Distinguished Speaker Series: Curt Bailey, Related Midwest

Curt Bailey, president for Related Midwest, was the presenter at CFA Society Chicago’s last Distinguished Speaker Series luncheon on November 20th. Related is one of the nation’s largest property development firms and Bailey’s talk introduced the firm and gave an overview of Chicago’s property market.  “We create and transform neighborhoods in Chicago,” he said, “[and] place-making is critically important to us.”

Related builds globally and has lately been focused on the New York and London markets. Bailey spoke about Hudson Yards (“Live, Shop, Work & Dine in New York”), the firm’s latest mega development in New York City. Facebook is among its major tenants, leasing 1.5 million square feet of the $18 billion project. Related also recently completed a property development in Kings Cross, London (where Google and Facebook are also tenants). Bailey also mentioned the Time Warner headquarters in New York, where Time Warner profited about $1 billion from a real estate transaction.

Bailey then gave a tour of Related’s recent developments in Chicago. The Park Tower at 800 N Michigan is one of them, as is One Eleven and 500 N Lake Shore Drive. They are doing a landmark building in the West Loop called One Bennett Park, as well as 340 on the Park. They also have a proposed building at the former Chicago Spire site at 400 N Lake Shore Drive, and another at 725 W Randolph that will feature an Equinox gym and a few other amenities. Bailey said that figuring out what kinds of amenities residents will demand is often a challenge, citing examples of movie rooms being less successful and gyms being more desirable.

Related is a leader in 80/20 developments, where 80% of a building is rented at market rate, and 20% is reserved for affordable housing. Their development at 900 W Randolph will be among the first 80/20 buildings built since Presidential Towers in the West Loop. Related is also working on an affordable housing project at the former Lathrop Homes site at Diversey and Damen.

Their flagship development is called The 78, which is a play on the 77 neighborhoods for which Chicago is famous. The 78, a proposed project in the South Loop between Roosevelt and Cermak, may go down as one of the largest developments in Chicago history. Among its potential tenants includes a new tech center from University of Illinois that will seek to offer a tech hub for recent grads and researchers that will keep technologists in Illinois after graduating. One unique aspect of the development is that it will feature an all-timber building, which was recently approved by the Chicago Fire Department. The development will create 30,000-40,000 construction jobs and hundreds of millions in tax revenue.

One audience member asked Bailey about how Chicago’s difficult financial picture factors into their development plans. Bailey responded that he “vacillate[s] between optimism and total fear on a near hourly basis.” Chicago is still a competitive destination for recent college graduates given the lower cost of living versus New York, San Francisco, Boston or Los Angeles, and those types of young professionals Related seeks to attract don’t seem to be bothered by Chicago’s ongoing pension crisis. Despite the city’s financial problems, “it’s still going to be cheaper for companies to hire smart workers in Chicago than in New York or Boston,” Bailey said. This labor competitiveness gives him some comfort, despite challenging times for the city and state.

Another question came regarding the possible effect of WeWork’s troubles on the Chicago real estate industry. Bailey said that they lease just 1 million of a total 140 million square feet of office space in Chicago, so the effect of their stumbles on the market will likely be muted. He does believe that the co-working trend is here to stay and has seen companies request this in many developments. He noted that Regus had already been doing what We Work is offering for many years and had several difficulties and reorganizations during financial downturns, which made him somewhat dubious of the WeWork model in the first place.

Interactive Empowerment Series Wrap-Up

The CFA Society Chicago Women’s Network Advisory Group gave us tools and tips for taking our careers to the next level during an interactive event that brought together all elements of the Empowerment Series on December 3rd at the Northern Trust Global Conference Center. The Empowerment Series was intended to support career development and advancement of women in the investment management profession but the events have also attracted men who are interested in these universal topics. The wrap-up event was structured similar to speed networking. Attendees participated in round table discussions guided by table hosts. Below is a summary of the discussions at each table per the Empowerment Series topics.

Negotiation Tactics:

Marina Viergutz, CFA engaged those at her table with a very important negotiation scenario. How do you respond to an offer for a new role, so you optimize salary and benefits? Preparation is the key. Starting with the offer letter, you should consider the following:

  1. Measure the salary and benefits against an industry benchmark or delay the negotiation until you have determined an acceptable range.
  2. Help the hiring manager and human resources help you. Do your research and be able to back-up any points in your case with facts and figures.
  3. Try a different angle. For example, if salary isn’t flexible, ask about bonus, time off and flexible work arrangements.
  4. Whether it is salary or benefits such as flex time, know what is important to you and try to get it at the start of a new role because it will be more difficult to go back later and renegotiate.

Looking at this more broadly, the same tactics can be used to negotiating compensation during annual performance reviews. Finally, there are nuances between internal and external negotiations. When approaching this internally, you can use your experience and tenure to get perspective and move the discussion forward but always be prepared.   

You can read more about the Tips and Tricks for Negotiating for Yourself Empowerment Series event with Laurel Bellows on the CFA Society Chicago blog.

Personal Branding:

Christine Tinker, CFA led a discussion among table attendees on how to advocate for yourself, articulate your value and utilize your branding statement as part of a personal development strategy. She built on Karyl Innis’ presentation stating that a brand solidifies a reputation and creates opportunities. Brand messaging is how you look, act, sound and speak. First impressions count and are based on:

  • Visual – 55%
  • Vocal – 38%
  • Verbal – 7%

It is also noteworthy that it takes 18 months of thoughtful work with small deliberate steps to rebrand yourself and get others to see you in a different light.  Get started now and practice a skill you would like to bolster and make small moves over time. This doesn’t happen overnight.

Other nuggets we walked away with were to be your own “fixer” department and aspire to be a premium brand. Use “A” words to describe yourself such as expert, authority, strategist, master, guru and visionary versus “C” words such as skilled, competent and reliable. Control what others see and think about you.  Everyone has a brand, but you may be unaware of some aspects of yours or how others perceive you. To dig deeper into this, ask people you trust for honest feedback so you can gain perspective. Create proof points or a list of accomplishments to support your branding statement. 

Read more about the Building a Distinguished Career through Personal Branding Empowerment Series event with Karyl Innis on the CFA Society Chicago Blog.

Take Control of Your Career:

The Career Advancement – Taking Control table led by Linda Ruegsegger, CFA discussed key ideas to help attendees assess the current state of their careers and learn about techniques needed to reach their goals. 

Table attendees completed a worksheet geared at helping to create an individual definition of success, career goals on the one to five-year horizon and skills needed to achieve these goals.

Tying into Gail Meneley’s presentation, the focus is to manage and navigate career transitions.  Some of the concepts explored were:

  1. How did success happen and how did you learn from failures?
  2. How do you promote yourself and receive recognition?
  3. What are some strategies for transitioning jobs including a positive exit strategy?
  4. What is the role of networking and having an elevator pitch to articulate your value proposition?

A key takeaway is that continual engagement in networking and building professional and personal relationships is an integral part of a career strategy. This is important whether you are looking for a new job or very happy in your current role. 

Check out the CFA Society Chicago blog to read about the Take Control of Your Career Empowerment Series event with Gail Meneley.

Building Relationship Equity:

Tiffany Greenhouse, CFA hosted the roundtable discussion on building relationship equity. This discussion built on ideas from Carol Seymour’s presentation. Greenhouse guided attendees on best practices for building an internal network, how to best set oneself up for sponsorship, and how to be a sponsor for others. 

Ideas discussed focused on the importance of building strong relationships inside and outside of your firm. Getting a sponsor and identifying key people you need to influence for success in your current role are critical. Having a successful relationship with a sponsor builds on personal branding and relationship equity. When building relationship equity, soliciting and acting upon feedback while being authentic is essential. 

What are tips for building relationship equity?

  1. Understand if you have a mentor or sponsor. A sponsor chooses you and will advocate for you. A mentor can be a peer; someone you bounce ideas off of or solicit feedback from.
  2. Articulate your value proposition in an elevator pitch.
  3. Map out the key influencers at your organization and whom you need to build relationships with.
  4. Seek feedback from people you work with on current projects.
  5. Be authentic – there is a lot of buzz around this.
  6. Build relationships ahead of time; It is often too late when you are looking for a new position.

The event concluded with networking over cocktails and snacks. Attendees at every stage of their career have benefited from The Alan Meder Empowerment Series and now have confidence and tools to move to the next level.

CFA Society Chicago welcomes keynote Bill Browder at the 33rd Annual Dinner

A sell-out crowd of 1,100 attended the 33rd Annual CFA Dinner on November 7th at the Sheraton Grand Chicago hotel. In his after-dinner remarks, Daniel Kastholm, CFA, chair of CFA Society Chicago, welcomed and thanked all for coming to the event honoring this year’s Hortense Friedman, CFA, Award for Excellence recipients and new CFA charterholders. He recognized the work done by the Annual Dinner advisory group in planning the event, as well as all advisory group volunteers that helped plan events throughout the year.

His advice to all 5,000 members within the CFA Society Chicago:

  1. Go to other events and encourage others to go along (outside the Annual Dinner)
  2. Volunteer for Advisory Groups that shape CFA Society Chicago Society
  3. Get involved if you’re a subject matter expert, to promote our local Chicago talent

Finally, Kastholm and all dinner attendees, congratulated the 140 new CFA Charterholders who passed all three levels of the CFA exam and completed four years of relevant work experience. The exams require hundreds of hours of study, with candidates sacrificing a significant amount of time, energy and effort.  Becoming a CFA charterholder demonstrates initiative, leadership and commitment to professional excellence in the investment industry.

The first Hortense Friedman, CFA, Award for Excellence award was given to Alan M. Meder, CFA, currently senior managing director and chief risk officer at Duff and Phelps. Kastholm highlighted Meder’s experience since receiving his CFA charter in 1988 including his service on multiple advisory groups, serving as chair of CFA Institute’s Board of Governors and service as a CFA exam grader for 23 years!

Taking the stage, Meder thanked Kastholm and the audience for the humbling introduction and award.  He reminded the attendees of the award’s namesake, Hortense Friedman, CFA, the brave woman who worked tirelessly to show others the way. He highlighted Friedman as a “beacon for others” and noted she was one of the first women to earn the CFA charter, in 1964. Meder left the attendees with wise words on how to continue the inspirational work of Friedman. “Bring more balance into the room…Invite women…and all to join the analytical ranks to become charterholders. “You cannot be what you cannot see.”

The second Hortense Friedman, CFA, Award for Excellence was awarded posthumously to Thomas N. Mathers, CFA. Mathers began his investment career at Northern Trust, founded Mathers and Company in 1961 and managed the Mathers Fund, his no-load growth mutual fund, from inception in 1965 until 1982. He was a past president of CFA Society Chicago and was involved in numerous foundations throughout his career. Kastholm described him as a “counselor of high integrity and a leader in the movement to bring professionalism to the field of investments.” Though his passions lay within investments, he always believed the most important thing in life was family. Mathers’s daughters accepted the award on his behalf as the crowd recognized his great accomplishments.

Bill Browder, CEO of Hermitage Capital and author of the best-selling book Red-Notice, was the keynote speaker of the night. Kastholm shared Browder’s background and qualifications over his career in investing.  Growing up in Hyde Park, Browder attended the University of Chicago. After graduating from Stanford Business School, he got involved in emerging markets investing, focusing on Post-Soviet Russia. As Kastholm noted, Browder’s record demonstrates how markets can be inefficient and how there remains value in active management (met with applause). Through his fund, Hermitage Capital, Browder became the largest foreign investor in Russia until 2005, when he was denied entry into the country largely for exposing corruption in state-owned entities. In 2009, his lawyer and friend, Sergei Magnitsky, was killed in a Moscow prison after exposing a $230 million tax fraud.  After his death, Browder was instrumental in passing the Magnitsky Act in 2012, allowing the U.S to sanction individual human rights abusers by freezing their assets and banning entry to United States. After the brief introduction, Browder took the stage to share his unique and influential life story.

With a warm welcome from the audience, Browder thanked CFA Society Chicago for the opportunity to share his story and expressed delight at seeing a number of friendly faces. He jumped right into his story in the summer of 2018, when he was invited by the chief anti-corruption officer of Spain to give evidence of Russian money-laundering. Before his meeting in Madrid, he was stopped by the hotel manager accompanied by two Spanish police officers. “You’re under arrest – INTERPOL Russia”, said the police officers.  Worried for his safety, he sent out multiple tweets and even contacted his Spanish lawyer while in custody. Browder recounted this memory to reiterate to the audience why he was truly “delighted to be here”. 

Born in Princeton in 1964, Browder was raised in Chicago in a pro-communist family. His grandfather was a labor union organizer in Kansas and ran for president on the communist ticket in 1936 and 1940. During his rebellious teenage years, he recalls asking himself “What is a good way to rebel from a family of communists?” After graduating from Stanford in 1989, he discovered the perfect answer while evaluating post-graduation options: “to become the biggest capitalist in Eastern Europe”. With the Berlin Wall collapsing in 1989, he moved to London and eventually took a position on Salomon Brothers’ Eastern European banking team. On an influential client trip to Russia, he advised a fishing fleet on a privatization project. Performing analysis on the ships, he determined the fleet was approximately worth $1 billion. The disconnect? The government was selling 51% of the fishing fleet for $2.5 million. At that moment, he realized he should be investing, not advising, on the Russian privatization program. 

In Russia’s transformation from communism to capitalism, a voucher privatization program transferred assets to Russian citizens to create owners of assets. With vouchers trading in the secondary market for approximately $20, the sum of vouchers would amount to around 30% of total Russian capital. Assuming a population of 150 million, the entire country of Russia was assumed to only have a $10 billion market capitalization. “This would be the single most compelling investment opportunity that’s ever existed in the history of financial markets,” he concluded.  After ensuring these privatization deals were widespread, he went back to London and recommended that Salomon Brothers stop what they were doing and invest in Russia. Eventually, he impressed a senior partner in New York and received $25 million to invest.

Seven months later, The Economist wrote the 1994 article “Sale of the Century” and a wave of investors entered the thinly traded Russian equity markets. The markets went up 500% in three weeks, and Browder’s $25 million investment turned into $125 million. With all the success, he traveled back to London to raise outside money for his fund, but bureaucracy among other difficulties caused him to leave Salomon and start the Hermitage Fund in April 1996. His fund was one of the most successful until 1998, when the Russian government defaulted on its bonds. The currency decreased 75% and his $1 billion fund lost $900 million. Terribly ashamed, he was determined to not leave his investors with losses. He invested in mostly oils and metals companies, on the theory their share price should go up if revenues (in dollars) were stable and costs (in rubles) were decreasing. 

Dealing with oligarchs who broke every rule in the book proved to be a hindrance to this investment theory, however. He resorted to becoming a shareholder activist. Through diligent research and some “stealing analysis”, he spotted asset stripping, transfer pricing and embezzlements on an industrial scale by the oligarchs. They poisoned the psychology in Russia over a 10-year period, when the richest in Russia went from 6 to 250,000 times richer than the poorest in Russia. One “stealing analysis” shared with news agencies was that Russian oil and gas https://blog.cfachicago.org/wordpress/wp-admin/admin.php?page=ai1wm_exportcompany, Gazprom, was trading at a 99.7% discount per barrel of hydrocarbon reserves to Exxon and BP. After further shareholder activism, Vladimir Putin, President of Russia, entered the picture. Up until 2003, Browder and Putin’s interests were aligned against the oligarchs, using the principle of “Your enemy’s enemy is your friend.”  However, this alignment quickly reversed, and in November 2005, Browder was deported back to London from Moscow as a threat to national security. Eighteen months later, and after the fund’s liquidation, the Hermitage Fund had been raided by Russian police and re-registered under the name of an ex-convict in Russia.

Sergei Magnitsky, a Russian tax lawyer, was hired to investigate the raid and stop what was happening.  He discovered two parts of the scheme, with the latter being successful:

  1. Steal Hermitage Fund’s assets, of which there were none
  2. Receive a government tax refund for $1 billion in capital gains earned by Hermitage Fund

The largest tax refund in Russian history, $230 million, was paid out on Christmas Eve. Magnitsky testified to the Russian government and was subsequently arrested by the police. After being placed in a pretrial detention, he was pressured to rescind his testimony but refused. For Magnitsky, his integrity was the most important thing he had. He was sleep-deprived, placed in cells with no heat or windowpanes, and moved from cell to cell in the middle of the night. This was done to get him to withdraw his testimony and sign a false confession. The torture continued to get worse and he eventually required medical operations for his health issues. Remaining adamant in his integrity, he was transferred again to a maximum-security prison (without a hospital). His health conditions spiraled downward, and he was repeatedly refused medical attention. On Nov 16, 2009, Magnitsky passed away at the age of 37, leaving behind his wife and two children.

From this point on, Browder made a vow to devote all his time to pursue justice for those who killed Sergei Magnitsky. Using Magnitsky’s meticulous complaints to the Russian government during his jail-time, this would become one of the most well-documented cases of human rights abuses in 75 years. Since there was no justice to be had inside Russia, Browder decided to get justice outside Russia. The oligarchs tended to keep money outside of Russia in London real estate, Swiss banks, etc. His solution was the Magnitsky Act, which allowed the U.S. to sanction individual human rights abusers by freezing their assets and banning entry to United States. As legislation similar to the Magnitsky Act passes around the globe, Putin and others have been unable to park their assets outside of Russia, which is a growing frustration for abusers. In his departing remarks, Browder stated a desire to continue giving Magnitsky a legacy: that his death wasn’t meaningless, and there are new ways and technologies of going after killers in the world. He remains vigilant in furthering Magnitsky Act legislation globally.

CFA Society Chicago thanks the following organizations for helping to make the 2018 Annual Dinner a success!P

Invesco QQQ
Northern Trust
UBS Asset Management

Fitch Ratings
State Street Global Advisors
William Blair

Thank you to all our Gold, Silver and Bronze sponsors as well!

