From legendary short seller to god of American capital

Chapter 213 Division of Labor and Cooperation

Chapter 213 Division of Labor and Cooperation

After Larry's explanation of "private equity investment funds," Mr. Porter made a very quick decision to make the most important career change of his life.

The reason is simple: Mr. Porter, having been in the securities industry for so long, can see at a glance that Larry's new "mutual fund" will create a brand new securities industry.

But getting this done is far more complicated than just talking.

The most crucial point is to present a concept that those involved in fundraising have never considered before, which goes far beyond what Mr. Porter's simple "trust" can achieve.

To achieve this goal, both individuals need to fully utilize their intellect and relationships, and complete all preparations as quickly and thoroughly as possible.

Therefore, Larry and Mr. Porter locked themselves in their office all Monday afternoon, first brainstorming, then making contingency plans for the conceivable difficulties, and carefully considering various details of the fund's establishment.

The two discussed the matter until late in the day before reaching a preliminary agreement.

The first thing to determine is the nature of the company. Since there are no similar companies at the moment, it is impossible to directly register a "fund company".

However, if you register a private bank, you will be unable to carry out other businesses that are not very related to traditional deposit and loan business because the banking license and interbank regulations are too strict.

Therefore, the two can only form a "trust investment" company at present.

Mr. Porter will leverage his connections with lawyers and government departments to begin establishing a foundation that is gradually gaining acceptance among the wealthy in the United States.

The most troublesome thing right now is that it's unprecedented, but it's also the most beneficial thing for the two of them.

Since there is no precedent to follow, Mr. Porter's most important task these days is to establish a company and compile a sufficiently rigorous set of core legal documents.

Because no one could recognize the significant changes in the fund industry, many matters that would later require strict review by regulatory authorities could be determined solely at the corporate legal level.

The second point is the investment of the trust company and the respective proportions of ownership.

Like other firms on Wall Street, trust companies themselves don't cost much; the most expensive things are connections, talent, intellect, and knowledge.

Now that Mr. Porter and Larry possess the latter two, the fixed expenses of the trust fund company itself are nothing more than renting an office on Wall Street, with an annual rent of only $600 to $1500. Including the costs of furniture, stock quote machines, telephones, etc., the annual cost does not exceed $3000.

However, trust fund companies still need very substantial upfront reserves to cover the following two expenses:

The most important expense is personnel costs.

Although the trust investment is a small team company with two people at its core, it still needs talents such as asset appraisers, financial analysts, legal advisors and senior accountants.

These professionals must be on duty from the start.

Mr. Porter shortlisted a few familiar experts in investment and accounting on a piece of paper and prepared to personally visit them to "poach" them.

The second major expense is the principal of the trust fund and subsequent investments in other funds.

To demonstrate the strength and stability of the trust fund, its initial capital needs to be substantial enough, and the company's principal must be as large as possible. This also provides tangible reassurance to those who are hesitant.

The two considered that the new fund would inevitably raise doubts, so they also needed to "reinvest" in the fund and ensure that the clients who raised funds would receive returns first.

This is somewhat similar to the "senior" and "junior" tranches in later private equity funds.

Clients are the "priority tier," receiving priority in profit sharing and facing minimal risk; conversely, the follow-on investments of fund founders are the "junior tier," losing their share first when losses occur and receiving their share last when profits are made.

In terms of the tiered design, the priority tier is more like the fund's "creditor," having the first priority right when distributing returns and repaying principal.

The rate of return is relatively fixed, such as 6%-8% annualized, but the upper limit is also low, and it is impossible to enjoy excess returns.

At the same time, they also enjoy a safety cushion because the junior tranche absorbs losses first, making the senior tranche very safe. This is generally suitable for risk-averse investors.

Considering the current level of acceptance of trust investment funds, Mr. Porter believes that 80% of his clients will likely invest in the "senior tier" to give it a try.

Mr. Porter and Larry's funds will naturally become the "junior tranche".

Profit distribution and principal repayment occur after the priority tier. Priority must be given to protecting the returns and principal of the priority tier. Therefore, all risks are borne, but all excess returns after deducting the fixed returns of the priority tier can be enjoyed.

If fund managers can thicken the "safety cushion," they will naturally be more closely aligned with the investment results, which will incentivize them to manage the fund well, because if there are losses, they will be the first to lose money.

This tiered structure, similar to the "preferred stock" and "common stock" in current US corporate equity, is acceptable to the wealthy.

Therefore, the two of them still need to come up with a lot of money.

After buying the property, Mr. Porter's personal assets were already quite limited, but he still gritted his teeth and prepared to mortgage the four-story property he had just purchased in order to obtain enough money to invest in the fund company's principal.

Although Larry is relatively wealthy, he is unwilling to excessively encroach on Mr. Porter's share, so he plans to wait until Mr. Porter calculates his share before making corresponding investments.

In addition, Mr. Porter will be responsible for setting up the fund contract, identifying target clients, and mobilizing his friends in the press to create momentum for himself.

Larry's task was to persuade George Eastman to cooperate with the roadshow and to convince Mr. