counties of Los Angeles and Orange. I specifically highlighted the cities of Los Angeles, Culver City, and Irvine as I have some portfolio companies with offices there. There is a lot of confusion out there, so hope this is helpful for others. I am happy to chat with anyone that needs help figuring this out. For full disclosure, I am not an attorney, I just read when I can and I have learned some decent online searching skills over the years. I also enjoy opportunities to marry my investing and general business background with my political and government exposure. The press has done a decent job covering all these Coronavirus-related moratoriums. However, with so many random outlets out there and pay walls popping up everywhere, it can be very difficult for small business owners without legal/regulatory teams to get the correct news relevant to them. Even for someone like me with local and Federal government experience, it was not always easy to decipher regulatory language and follow executive orders, resolutions, ordinances, and even executive orders being rescinded. Aside from the news articles, I always recommend making an attempt to get as much of the information directly from the root source.

1. First, even if you get a loan from the CARES Act Paycheck Protection Program, you are obligated to earmark it for rent. See this article addressing this myth: https://www.bisnow.com/houston/news/economy/the-cares-act-is-a-relief-for-small-businesses-but-with-caveats-103710 
2. Governor Newsom’s Executive Order N-28-20 on March 16, 2020 lays out a framework for local governments to follow in enacting moratoriums on evictions of commercial tenants during the COVID-19 pandemic. However, the Order does not itself implement a statewide moratorium. Governor Newsom left it up to the cities and counties to execute their own ordinances or resolutions. Some people interpreted the Order as an encouragement to cities and counties, but there is no obligation. Here is the Order:  https://www.gov.ca.gov/wp-content/uploads/2020/03/3.16.20-Executive-Order.pdf. Here is an article with an overview: https://www.jdsupra.com/legalnews/california-commercial-landlord-77556/
3. The City of Los Angeles did enact an eviction moratorium, which includes commercial properties, through the end of the “Local Emergency Period” as declared by the Mayor. Renters can pay the rent up to 3 months after the end of the Local Emergency Period. This is an open-ended date as the Mayor has not declared an end date to the Local Emergency Period. The ordinance excludes multi-nationals and >500 employee businesses. Here is the actual ordinance passed by the Los Angeles City Council on March 27, 2020 and signed by the Mayor on March 31, 2020: http://clkrep.lacity.org/onlinedocs/2020/20-0147-S19_ORD_186585_03-31-2020.pdf. Surprisingly this City Council ordinance is not well covered in the press even though Mayor Garcetti rescinded his prior Executive Orders to make way for this ordinance. Most of the press focuses on the Mayor’s Executive Orders. I also noticed some publications cite prior drafts of the City Council ordinance, which have outdated information that was not actually passed by the City Council. Here is a decent explanation I found from a large law firm, Gibson Dunn: https://www.gibsondunn.com/state-of-california-and-city-of-los-angeles-enact-new-tenant-protections-in-response-to-covid-19-pandemic/
4. Culver City enacted their own moratorium, which included commercial tenants, through May 31. Here is the resolution: https://www.culvercity.org/home/showdocument?id=18916. And, here is an article about it: https://urbanize.la/post/culver-city-extends-covid-19-eviction-moratorium 
5. Los Angeles County passed an eviction moratorium,including commercial tenants, through an executive order by the Chair of the Los Angeles County Board of Supervisors. The moratorium is in place through May 31. Here is the order: https://covid19.lacounty.gov/wp-content/uploads/19032020HP_MFP_M577143825.pdf. Here’s an article covering the order: https://www.nbclosangeles.com/news/local/la-county-announces-moratorium-on-evictions/2330389/ 
6. City of Irvine, however, did not enact a moratorium. Instead they approved a resolution to “encourage, and expect…all commercial landlords…to abide by the provisions of the Governor’s Executive Order…City has…refrained from exercising…full regulatory authority…based on its long history working together with its business community.” I am sure there was some decent lobbying by commercial real estate landlords in Irvine. Here is the actual resolution: http://legacy.cityofirvine.org/civica/filebank/blobdload.asp?BlobID=32405 and the announcement on the City’s website: https://www.cityofirvine.org/news-media/news-article/city-council-adopts-resolutions-pertaining-covid-19-landlords-evictions-and 
7. Lastly, the California State Judicial Council on April 6, 2020 adopted a new rule to not hear eviction cases for 90 days, even if a landlord files such a case. While it is not apparently clear, this rule does apply to both residential and commercial potential tenant evictions. Here is the announcement on their website:https://newsroom.courts.ca.gov/news/judicial-council-adopts-new-rules-to-lower-jail-population-suspend-evictions-and-foreclosures. Here is a decent article explaining this new rule adoption: https://www.dailynews.com/2020/04/07/coronavirus-eviction-ban-what-tenants-need-to-know/  
8. And for good measure, here is a good article on the commercial real estate landlords’ perspective: https://www.bisnow.com/national/news/economy/april-rent-collection-coronavirus-what-happens-now-103687. For those renting from the Irvine Company, one interesting excerpt: “The Irvine Co., which has a portfolio of more than 40 retail centers, told its retail tenants they will not be charged rent for the next 90 days starting April 1, and the deferred rent would be paid back over a 12-month period with no interest starting Jan. 1, 2021.”