Transitions Techniques

From back-office roles to a decision-making roles

How to make a transition from a back-office, support role to a decision-making role in investment management was the topic of discussion on November 18th for a panel with real experiences in making just such a career move. Moderated by Eric Schweitzer, vice president at Challenger Gray & Christmas, the panel featured three charterholder members of our society:

  • Vincent Baxter, CFA – Associate Equity Portfolio Manager, Northern Trust Asset Management
  • Jackson Finks, CFA – Analyst, Dearborn Partners
  • Oday Tillawi – Associate/Desk Analyst – Investment Grade Credit, Allstate Investments

To begin, Schweitzer asked the panelists to describe both their current roles and the support positions they had transitioned away from. Finks joined Dearborn Partners in 2013 after a year in trust operations at US Bank. His first role at Dearborn was in trade support and operations, but after a year he was able to move up to analyst in support of the firm’s rising dividend strategies.

Tillawi began at Allstate in the Financial Planning and Analysis team responsible for the financial planning and reporting for the business unit. He shifted from there onto the fixed income portfolio management team within the past year where he both assists the senior portfolio managers directly and conducts fundamental research on investment grade credits. He passed the Level III of the CFA exam this year.

Baxter, has been a portfolio manager for tax-aware quantitative equity strategies at Northern Trust Asset Management for the past year. He moved into that position in stages, from back office, and middle-office roles supporting asset management.

Schweitzer then dove into the meat of the discussion by asking the panelists to focus in turn on three steps to the transition process: Preparation, Targeting, and Interviewing. Although they might not have been aware of these steps, of necessity they had to proceed through them to reach their goals.


Finks led off by saying he realized very quickly that his introductory position in trust operations would not lead to something he aspired to. The positions of higher responsibility he would be able to advance into from his starting point held no allure for him. So, he immediately enrolled in the CFA exam series and began networking at other firms. One such networking meeting led to a job offer in trade support at Dearborn.  While this was a lateral move in terms of the role and responsibilities, he saw a better chance at advancing into a more desirable role at the smaller firm than he could see at US Bank.

Tillawi also relied on the CFA program to open doors for him. Inside Allstate, the competition for openings in asset management was high, so he realized he would need to be aggressive from the start, and working toward a charter fit the bill. He also sought out a mentor on the team he was targeting and found that not only did that relationship help him get recognized when an investment-related position opened, it also was beneficial in studying for the exams.  He made a habit of writing a summary of each meeting with his mentor to have a record of his suggestions.

Regarding mentoring, Baxter mentioned that while in his middle office role he was seated in close proximity to the portfolio managers he supported. That allowed for opportunities to educate himself by questioning the experts he supported, effectively making them unofficial mentors. Tillawi recommended being assertive and asking respected people to serve as a mentor, especially if working at a firm without a formal mentoring program. In his experience, many people are very willing to mentor a junior colleague who shows initiative. He also suggested preparing a career development plan as an aid to maximizing the benefits of a mentor.

In response to Schweitzer’s question about skills the panelists developed to enhance their chances for advancement, Finks and Baxter agreed that enhanced communication skills were critical keys to success in their new roles where they had to communicate regularly with sales and client service professionals and sometimes clients. Finks strongly endorsed networking skills. All three panelists strongly supported enhancing Excel skills. Even in a world of ever more prevalent modeling and analytical systems, Excel remains a prime tool in asset management and many people do not know how to use its full potential.   Finks said he became the “go to” authority on Excel in his office and provided assistance to colleagues, which only enhanced his chances for advancement.


As two of the panelists had transitioned internally, only Finks could provide comments on the second step of Targeting. He cast a large net while networking because he needed to change firms to improve his chances at his hoped-for position. He employed personal and business contacts to land an introduction at Dearborn Partners. He advised people to maintain strong contacts with anyone in their networks who are most likely to be influential in hiring and promoting in the areas one aspires to join. 

In response to Schweitzer’s question about the importance of company culture, Finks thought that he was too early in his career to give that much importance. He was more concerned in the role first. However, Tillawi, also early in his career, pointed out that we typically spend half our waking hours at work so getting the correct cultural fit, at least at some point, will be critical to career success as well as personal happiness.

As for networking, which Schweitzer considered a part of targeting, all three panelists had pointed observations. Baxter noted that it’s easier to do in a large company, simply because of the larger pool of co-workers, but he recommended making a personal connection with new contacts to make yourself more easily remembered.  Finks and Tillawi both recommended attendance at the Society’s events for easy, and well-targeted networking. Tillawi said he had success sending cold e-mails to people he thought would be especially helpful. Social media, especially LinkedIn, can be an invaluable tool. Schweitzer pointed out that it is now the first screening tool used in candidate searches, and also that research at Challenger has shown that new hires are most frequently second-degree connections with the key decision makers in the search.


Schweitzer then moved on to the final step, Interviewing. Baxter had perhaps the most insightful comment to make on interviewing. As a candidate seeking to move from the middle office into a front office investment role, he assumed he would not have the best qualifications on paper relative to other candidates already within the investment decision making chain. He made up for that by demonstrating his passion for investment management. That paid off for him in time. Tillawi was surprised at how little he was asked in interviews about technical information. Rather, he described more of the questions as situational or behavioral. Others with the same aspirations should be prepared for them.

In final wrap-up comments, Finks advised patience. Recognize that the transition process will play out slowly and take longer than expected. Baxter said having a definite idea of the target role is critical, while Tillawi added it should be a goal that one can write down to help maintain focus.

Vault Series: Counting Cards in Biotech

No EBITDA, no revenue, no product. What’s not to like?

Despite being fraught with risk, investing in biotech stocks can be highly lucrative. Michael Caldwell, a portfolio manager at Driehaus Capital Management led a highly interactive discussion with a roomful of captivated attendees. Caldwell has been at Driehaus since 2007 and has a BS in biomedical engineering, which he opined wasn’t necessary in order to do his job, but certainly helps with understanding the vocabulary within the biotech world.

