Nick Colas Says Public Equity Market May Be a Broken Concept

on iTunes, SoundCloud and at Bloomberg dot com. Well recently, David Einhorn, who is well respected hedge fund manager frequently gets calls right, suggested that General Motors should divide its shares into two classes, one that would be for capital appreciation and the other which would be for its hefty dividend. His goal to unlock value in these shares. This raised a lot of questions for Nick Cholas, who joins us

right now. He's chief market strategistic converge x UH and wrote a fascinating piece about how this highlights some of the broken aspects of the public equity market. Nick, Yeah, that's exactly right, because as I started thinking about iron Horn's proposal, I realized that it's really part of a continuum, and that you've seen other kind of little chips away at the classical equity market structure over the past decade

or so. So you look at Snap with its recent I p O not offering voting shares, You see dual classes of stock, and a lot of the most successful tech companies Google, Facebook and so forth, and you begin to realize that there's something going on much bigger than just GM iron horning in one company and a debate

about cyclical companies and valuations. Right, and you point to also initial public offerings and how much uh, the total volume of i p O s in any given year has gone down dramatically over the past a few decades. And this is also an issue that Jay Clayton, who has been nominated to be SEC chair, raised in front of Congress when he testified, saying that this is one area that he wants to address. Why do you think that there is a sort of structural flaw that is

increasingly prevalent in public equity markets? Yeah, this is the single most important question nobody really talks about very much, because the key issue is that public equity shareholders must have access to the very best companies that a society

can create. The reason is if they don't have access to that, they're just stuck with the losing companies because the nature of disruption is such that the new companies started out in California go on to grow and really impinge on the growth of other companies that are publicly held currently. So you have to be able to buy

the new ones to basically benefit from society's innovation. If you don't have access to them, then over time investors and take their money and go away because they don't want to own just the losers, they want to own the winners as well. Matt Levin and Bloomberg view columnists here and I were talking about this extensively last week, and we were talking about, you know, how the public equity markets have been part of the American dream of you know, sharing in dynamism and getting a part of

the fastest growing companies. But you know, I would argue, couldn't you say that public equity markets haven't gotten worse but that private debt mark it's have just gotten so much better private debt and equity, and you know, you have this incredible ground swell in the amount of debt that has been issued, You have cheaper rates thanks to the Fed and Frank's thanks to also changing dynamic in demographics. Um,

couldn't investors just participate through the debt markets. Um, they could do it degree, but ultimately the way you get upside an investment is owning the equity piece of the balance sheet, because that's why all the residual cash flows go. I think you raised the right points, though, and that VC has gotten a lot bigger, a lot deeper, and a lot better. And there's a lot of really smart investors out there in VC land that's just do venture

capital investment. Additionally, we're going through this big macro stage in the economy where there's a lot of disruption. Disruption takes a long time to invest in and see the benefits of that. And I think one other reason why there's not a lot of I p o S is venture capital is reluctant to give voting control or even voting input to public equity investors for projects that might be still five or ten years down the road, and so they keep them private instead of taking them public.

And just to give some numbers behind that, as you highlighted in your recent report, in a late ninety nineties, there were often thirty eight i p o s per month. Now that number is more like ten to twenty time twenty I p O s per month. So, Nick, you raise a good, quite good point with voting rights. Do you think that we're going to see more companies stripping away voting rights in their I p o s and

frankly stock buyers being okay with that? Yeah, absolutely, I think that's definitely the way of the future, because ultimately the goal is to get these companies out into the public domain. Let investors investors they want, or if they don't,

then they don't have to. But whatever it takes to connect the public equity investor to this tremendous growth engine that's going on in Silicon Valley and in sand Hill Road an adventure capital around the world, that's the most critical thing that can happen for equity markets in the next five to ten years. How much of mom and pop investors lost out by not being able to participate

in these early stages of these Silicon val companies. Well, let's think about Ubert, for example, still private worth by any estimate sixty seventy billion dollars. It would have been great if public equity investors could have bought that company. Was when it was twenty or five billion dollars, still a very viable market cap for a public company something they could have done and benefited from that. So that's

just one example. I'm sure there's many others. Yeah, but couldn't somebody argue that there also were a lot of flops that managed to go bankrupt and squander a lot of money that public equity investors were saved from. Yeah, there's two ancillary points that. The first is that you still need all the right disclosures, financial disclosures, risk disclosures, good investment banking, due diligence, the whole nine yards on that.

But on top of that, you do ultimately have to take some risk in order to make a return, and that includes potentially buying some flops along the way, And that's okay as long as you're invested in broadly diversified portfolio.

