The Private Equity for Families Blog

Checking Into the Roach Motel

Make Sure You Locate the Cashier

A trip to Las Vegas is always interesting. If you are willing to trade light deprivation, sensory overload and spacial disorientation for free drinks, great people watching and endless opportunities to lose money, this is nirvana. Recently, I had the opportunity to spend three nights at Planet Hollywood while attending the International Builders Supply show. I walked almost 10 miles of convention center in two days and was energized by the hustle and bustle of a free and open business world. Returning to the hotel I was reminded that Las Vegas operates on a much different model.

Operating In a Controlled Environment

Each property is a controlled environment. You can convert real money into chips at any gaming table but you can only revert to cash with the cashiers, assuming you can find them. The chips are all the same color and after a few beers you have forgotten the difference. Unwittingly you are betting $75 a throw when you intend $15. The other subtle control feature is table stakes. You fill up the table with $15 players and after several rounds of free drinks you raise the table stakes to $25. You also cannot rest in Vegas. No time outs. The cafeterias are uncomfortable. The ergonomics of the seating and the lighting alone make you yearn for a cushioned seat and a mixed drink. The plates are too small and utensils are always dropping. Your coffee is refilled instantly.

Then there are the dealers. Almost all of them are young, friendly and attractive. The most appealing ones remind you of the girl next door, but with more skin on display than you saw during your entire high school experience. They are deadly flirts; assassins with a shoe. They have no discretion, house odds on their side and a pit boss with a permanent scowl to remind them what team they are playing for.

A Great Reaping Machine

Underneath the shining surface of Las Vegas there is a great reaping machine at work. It really would be a marvel to watch every day were it not for the personal heartaches. Like the Hotel California, you can check out any time you want but you can never leave. I mean it is almost impossible to find an exit and, if you do, you usually end up in a shopping mall that dumps you back in the Casino.

A new creature discomfort this time was the shower experience. I was momentarily relieved that the water jets were adjustable until I discovered that the needle like spray only adjusted one way. I had to choose between “defoliate” and “shot blast”. You certainly would not be seeking a shower to sober up. I wanted to keep my skin so I opted for double deodorant before I went to the Builders Show.

The guys in control of Las Vegas are pretty serious about that guaranteed 15% EBITDA profit margin and will remove external threats. That happened once to a group of guys from MIT who organized a card counting attack which is memorialized in “Bringing Down the House”. It did not end well for them when they met the girl next door’s steroidal brother in the “attitude adjustment” room in the basement.

A Few Asset Classes Operate in a Closed Environment

The more I was marveling about the reaping machine, the more I was thinking about controlled environments for asset classes. Many are reminiscent of Las Vegas. The stock and bond markets convert your cash to digital chips. Most people do not realize that they are merely beneficial owners of their securities. Legal title is in the name of a trustee like Cede & Co. (check out the definition of “cede”- interesting choice of name for your trustee). If you want your cash back, you have to convince the cashier. Unlike Vegas, however, the cashier makes the market in your chips and when your interests diverge from their own positions, a similar reaping may occur. This was demonstrated in the movie “The Big Short” when Wall Street market makers manipulated the price of credit default swaps until the big securities firms had cleaned their own stables of toxic mortgages. The good guys who were holding 200:1 long shot winners could not realize their winnings until the cashier was assured they were on the same side of the trade (net short).

Banking is another closed system. The cashier is not your relationship officer or your local bank President. It is the Federal Reserve System. Your money is only yours as long as the Fed allows it. Bank holidays, cash withdrawal limits and increasingly complicated wire transfer procedures are like trying to find a cashier in Las Vegas.

Other Asset Classes Operate More Openly

Contrasted to these closed systems is the real estate market. Because the records for property ownership and the system of private real estate ownership go back to feudal times, title verification has evolved as public and open. Many dead despots have learned taking a man’s home is risky. The cashier is also not the market maker. The same is true for physical assets, collectibles, private equity, hedge funds focused on private securities and any property where your ownership is not derivative or beneficial.

As the shower jets were removing one of my ear lobes, it dawned on me why one of my friends from Goldman Sachs bought half of Jackson Hole when he retired. Maybe he was worried about his old friends remembering him when he needed a cashier

Locate the Cashier

Las Vegas is the American answer to the Pyramids. As the Chairman of our window company remarked “This city was not built by losers”. The same is true for the stock and bond markets. US capital markets are the 8th wonder of the world. Like Las Vegas, however, it is always a good idea to locate the cashier. You never know when you might want to cash in your chips.

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Rob McCreary

Rob McCreary has more than 40 years of transactional experience as an attorney, investment banker and private equity fund manager, and has spent his career in building entrepreneurial organizations with successful track records Founder and chairman of CapitalWorks, he is responsible for developing and maintaining senior relationships with investors and portfolio governance.

This blog represents the views of Rob McCreary and do not reflect those of CapitalWorks or its employees. This blog is not intended as investment advice. Any discussion of a specific security is for illustrative purposes only and should not be relied upon as indicative of such security’s current or future value. Readers should consult with their own financial advisors before making an investment decision.

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