“People think that biotech is a black box, a gamble,” Caldwell said. This is because success for companies is often binary with respect to the drugs they develop. The extreme outcomes coupled with the complexity of the science involved make investment analysis very difficult. The odds of creating a successful product are quite stark indeed: Caldwell estimates that 90% of the drugs the biotech industry creates fail to reach the consumer market. With such a high rate of failure, how can investors in this lucrative, yet little understood asset class give themselves an advantage? As Caldwell put it in his presentation, “If biotech is a gamble, then let’s count the cards.”

There is currently a biotech renaissance taking place, in part driven by a precipitous decline in costs for DNA sequencing, and the biological insights that result. Scientists had first sequenced the human genome in the early 2000s and initially it was incredibly expensive to do. Since then, firms such as Illumina have helped provide mass availability for biotech firms seeking to sequence DNA and produce drugs.

Caldwell explained that DNA (which he termed “the software on which life runs”) encodes RNA, which in turn makes proteins. In order to create a viable medicine, specific proteins inside of our bodies are targeted. Right now, only ~600 proteins are targeted by approved medicines out of a possible 20,000, so the runway is long. Disease can occur when one of these proteins does something wrong.

Given the incredible potential for high returns within biotech stocks (Caldwell cited several successful investments including Loxo Oncology), how would one go about analyzing the companies and selecting the best ones? Caldwell presented a checklist of metrics Driehaus looks for including strong intellectual property, robust biological rationale, safety and dosing schemes, competition, market size, timeline and management. This is the method they have found creates the most value given the complexity of the space.

Caldwell then discussed some of the points in finer detail, including assessing intellectual property (IP). The IP biotech firms own represents a barrier to entry that can offer a strong shield against competition, depending on what the patents are based upon. He explained that the molecule composition is seen as the highest form of intellectual property. Driehaus aims to invest in companies that utilize what Caldwell described as “good biology”. He talked about the biological cascade, a series of biochemical reactions that often begin with a single gene mutation; these single gene diseases – termed monogenic – can be examples of “good biology” because the biological cascade of disease is often characterized.

Bad biology would refer to companies that focus on the correlation between a mutation and disease with an absence of causation, as an example. One area of intense research is Alzheimer’s disease. Nearly every Alzheimer’s study has failed because the disease still isn’t well understood.

Array Biopharma was another biotech company mentioned that Driehaus researched and ultimately invested in. Caldwell said that the biology was good, its clinical strategy favorable, and the drug had a strong market potential. They decided to invest in fall of 2017. There was a colorectal cancer trial that Driehaus expected would work.  The stock traded sideways for over a year, until good results from the trial were released.  Shortly thereafter, Pfizer announced their intention to acquire Array, generating a huge return.

A key area of focus for Driehaus is what Caldwell termed “precision medicine”, which can be described as an approach to healthcare that allows doctors to select treatments that are personalized to each patient’s genetics. This technique can be applied to all disease areas but has mainly been used in the realm of oncology. Usually when a Driehaus analyst hears about a precision oncology strategy their ears perk up and they tend to do more research. Precision medicine is typically used by smaller biotech firms, and much less frequently by larger multinational pharmaceutical companies. This is because the types of products created by precision medicine methods often target ailments that wouldn’t generate enough revenue to move the needle for a massive international pharma firm but can still be good businesses that create billions in market value.

How risky will the 2020 elections be for biotech investors? Caldwell said that they think about it, but it might not be as bad as the headlines lead you to believe. Right now, the United Kingdom is the stingiest healthcare sponsor in the world when it comes to paying for expensive drugs. If the US were to go down a similar path, that would hamper sales for some of the higher volume drugs. But, as Caldwell pointed out, if you can locate truly life-changing drugs and invest in the companies making them, there is still significant value to be created and captured. Regulation is another ever-present risk, as is competition.

This was a very comprehensive and interactive introduction to the exciting, impactful world of biotech and investors will likely be increasingly interested in the space as advances in science continue.

Opportunities in Hedge Funds in 2019

A distinguished panel gathered on October 10, 2019 at the Standard Club to discuss the current environment for hedge fund investments. Kenneth Heinz, president of Hedge Fund Research, Inc. served as the moderator.

The panelists included:

  • Kevin Doonan, Executive Director, Hedge Fund Strategies, GCM Grosvenor
  • Joseph Scoby – Head of Systematic Investing, Magnetar Capital
  • Tristan L. Thomas, CFA – Director of Portfolio Strategy, 50 South Capital

HFR’s Ken Heinz began with some opening remarks, which he dubbed “Whistling Past the Graveyard”. After a rough couple of years, investing in hedge funds in the next 2-3 years will be better, he said. One reason is that hedge funds are currently preparing for macro risks for which many mainstream investors might not be ready. A couple warning signs Heinz noted include a recent huge jump in overnight repo rates, and negative interest rates on a wide swath of global debt. Also, IPO markets are showing weakness, with the large We Work IPO having been pulled recently at the last minute. Impeachment proceedings and a possible Warren presidency (with her populist, anti-corporate message) also suggest more risk on the horizon.

Tristan Thomas started by talking about bond returns. A return of about 8% YTD for the Barclays Aggregate index indicates that a lot of bond returns have been pulled forward. That leaves little return potential ahead for bond investors unless yields go negative. The minuscule amount of yield available leaves bond investors in a quandary. They still need income and cash flow, but aren’t entirely comfortable taking on more risk. With that backdrop, hedge funds can play a role in the portfolio. One symptom of this trend, Thomas noted, is that he has recently been talking more to clients’ fixed income departments, who need help generating yield, instead of the alternative groups he typically speaks with. Another challenge is that the costs of running a hedge fund have gone up.

Heinz asked the panel if they are seeing reduced liquidity in the market. Thomas answered yes. Doonan added that markets are now faster to gap down because of weaker hands and banks are less involved than before. Some securities have better liquidity than before, particularly securities held inside ETFs, but securities outside of ETFs have fared worse with respect to liquidity.