How much do the sort of regulatory burdens that Jake Clayton highlighted as being owners for a lot of companies, how much does that factor into corporations decision to or not to have an I p O. You know, ultimately there is definitely some issue with all the regulations, our bins Oxley and disclosures and what happens if you get it wrong and having corporate officers signed off on on statements, all of which are kind of post crisis developments, But

the overwhelming issue seems to be that venture capital is really reluctant to let go of their babies. They think they have really figured out the next week of disruption, and they don't want to have a lot of outside investors having to vote on who the new CEO is or if this company is going to emerge earlier or later. They want to maintain that control because they feel they

understand the landscape better. So, worst case scenario, if this trend continues of only the losers remaining in the public equity market, what do you think will happen? You know, ultimately, in the worst case scenario, people start to invest less. So, for example, we all know Amazon has really killed it and driven a lot of bricks and mortar companies and

the tubes. What if Amazon had never gone public, we wouldn't have access to that company, it wouldn't have grown as it has, and more importantly, would only be stuck owning the department stores, which are now really struggling against the Amazon threat. So it's super critical to have the winners in the market as well as the losers so

you know, it's interesting to me. I find that often when markets are entering a kind of boring state or one that is neither one of incredible upside or downside, is a time when people get deeply philosophical about the

meaning of of these markets. I mean, it's part of the reason why we're seeing some of these existential questions emerged, because the FED is kind of managing things well and everything is just kind of chugging along, and nobody can really make a much more of a dramatic statement than that.

I think there's a piece of it, but I think we're also I think there's a lot of people, I'm sure everybody in this building deeply intrigued by artificial intelligence, autonomous driving, new technologies generally, and I think everybody understands it's important that investors have access to those technologies as they go through development and become public companies, because other wise you could have a situation where venture capital continues

to own all the disruption and what gets disrupted is still in the public markets, and you don't want to see that happen because capital will stop circulating as well as it has before. Nikki used to work in the auto industry. Right, So have you talked with anyone about David Idhorn's proposal. Yeah. I spent ten years covering the autos at the old First Boston Credit Suites, and I have been in contact with several former CEO s CFOs treasurers.

To a person, they don't like the idea very much, but I will tell you that they also understand the frustration because they've all lived through multiple cycles of this group never outperforming from cyclotrough to CycL trough. Several lived through the bankruptcies during the financial crisis, and they get that there's a problem. They're just reluctant to try to fix it aggressively at this point in the cycle. Well,

how could they fix it? You know, on horse proposals and intriguing one because at least addresses the issue of who, you know, maintaining a shareholder base that is explicitly loyal to your financial structure. So if you're a dividend investor, you buy the dividends stock if you just want the bio back by the buy back stock. So it's an attempt to answer answering that question, but I think it's not the final word. Just to sort of dovetail into

the FED. I mean, do you think that a FED, a few more FED rate hikes or a possible announcement of the unwinding of its four point five trillion dollar balance sheet will upend stocks in any way, or that you know, this will become a major disruption that is

not on the radar right now. Yeah, And the context of the market that we see right now, in the economy that we see right now, the answer is no. I think everybody has a fairly good feeling that we're going to grow one and a half to two two and a half percent this year in terms of GDP, that inflation is going to get back to two percent and kind of stay there, and the FED is going to raise twice more. And that's the playbook everybody's using.

And so as long as we sort of follow that playbook and everything else, the two rate increases is probably fine. The unwinding of the balance sheets a more complex issue, and it's much about how the FED chooses to do that and at what pace and how they give guidance of about it. And I doubt they'll do that until

the back half of the year. So we have a few more months of just thinking about June as an ax creating increase, and then I think they'll start talking about not just the pace of the unwind, but the mechanics of the unwind. What do you make between the divergence between soft economic data and hard economic data? Boy, you know it's it's it's it's like a viral cat video.

You know, it's it's sometimes it's not that exciting. Actually, it's one of those themes that just feels like it exploded out of nowhere and it will be gone again in two days. I think it's an important notion, but I think it speaks to your point that people don't have much else to talk about at the moment, and as a result, trying to parse the data even more finally than before. The bottom line is are we growing or not growing? The answers, yes, we're growing. Are we overheating? No,

we're not overheating. I love that, By the way, I love the idea of the difference between soft and hard data being a viral cat video. Anything that we should be talking about real quick that we aren't. No, that's definitely. This to me was like the most important topic that I could come up with was what is actually what is a vote? Of what is a share supposed to do not only for the investor, but for society as

a whole. Honestly, a super important topic and a very very good report that you did, Nicholas, thank you so much for joining us. Nic Cholas his chief markets I just at converge x talking about why public equity markets are deeply flawed right now and how this could potentially really badly affect the future of where people put their money and how much they invest. Thanks so much, Nick, Well,