I hope this is helpful to others.

East Los Capital’s Thoughts & Perspectives on Markets

From East Los Capital blog: https://eastloscap.com/2020/03/19/east-los-capitals-thoughts-perspectives-on-markets/

That we live in interesting times cannot be understated. On Monday, the VIX recorded its highest level (83.56) since the 2008 crises. The VIX is widely known as the “fear gauge” and reflects market volatility and the general cost of hedging using options. A VIX that is this elevated reflects a market that is confused and agitated but on the brighter side the VIX rarely stays this elevated for long. In 2008 the VIX peaked at a closing value of 80.86 on 11/20/08 and reentered the 40.00 level 18 trading days later.  Investors seem to be asking 2 related questions these days:

1) Can the Federal Reserve and other central banks provide a successful encore to their 2008-2009 performance in which they introduced monetary tools never used before to shorten a downturn that many believed could have lasted for years, and

2) what will be the speed and trajectory of an eventual recovery?

Many have prognosticated in recent years that should we have a severe economic downturn, the Fed would be less able to effectively address it since it had not normalized interest rates or shrunk its balance sheet in the manner that it had initially planned. Over the past week the Fed has slowly been addressing many of the same concerns that predominated in 2008 and has been rolling out some of the same “fixes” it used previously. Interest rates have been lowered to zero, commercial paper facilities have been put in place along with repo programs, primary dealer credit facilities, expanded dollar swap lines, QE 5, and talk of helicopter money, stimulus and bailouts (loan guarantees) for hard hit industries. Some of these can and have been enacted by the Federal Reserve while others require Congress. Investors’ reactions to these announcements have been uneven at best ranging from despair to euphoria while 1,000 point up/down days have become the recent norm on Wall Street. Whether these fixes will be as effective the second time around is something that we will not know for months if not years.Investors seems to be handicapping 5 different potential outcomes from these interventions:

1. Recession: The Wall Street consensus appears to be well over 50%.
2. L-shaped recovery: A severe recession that takes years to return to trend line growth.
3. Stagflation: High inflation coupled with high unemployment.
4. V-shaped recovery: Similar to December of 2018 when the Fed changed course on tightening.
5. U-shaped recovery: Gradual with a less defined trough.

How are we looking at the world at East Los Capital:
For context, we have been cautious and skeptical of the indefatigable stock market for some time. We had experienced one of the longest economic expansions and bull markets ever and much of this seemed to be built on artificially low interest rates, multiple expansion, and what seemed like the endless appetite of CEO’s to repurchase billions of dollars of their own stock at higher and higher valuations. As recently as January, famed hedge fund manager Ray Dalio claimed that “cash is trash” and recommended that investors stay in the stock market to protect against dollar devaluation. Now, we have record dollar strength and shortages worldwide. Many companies that used their cash to repurchase stock at all-time highs would undoubtedly like to have some of that cash back. Other investors such as Warren Buffet routinely told retail investors that it was fine to buy as long as they had a long-term perspective while Berkshire Hathaway sat on billions of dollars in cash due to “unattractive valuations”. Economic data from around the world including the U.S. was uneven and in some cases downright bad and growth was unimpressive which may be why the Federal Reserve cut interest rates 3 times last year. Now given recent events, we have no doubt that Mr. Buffet is putting some of the gigantic cash hoard to work as we speak.

Something was going to derail this bull market and the coronavirus was the catalyst, but we do not attribute all of the violent selling in recent days solely due to the virus. The implication is that even once the virus issue is behind us, we will be left with many of the economic issues that were present beforehand and with an even weaker economy.

We are of the belief that we will experience a definitional recession followed by a u-shaped recovery. In our most optimistic scenario, testing kits become widely available in the near future and counterintuitively as the number of reported infections increase, and presumably most people recover in a reasonable amount of time, the uncertainty that Wall Street hates will be removed. During past health related market sell-offs the market decline has tended to bottom as infection rates peaked. In this scenario we would still likely experience at least 2 quarters of headline GDP contraction, but people and businesses would be able to return to their normal activity levels faster than expected.