The conversation then shifted to ESG, a fast-growing area of investing that the hedge fund world has been slow to embrace. Thomas opined that the ESG trend is real and here to stay and represents a big opportunity for hedge fund managers to win additional mandates. One challenge managers face is defining exactly what ESG is. Investors each have their own answer on what ESG constitutes, and managers need to be flexible and offer customization in order to capitalize on the opportunity. As for returns, Heinz asked the panel if ESG has an impact. Thomas said that there isn’t quite enough data in the hedge fund space to definitively answer that question. Doonan also said that he believes the implications of focusing on ESG will be huge and may have an even bigger environmental impact than government policy.

The group spoke at length about the growing influence of tech on their investment process. Scoby said that at Magnetar, they often debate whether they are a technology firm or an investment firm (Answer: they aren’t mutually exclusive, so both). To remain competitive, firms must constantly appraise external technology to ensure they are using the best tools available. Doonan said that many asset owners and funds-of-funds use advanced analytical tools to decompose returns to ensure that they aren’t overpaying for beta. Regarding some other more nascent technologies such as blockchain, Doonan said that they have generally stayed away.

Heinz asked how the panel’s investment processes have changed over the past five years. Doonan said that the average hedge fund has not delivered enough return to justify its fee, which has made focusing on specialization and co-investment recurring themes. As far as identifying an attractive strategy for the current market (or alternatively, which should be avoided), Thomas said that in a perfect world, it would be macro, but there are few good macro managers out there. He likes credit-oriented managers and strategies with short books that are delivering alpha. He sees relative value strategies as less interesting right now. Doonan said that his firm generally tries to avoid generalist managers in favor of more niche, specialist strategies, while rates trading strategies look problematic to him.

A lot of the appeal of hedge funds comes when equity markets are challenged, so if the equity beta continues to deliver returns around 10% with lower than norm volatility, hedge funds will be somewhat unattractive. It is very hard to find true alpha, and also difficult to separate skill and luck, which makes advanced analytical tools, careful due diligence, and experienced managers with niche strategies all the more attractive in today’s low rate world.

Distinguished Speaker Series: David Herro, CFA, Harris Associates

Trust and effective communication provide investment teams with the ability to stick with a sound investment philosophy and process during periods when the approach is out of favor with the market. Oakmark’s focus on developing an intrinsic value for companies provides a foundation for portfolio management decisions. He believes that this foundation drives the long-term successful investment returns that the firm has earned for clients.

David Herro, CFA, partner, portfolio manager and chief investment officer of International Equity at Harris Associates, addressed 200 guests at the University Club on Tuesday, October 8th for the sold-out Distinguished Speaker Series luncheon. Herro emphasized the importance of our fiduciary duty, a sound investment philosophy, the difference between a business’s value and its stock price, the opportunities that macro events can create and the importance of managing emotions. These five themes have been central to his long-term success managing the Oakmark International Equity mutual fund.

Herro measures the attractiveness of a business based on the present value of expected free cash flow. Prices below this value create buying opportunities, and above a reason to sell or not buy. He uses a normalization process to determine the required discount rate, instead of using today’s very low rates. The discount rate also varies for countries and companies based on risk assessments. During his presentation, he illustrated times when one of his holdings, Glencore PLC’s stock price movied far from his computation of intrinsic value. He noted that price often responds to current information versus the long-term business value. This volatility provides opportunities for investors. He guides clients to think and act like investors, not traders.

Herro provided several examples of when macro events moved security prices far from intrinsic value. During the European sovereign-debt crisis investors could purchase Italian government bonds with yields near 8.0% that are less than 1% today. Additionally, yields on Greek government bonds moved above 30% in 2012 and are now lower than US Treasury yields. He notes that despite these movements in price, intrinsic values have not changed by these large magnitudes.

Managing emotions requires a strong foundation. The faith to maintain a set of beliefs during the great financials crisis eventually rewarded investors. In contract, a focus on stock price movement created severe anxiety that lead to many poor decisions.

Herro compared today’s difference between the performance of growth and value styles as comparable to the 1995 to 2000 timeframe. He acknowledges that identifying a change in this relative performance is extremely difficult due to a large number of variables with unstable coefficients. However, he believes that the magnitude of the differences strongly favors the value style currently.

Herro noted that we should never forget that our purpose is to earn returns for our clients. Key ingredients to success include a sound approach, acting like an investor vs. a trader, exploiting opportunities created by macro events and managing emotions. These thoughts have served him well and he believes that they will continue to serve our industry well.

Distinguished Speaker Series: Rob Brown, CEO, Lincoln International

Current drivers of the global M&A market and perspectives on how it may evolve going forward

On September 10th the Distinguished Speaker Series Advisory Group hosted Rob Brown to provide his insight on the M&A market over lunch at the Metropolitan Club. Brown is the CEO of Lincoln International. His firm serves private equity firms, corporations and private businesses around the world, providing advice when selling or buying a business, securing financing solutions, valuing an organization or portfolio, or navigating special situations. Brown has nearly 30 years of experience advising leading private equity groups, privately owned businesses and large public companies on divestitures, acquisitions and other strategic initiatives.

Brown is a recognized advisor and thought leader in the investment banking industry. He is a frequent guest on WBBM’s Noon Business Hour in Chicago, and a speaker and author on mergers and acquisitions-related topics. Brown sits on the board of UNICEF USA and the Dean’s Business Council for the Gies School of Business at the University of Illinois. He is also President of the Board of Regents at Saint Ignatius College Prep in Chicago.

Brown started with an outlook on the M&A market. Global M&A activity has increased year to date in 2019 compared to the same period in 2018. There have been around 230 M&A deals this year verse 200 in 2018. The P/E market has been robust as well. Following several years of growth with an all-time high in 2018, inflows have returned to more moderate levels. Activity in 2019 could be characterized by established P/E platforms getting larger, with new funds facing a more challenging fundraising environment. Despite the fundraising slowdown, a thinner slate of opportunities for capital deployment has mitigated the impact to capital supply, leaving significant dry powder available in private debt funds.