I want to turn the attention to marijuana. Actually, um, not the actual plant, but real estate that is involved with the cannabis industry. And here to speak about that is down is don Sandoval. She's chief operating officer of kal X Development Incorporated, which is based in New York City. And Donn I was reading about your background. You were on Wall Street for a long time, You're a graduate of Wharton. Uh, how did you find yourself in the

cannabis industry. Well, at LESTA, the cannabis industry and my interests there really began about seven years ago. Uh as developments began in Colorado and we're continuing develop in California. And it was quite clear to me that the efficacy of the plant and all the various uses that have really just garnered increased exposure as research has increasingly better research has come online was a trend in my opinion,

that was going to continue. And so as I started to look at various verticals in the cannabis space, it was quite clear to me that real estate was a sector that was both scalable and somewhat protective in the sense that you have bricks and mortar assets as well as an opportunity for diversification across the country that could provide us strong buffer should the cannabis experiment across the country be repealed or simply rolled back in a particular jurisdiction.

With the cannabis experiment, I like that way of describing it. Can that can you dovetail that into present day dynamics and sort of the political rhetoric that we hear uh from Jeff's sessions about potentially cracking down on marijuana and rebuffing attempts to make it legal. I mean, has this resulted in a plateau ing of opportunities for your business and for cannabis in general in the US? I would say, to date, Uh, the comments out of Jeff's sessions as

well as Sean Spicer on behalf of the administration. UH is really saber rattling and certainly a far cry from any legislative action. And we know frankly behind closed doors that Jeff has has made some of his lieutenants in the Republican Party somewhat more comfortable that we know immediate act and in terms of greater federal enforcement as it

results as it relates to recreational cannabis. So in terms of the opportunity set for Kalx and the cannabis industry in general, I would say the opportunity set is is unimpacted at this stage. How big is the cannabis real

estate market? Well, it's a difficult question because it's such a fractured industry and as you move from state to state, their local and regional jurisdictions that have very very high degree of differentiation between zoning laws and licensing practices, such at the actual building count on a per state basis, depending on how you want to divvy up those zoning requirements can vary quite substantially. Well, how big is Calex Calyx is currently nine properties, we manage over six fifty

thousand square feet. Our buildings are spread across four states, primarily out West Colorado, Washington, Oregon, and Arizona, and we currently house twenty one tenants. So what's the difference between a cannabis related building and a regular building? So a cannabis building is subject to very strict guidelines with respect to zoning and sighting, as well as it has very

specific infrastructure requirements power, water, lighting, UH. And it is exactly these types of unique characteristics, both from a regulatory perspective and a facilities perspective, that create what we like to call it Calyx, a new vertical within the commercial

real estate space. Has it been harder for you to drum up interest with investors just because of UH, some of Jeff's Sessions comments and Sean Spicer's comments, even if in back room conversations they're sort of poo pooing any potential imminent and repeal of some of the local UH

legalization legalization of marijuana. I think with certainty the new administration and the comments that we have had out of it as well as it comments from Jeff Sessions in particular, have given investors pause to a certain extent um but again, it is clear that the administration, whether it's tax reform, immigration, or healthcare, has much larger issues, UH it intends to deal with before I believe getting to cannabis. Well, I guess we'll see, right, Um, what about up north? Do

you look in Canada at all? We do watch what's going on in the Canadian markets, for sure, we don't own any property there, but it's certainly tremendous growth and the capital markets there have really experienced some exponential growth

with respect to cannabis companies of late. Well, yeah, and in the past couple of weeks, didn't Um, wasn't there some legislation that was signed that would sort of expand the legalization of maria on a in Canada and it led to some kind of complete boom and share is tied to that industry. Right. There is expected legislation later this month to be brought to the floor whereby UH continued expansion of marijuana in Canada on a legalized basis could have a much more developed framework as early as

July of next year. So what's the biggest opportunity for you going forward in the next year. So, the biggest opportunity for calxes to continue to build its real estate platform. We're looking quite aggressively at new opportunities more towards the East Coast. We're looking at acquisitions in Florida, Maryland, Massachusetts. To be to be clear, real quick, what are your conversations like with your colleagues, your former colleagues on Well Street.