How does this affect our investment philosophy and strategy:
We continue to favor asset-light companies which provide the opportunity to improve growth and efficiencies through the better use of technology (e.g., techification) via East Los Capital technical partners.

The need to be able to work remotely and have data secured and available to everyone reinforces our focus on cloud infrastructure. A renewed focus on internet security has emerged as people work from out of the office which is consistent with our bias towards cyber security.

While we do not invest in biotech or anything directly related to drug discovery, we do look at companies in the health care IT space as well as those featuring telemedicine capabilities. Both of these areas will continue to garner much investor interest in the years to come.

We have previously expressed a philosophy of using conservative capital structures with minimal to moderate levels of debt. The recent devastation of highly leveraged companies reinforces this thinking.

We have not been willing to chase valuations and now valuations have come down rapidly with the potential double whammy of multiple compression and reduced earnings in the future. We believe that it will take time for sellers, who unlike the managers of publicly traded equities, are not used to seeing their valuations marked to market on a daily basis, to come to terms with the fact that the value of their businesses may have come down meaningfully.

We believe that the dramatic decline in public market valuations may provide a new area for sourcing potential deals, especially in the lower middle market as many of the publicly traded companies in this segment arguably should not be public companies and have struggled with the cost and regulatory burdens associated with this. Now will be the opportune time to have conversations with these companies about going private should their existing capital structure allow for it.

What are we still trying to figure out:
Will the massive amount of “dry powder” that has been on sideline limit the decline in valuations as this money finally commits to transactions?

What is the real damage to supply chains and how long might this take to recover?

What is the damage to animal spirits and risk tolerance? Some Wall Street professionals have never seen a down market and this could dampen valuations for an extended period of time.

What will be impact on private market allocations after pension funds have lost so much of their recent performance. As of today, we have given back almost all of the gains from the last 3 years in the public markets.

Many of the industries that are currently seeking assistance from the federal government bought back billions of dollars of their own stock in recent years. Share buy backs were already controversial in some corners and now there is talk of eliminating or restricting this activity going forward. What would this do valuation metrics going forward?

We know from our 2008/09 experiences that a recovery in the debt markets will be a sign of a valuation bottom for equities. Investors will not be aggressive in buying the equity portion of the capital structure when higher priority debt on the same companies can be purchased at a significant discount to par.

What will be the impact of the massive interventions being implemented and discussed by governments and central banks. Personal balance sheets are important. Corporate balance sheets are important. This logic should extend to central banks and governments which will be growing deficits and possibly stoking inflation to levels that finally exceed their “2% targets” to a degree that is unhealthy.

Summary
The environment that we are currently experiencing reinforces our belief that companies optimizing their businesses around technology will be the most agile and best poised for growth in all market environments. We will continue to look for opportunities consistent with this thesis and at reasonable valuations.

Beaten down publicly traded micro-cap and small cap companies which would be better served as private companies may prove to be a new area of deal sourcing for our firm.

Research, research, research. The importance of fundamental company and market/industry research will continue to be a priority. Companies which have held up the best during the recent market downturn have been those possessing the best underlying fundamentals along with competitive moats and/or markets with strong secular tailwinds. We strive to find these companies in the lower middle market.

Quarterly results from the mega cloud providers: Not as “cloudy” as thought

From East Los Capital blog: https://eastloscap.com/2020/02/10/quarterly-results-from-the-mega-cloud-providers-not-as-cloudy-as-thought/

Over the past several quarters, Wall Street has been laser focused on signs of slowing growth amongst the hyperscale cloud providers.  In recent quarters, these tech giants represented by Amazon, Microsoft, and Google have provided just enough uncertainty in their results to rattle investors concerned about slowing growth rates.  In Q3 of 2019, Amazon stock was punished by investors after it reported AWS results that were slightly below analyst estimates and pointed to a potential slowdown in infrastructure.  These companies have been growing at truly impressive rates for years (AWS launched as a commercial service in 2006).  Despite the tremendous opportunity that is still ahead of them, it would not be unexpected to see some slowing in growth rates as the law of large numbers begins to take hold.

Intel surprises and scares

In the most recent earnings season where companies reported results for the quarter ending December, 2019, Intel once again gave investors reason to be nervous as they reported strong results with what many perceived as conflicting commentary and guidance.  Intel management reported results that beat quarterly expectations driven by strong demand in their cloud business (data centers) and remarked that there is an insatiable appetite for data driving the cloud – “they need more compute, more storage, and need to move data faster which places demand on the cloud players.”  But then management threw investors a curve ball with their CFO stating that after the first quarter the company expects “more modest capacity expansion for the remainder of the year” as cloud clients “move to a digestion phase.”  Management alluded to short term distortions in demand signals for their reluctance to be more aggressive in second half forecasts.  “The cloud providers come in big spurts, they buy a lot, they ingest it, they consume it, they suspend their buying and then they come back in big waves.”  Investors looked forward to commentary from the Big 3 cloud providers to see just how big, or small, these waves might be.