On the lending front, bankers are still providing funds while defaults, the bellwether of a slowing economy, have not increased in a material way. Overall, the continued trade/tariff uncertainty, slowing global growth, Brexit concerns, and mixed signals from key economic indicators about the likelihood and timing of a recession have given lenders a pessimistic view of the market. They are lending but looking for a reason not to!

Brown advised that valuations of businesses have grown to historic highs. This is due to several factors, the most significant being the tax cuts passed in 2017 (reduction of the U.S. corporate tax rate has made the United States a more attractive jurisdiction for inbound M&A activity and has likely increased the value of U.S. domiciled businesses), and the large sums of P/E money raised over the past several years looking to be invested.

Additionally, there is nothing on the horizon which makes Brown think these valuations would change in the next 3-6 months. Overall deal activity is great with high valuations being the norm. Brown advised that now is an excellent time to consider selling a privately held business. The M/A market could be close to its top as the number of private sellers entering the market is high. These entities are usually late to the market.

Brown noted that although the market is richly priced, a recession would not necessarily bring down M&A prices. It is more likely that M&A activity would cease, but as soon as there is an upturn in the market deals would flow again.

Browns kept his prepared remarks relatively short in order to answer audience questions.

Q: Should a recession occur would capital be available, or would the market dry up?

A: M&A firms have committed capital on their books. This capital would not be put into M&A deals, but left as idle, short term investments. The M&A firm will sit on these funds making a nominal rate and wait until the market breaks upward.

Q: How much of the high multiple business valuation is due to any cyclical effects?

A: Modeling of returns has dropped over the past several years. P/E should float based on a measure of public equity plus a spread. As the prices in the public equity market have risen, so to have the multiples for the M&A market.

Q: Is there pressure on the 2 and 20% fee schedule?

A: In 2009 when the market was in disarray the outlook was for a 30% reduction in P/E firms. This outlook turned out to be completely wrong. The overall amount of P/E firms is now greater than in 2009, and with the constant search for returns that will beat the market, the current fee structure is unlikely to change.

Q: What effect will negative interest rates have on the M&A market?

A: Low or negative rates have not affected the cost of capital. Capital has been cheap for an extended period.  Any nominal change in interest rates will have little to no impact.  What is more important is the availability of capital. It is the extension of investors risk appetite that is the greater concern. Investors are stretching beyond their comfort zone, getting riskier with their investments.

Q: What is the state of European M&A?

A: The trade war with China has caused a number of unintended consequences, one of which is that China has refocused its M&A activity away from the U.S. to Europe and Germany in particular. Lincoln’s office in Germany will set an M&A record in deals for 2019.

Investing in the New Space Race

The Educational Advisory group hosted an event on September 12 at the Palmer House Hilton to educate financial professionals, investors, and space enthusiasts on the technologies of space exploration, the geopolitical landscape, and potential winners and losers in the new space race. Attendees learned about how disruptive forces in the space industry will impact other industries and how this translates to investment opportunities.

Moderator, Myles Walton, CFA, managing director and senior analyst at UBS guided the panel discussion utilizing his wealth of experience as an aerospace and defense analyst and work with defense policy and weapons systems. Panelists at the event included:

  • Steven Jorgenson, co-general partner of Starbridge Venture Capital and founding partner of Space Finance group, Quantum Space Products, Space Angels Network and Integrated Space Analytics
  • Mark (M.E.) LaPenna, founder and CEI of Xenesis a pioneer in space-based optical communications technologies
  • Richard Godwin, serial investor and business consultant and director of cutting edge NewSpace and aerospace companies
  • Dr. Joan Johnson-Freese, U.S. Naval War College professor, Charles F. Bolden, Jr. Chair in Science, Space & Technology, former chair of the National Security Affairs Department at the Naval War College and researcher and author

Myles framed the discussion by asking panelists to comment on what they are most optimistic about space exploration space and what they felt were lessons learned. Johnson-Freese highlighted that seeing investment from the commercial side that came to fruition ten years ago is encouraging. This is balanced with the awareness that space projects take a long time and subsequently have a longer investment horizon. Most technology is dual-use for civil and military and because of this geopolitics come into play. Jorgenson is encouraged by the investing opportunities he sees and that companies in this industry are profitable sooner than expected. He asked us to focus on how these companies impact other industries in the economy. LaPenna honed in on data science commenting that long-term there are many ideas that are yet to be recognized or developed. Investors should not follow the herd and look for diamonds in the rough.

Shifting to lessons learned, Jorgenson spoke of previous business models that were developed by engineers and not by business-savvy managers. Business-savvy managers have come in and the management and execution risk has become better helping to define client demand with a path to revenue. Having a mix of government and commercial investors has been key. Johnson-Freese agreed that business-savvy managers have added value and that the US government recognizing innovation in commercial firms is also a big step. Godwin reflected that the work-life balance of the highly driven and intelligent employees in these firms was not sustainable. LaPenna provided a perspective that some approaches may not be realistic and there is no cookie cutter formula for determining an effective business model. For example, space entrepreneur Elon Musk wants to finance privately but his satellite project is estimated to take 15 years to obtain a mass of 750 million users.

There is significant momentum behind non-governmental stimulation for the space industry. But, is this good or bad? All panelists largely saw this as a positive boost to the space industry. However, with unique opportunities come unique challenges. A key threat is space debris. As satellites are increasingly used, who owns the natural debris found in space and more importantly who is responsible if a satellite is damaged? Godwin pointed out that no one is solving this obvious insurance problem. The insurance industry needs involvement and issues caused by debris need prioritization and resolution. Johnson-Freese added that space law is evolving, and another unique issue is forming laws around how to bring back things from space. In examining challenges, a big question is if global connectivity is demanded by space applications. Steven Jorgensen commented that solving spectrum and bandwidth issues is crucial and optical may provide faster connectivity compared to other technologies. Of options available, optical may also be a cost-effective solution.