It's interesting. Everyone wants to know if the green rush is for real, and what I say is, uh, it's a nascent industry ripe with risk, but a lot of opportunity. If you're willing to spend the time and do the work, I'm sure you have a lot of fascinating conversations. Thank you so much for keeping us up to date and what's going on in the cannabis real estate industry. Don

Sandoval's cheap chief operating officer, I can't speak today. It's Friday, chief operating officer at Klex Development Incorporated in New York City, talking about all the opportunities for cannabis related properties. I want to turn to energy, uh, and not just the production of energy, but using waste from energy production to create more energy. I want to bring in Steven Jones, President and Chief executive Officer of Covanta Holding Corporation, which

is based in New Jersey. Uh, Steven, I want to start first with the business model here. What is waste to enter g Yeah, high Lisa, thanks for having me on for first starters. Uh. Waste energy is basically taking waste um from either people's homes or special waste from corporations, uh, and putting through a combustion process in order to reclaim or capture the b two us that are that are still contained in that waste and and based on that

recapturing or combustion to produce energy. And you can produce steam um and or power um from the from the steam. So is this a no waste process or is this just sort of trying to strip out anything that's left over in a less efficient energy production process, uh, and using it again. Yeah, so it's it's the latter. So effectively, what you want to do, and we're certainly in favor

of this, is go through the recycling process. And after the recycling process, there's still waste that's left over and it has be to you value to it. And so rather than uh putting it in the your surface, so putting it into a landfill, the alternative is to put it through a combustion process and reclaim that energy. Can you just give me a visual here, I mean, do you go to landfills and just uh pick up big

portions of garbage and feed it through a machine. I feel like it's like a Doctor Seuss book where you sort of put it in a machine and it comes out in a box and you have some more energy. Yeah. We actually we actually run forty two energy from waste facilities around the US and also internationally. So we have a big project we're building in downtown Dublin right now. So these facilities actually are in and around population centers,

so their critical infrastructure to population centers. And actually, um, we don't pick up waste. Uh. There's companies out there that that you know, that go and pick the waste up from the curb from from your house. Uh. And then they're alternatives are either take it to a landfill to uh to dump it or tip it or take

it to one of our facilities. And again, um, when they take it to a landfill, uh, it decomposes over about a fifty year period and produces methane and methanes um about eighty times worse than than C O two is a greenhouse gas. So UM, there's a lot of people and then particularly a lot of companies in the US who don't really want to take their waste to landfills any longer, and we would rather have to go through what's a more sustainable process, which is an energy

from waste plant. So how many waste energy facilities does Covanta have, So we own or operate forty two. So we're the largest in the world. Our next closest competitors about half the size of US UH and UH. Generally we UH we process about twenty million tons a year of waste and that's about five percent of the waste in the US. The US still has a lot of landfills that that we that that are utilized for waste disposal. It's enough we produce enough electricity to power one million homes.

And the other interesting thing is that we also reclaim metal from the waste. There's an enormous amount of metal that goes through the through the waste stream, and so we reclaim or recycle approximately five thousand tons of metal metal annually and that's enough to build five Golden Gate bridges a year, which a lot of people find UH

find interesting. A lot of metal in there. I'm just sitting here, sitting here trying to think about the economics of this, how this works, because I would guess that it's fairly expensive to build the equipment to sift through mountains and mountains mountains of garbage. Yeah. So again, the waste comes to us, just like it would so we don't either. Yeah, but even processing it. Yes, so we

get paid for the waste. Um. From from an economic stan point you to think about it, we get paid for the waste that we take in um, just like we just like a landfill, gets paid for that. But then we're able to put it through the combustion process and produce energy, and then we get paid for the energy and also for the metals that we recycle. So um, it's a system that's got a number of inputs and outputs and we get paid for all those. It's very

attractive underlying economics. We have high adjusted a bit on margins greater than and our free cashual conversions in about the range. So uh, these these plants have a high degree of free cash flow conversion. Do you deal a lot with nimby with people not wanting to have these uh? Not? In my backyard, not not wanting your plants near them. Yeah, it's interesting. In the US, there's there's a lot of nimby.

I would tell you new plant, new plant. UH developments in the US are few and far between, UM because the US has a lot of landfills and so UH that tends to be the route that waste goes. But if you go UH to any other international jurisdiction, So so they think about the EU, UM Ireland for example, where we're building a big plant. Even a lot of places in Asia, there's a lot more acceptance of energy

from waste. I think the citizens there have UH and the governments there have become um more UH inclined to not put their waste in the landfill and have the greenhouse gas impact occur. They'd rather have a go to an energy from waste plant. And then in the energy

from waste plant, there's a controlled combustion process. So if you think about the capital we spend on these plants around, the capital goes into the air pollution control systems on the back end, so it's a much more controlled process rather than a landfill where the where the waste decomposes over you know, roughly fifty year period. This is so fascinating to me. Steven Jones, President and Chief executive Officer