AWS rights the ship

Amazon regained investor support on the back of strong results at AWS which exceeded expectations.  Revenues of $9.9 billion during the quarter reflected 34% year over year growth, which, although a very slight deceleration from the prior quarter, was enough to satisfy skeptical investors who had begun to question the sustainability of these types of growth rates from a company that now boasts a trillion dollar market cap.  Operating margins expanded, so any argument that growth was being achieved at the expense of profitability was mollified.  Importantly, AWS long term commitments of $30.0 billion maintained over 50% growth.  AWS continues to grow revenue as a result of the company’s push into large scale enterprise customers and strong adoption of new AWS products and features.  Amazon also announced that it is extending the useful life of its servers from 3 years to 4 years which is consistent with the data center efficiency investments Amazon has discussed over the last couple of years.  While this may not be good news for the hardware players (and might explain some of the comments by Intel) we view increased efficiency at AWS as good for the overall health of the cloud space.  Efficiency drives pricing which drives adoption.

Azure continues its sizzling growth

Microsoft does not disclose actual revenue numbers for Azure but they do disclose growth rates and a reacceleration to 64% year on year growth was enough to cheer investors and put to rest any near term concerns about slowing growth.  Management boasted about “very good and healthy broad base consumption growth, especially in IaaS and PaaS.”  They specifically called out that it not only had good workload migration work and strong growth in the optimization of the workloads already running, but the fact that some of these new PaaS workloads, like Synapse and Cosmo DB, and Arc are starting to add some momentum in that part of the stack.  This bodes well for continued growth.  In Azure, revenue growth will continue to reflect a balance of strong growth from consumption based business and moderating growth in per-user businesses, given the size of the installed base.  While gross margins are expected to continue to improve, the rate of improvement will decline due to this mix shift.  Management touted new products and features across analytics, AI, the edge, hybrid computing, quantum, and their exclusive relationship with SAP.  All in all, an impressive quarter for the company.  A CNBC talking head was recently heard postulating that if the company were to change its name to Azure it would see an instant bump in valuation as images of Windows and desktops were replaced with cutting edge cloud technologies.  Management might want to take that under advisement.

Alphabet surprises with good results and increased disclosure

Google rounded out the reporting results of the cloud providers with perhaps the most interesting development in that management decided to break out cloud results separately.  There is no greater joy for analysts than to see the actual numbers that they have been guessing at forecasting for years.

Revenues from Google’s Cloud business accelerated to 53% Y/Y growth in FY19 (vs. 44% in FY18) with the business on a $10 billion run rate as of Q4’19.  Google Cloud Platform (GCP) is growing “materially higher” than overall Cloud with management noting particular strength in their Data Analytics products.

Year on year, the number of deals over $50 million more than doubled with investments in Cloud’s go-to-market expansion resulting in customer momentum.  Large customers who are making multi-year commitments resulted in a backlog which ended the year at $11.4 billion.  As evidence of the company’s commitment to being the #2 player in cloud by 2023, the majority of new hires were engineers and product managers with the most sizable headcount increases being within Google Cloud.

Google is embracing its position of “challenger” by investing aggressively with a focus on building out go-to-market capabilities and executing against a product roadmap that extends the global footprint of their infrastructure to focus on 21 markets and 6 industries.  The cloud team is on track to triple the sales force in three years, which includes bringing in a number of senior strategic hires and supplementing them with the channel partnership program.

Take Aways for investment in IT Service/MSPs/cloud integrators

The cloud is strong, healthy, and increasingly larger.  Even with growth rates that are naturally declining, the absolute dollars spent on the cloud is increasing.  Total IaaS/PaaS revenue from the Big 3 cloud providers grew from $6.9 billion in Q4’17 to approximately $16.0 billion in the quarter which just ended.  At East Los Capital, we regularly speak with cloud executives in order to have a pulse on the industry.  Most cloud executives state that the largest bottleneck to growth is partners which can assist customers in the integration of their increasingly broad and complex product offerings.  This is fertile ground and a gigantic opportunity for partners which have or can obtain the necessary engineering talent, certifications, and scale to assist businesses and the cloud providers in what will be an ongoing and lengthy transition to the cloud.  Along with the transition comes an increasing need for managed services and customized application development.  The best positioned cloud services partners will reap the rewards.