What does the future look like for governmental space programs and what should investors expect? Part of the answer lies in American culture. NASA is culture and Americans are proud of the space program but are not as keen on funding it with tax dollars because they do not see it as a priority. Space is taught as a history lesson, but the American public is less interested in the underlying mechanics. It is also cheaper to continue using old technology versus testing new technology. New programs are announced but do not come to fruition due to costs and the inability to gain traction. Programs that do go forward have protracted development cycles opposite of how American culture focuses on quick turnaround. This causes political and technical risk. The original space race originated from political tension. Panelists pointed out that if China lands a man on the moon, the US could have increased enthusiasm for space programs.

A theme throughout the program was the role of private investors versus the government for the previously mentioned dual use technology typically used by the defense sector and how this will play out in the future. LaPenna thinks private investment is vital and reminded us that if you look back in the airline industry, many airlines were spurred by private investments from millionaires. He believes if you don’t dream big, you don’t get returns. Richard Godwin believes that it all comes down to survival and that one needs to understand the market from a technical and customer perspective. Godwin also suggested that investors should consider that many of the firms will not likely get to an initial public offering (IPO) stage and will be acquired by the government. Johnson-Freese shared an observation about barriers for commercial firms investing in space. A significant roadblock that hinders commercial firms is working through government requirements such as contracts, security clearances and paperwork. This has impacted product development adversely. On the other hand, venture capitalist firms have been able to make inroads and now have calls with the US Air Force to learn firsthand about requirements. The Air Force in turn can fund projects quickly and is working closely with private industry.

As investors, what should we take away about space investing?

  1. Few funds focus on this small sector where markets are somewhat limited.
  2. There are technological and business challenges such as global connectivity and space law that need to be solved creating investor opportunity.
  3. Private and commercial investment is growing but investment models are in their infancy with large investors filling roles that the government can’t.
  4. Projects and products have protracted multi-year time horizons.
  5. As this sector continues to evolve, there are many needs and products yet to be identified.
  6. The government is working more closely with entrepreneurs and the private sector than in the past.
  7. A catalyst such as another world power reaching a milestone could place an increased emphasis on space investing.

The space industry has an exciting and uncharted future. Buckle up and get ready for a zero-gravity experience.

Distinguished Speaker Series: Vivien Azer, Cowen & Co.

Cowen’s Views on Cannabis

On July 9, Vivien Azer, the analyst responsible for covering cannabis at Cowen & Co., presented her views at CFA Society Chicago’s Distinguished Speaker Series luncheon at the University Club. Cannabis/Hemp/CBD is an “emerging” sector within the U.S. and Canadian stock markets as legalization of the formerly stigmatized substances has begun to change.

Azer concluded that the “relative size of mature Consumer Products Group (CPG) categories reflects a long runway for growth in cannabis”. The global size of the alcoholic beverage market is $1.3 trillion, the NARTD (non-alcoholic ready-to-drink) market is $1.2 trillion in size with traditional tobacco being $800 billion, while the currently “illicit” cannabis market is estimated at $150 – $200 billion in size.

Azer started coverage at Cowen & Co. in September of 2016 and the two questions she asked before starting to examine the sector were: 1) Can Cowen make investors’ money covering cannabis; and, 2) Can Cowen make companies money (presumably bringing private companies public) covering the sector?

The Disruptees:

Within the Consumer Products Group (CPG), there are 4 distinct verticals:

  • Adult Use which includes breweries like BUD, Heineken and Molson (TAP)
  • Beauty & Nutraceuticals which encompasses Coca-Cola (KO), Pepsi (PEP) and cosmetic companies like Estee Lauder (EL)
  • OTC Pain / Sleep, which is primarily Johnson & Johnson (JNJ) and Procter & Gamble (PG)
  • Traditional pharmaceuticals like Merck (MRK), Eli Lilly (LLY), and AstraZeneca (AZN)

Azer noted that both Constellation Brands and BUD had either made investments in the cannabis space already or were interested since the traditional breweries and alcoholic brands were likely to be disrupted from cannabis as consumers see it as a psychoactive substitute.

Don’t forget Canada (The Great White North, eh?)

Azer and Cowen believe that cannabis represents a $12 billion market opportunity in Canada by 2025 with retail accounting for the bulk of the sales. One slide showed the monthly progression of Canadian retail sales in cannabis from October 2018 to March 2019 which cumulatively represented $300 mm (CAD) in retail sales. Cowen seems to see Canada as an early leading indicator of U.S. retail sales since Canada seems so far ahead of the U.S. in terms of its retail rollout. The early retail sales adopters in terms of Canadian provinces are Alberta, Ontario, Quebec and Nova Scotia with each having 24%, 23%, 13% and 8% respectively of Canadian cannabis sales. Alberta has 13% of Canada’s population but 24% of Canada’s total cannabis sales given early bricks-and-mortar adoption.

United States:  

At the time of the lunch, 11 states and District of Columbus had legalized cannabis for adult use. Colorado was the earliest adopter in terms of retail sales but their sales slowed when California and Nevada legalized adult use of cannabis. Cowen estimates that 80% of the $50 billion cannabis market in the U.S. is currently “illicit”.  By Q1 ’19, five states had generated roughly $5 billion in cannabis revenue and those were Colorado, Washington, Oregon, Nevada and California. Cannabis use has clearly come at the expense of alcohol.

Here are the numbers Cowen published as market sizes for various aspects of the cannabis market:

  • THC is an $80 billion opportunity by 2030
  • CBD is a $16 billion revenue opportunity in the U.S. by 2025

Vivien Azer of Cowen did a great job outlining market opportunities and the “macro” of the cannabis/THC/ Hemp/CBD markets. Canada is an interesting comparison since it appears to be out in front of the retail rollout experience. During Q&A, Azer touched on the SAFE Banking Act which will insure access to financial services for cannabis-related businesses. Since the lunch, the House has passed the SAFE Banking Act, but it still hasn’t been passed in the Senate, although passage is ultimately expected.

If you were unable to attend this event but want to learn more about the cannabis industry and where it’s headed, be sure to join us at our next cannabis event hosted by our Education Advisory Group at the beginning of 2020. Information available on the CFA Society Chicago website soon!