of Covanta Hold Incorporation, Thank you so much. One thing that this just raises in my mind as the US has so much more land and empty land than a place like the European Union, where there needs to be more of a premium put on consolidating space and making sure that it is all used efficiently. Fascinating topic energy

waste energy. I want to turn to a story that's getting a lot of attention today by Bloomberg's Laura Keller, financial news reporter here at Bloomberg, and it's about how traders are shifting the way they try to communicate out of the eyes of their employers. Laura joins us here in our Bloomberg eleven three oh studio. Laura, can you just tell us a little bit about what you're finding

about how traders are communicating with each other. Yes, so, Lisa, we talked with I think probably a half to two dozen different people about this and more over the years and really just looking at why they're turning to these things. So it's these things being WhatsApp and other types of encrypted uh sort of chat vehicles exactly, and I message apples I Message counts as well because that does have

some encryption as well. UM. So essentially using these different communication devices, these text based messaging services to talk about work, to talk about things they don't want anyone to see. So we kind of found a range. You know. It's some things just sort of jokes, things that you would share, you know, like email chains used to be. Other things are a little bit more you know, maybe it's a work thing that's happening that you don't really want any

much to know about, complaining about work. But it also is us to this level of legally dubious information, which is you know, talking about client positions. UM. And we also even you know, have some examples too of actual bribery and securities fraud being talked about UM on these different apps. Okay, so just to be clear, the reason, one reason why this is so front and center for so many people is that just this week a former Jeffreys banker was fined in the UK for sharing confidential

data on WhatsApp. UM. This sort of brings to for the issue. But banks are trying to crack down on this. I mean, this has been going on for a while. Banks have certainly cracked down on mobile phone usage and texting. Um, what are they doing to combat this? Right? So, banks, as you say, you know, each and every time there's a new place that people are going offline to talk, they've It's like cat and mouse. They always find a way.

Emails used to be something that we didn't have ingested into these big bank compliance forms, and now we do. So the banks are trying, I mean they know that this is happening, but a lot of them have these bands on text messages. Period. You know, you can't bring your your cell phone to the trading floor. You're not supposed to be conducting work. There's also different agreements that you sign when you're employed with the bank, saying yes, I attest that I will not conduct any business on

any form of communication that you don't already monitor. You know, you know what I'm struck by as as I as I read your article and as I hear you talk

about it, Why are people doing this? I mean traders could just meet in person, right, I mean, yes, this is an encryption method and so people could go to this, But I mean it comes down to why are why are traders still trying to do this if they know it's illegal, and their use of these uh encrypted apps just sort of highlights their knowledge of the fact that they're illegal. So I mean, do people talk about that.

I mean people could just be meeting in person. It's just highlight how frequent it is that this type of activity goes on, Right, So people do meet in person, they do talk about these things then, or they pick up the phone and they talk about it. They're usually they prefer cell phones obviously rather than a line of work. If used to have personal cell phones, which would go out of the range of their banks, right, But those

things can still be subpoenats. So if there's ever any question that could actually be under the purview of some kind of prosecutor, if you have WhatsApp or a signal that deletes and nobody ever is able to subpoena those records, that's better. And I think you're seeing a lot of people in the political space to using confide using signal because they don't want to ever be monitored under any circumstance, even if they're not saying anything that would be a problematic.

But is this type of encrypted app preferable even to an in person meeting. I don't think it's preferable. I think it's when more of a convenience standard. So if you are in your same morning sales meeting at the bank floor, you can't really pick up the phone because you're literally in that meeting. You can't go meet someone

because you're at work. But if you have something to say to someone about work, um, we we have some examples in here about people talking about you know, the trading desk buys and sells that's happening in text form in these sales meetings when it should probably be happening on you know, Bloomberg, IB on message whatever it is.

You know. I have to wonder how often people use these apps more for conversations that might be a little bit racier than compliance would like, less so for the illegal issues, and more for uh, say, you know, cracks about I don't know, pick you're not safe for work topic. Um. But you know, if I imagine, it's more that than it is the other exactly. And I don't want to overstress that there are these sort of you know, dubious things happening all the time, but we certainly found those examples.

But you're right, it is a lot of things where I would rather not have my boss look at this. You know it's a complain about work, it's a complain about your boss, or maybe it's also something you know, we don't mean I want to swear on my text. We have so many complaints of banks. Um compliance officers have been so stringent on that that you actually get flagged right away if you use any kind of swear word or tone. Tone is important. So what'sapp is a

is a swearing platform. Laura Keyle Keller, thank you so much for joining us. Laura Keller is a financial reporter here at Bloomberg News. Thanks for listening to the Bloomberg pien L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.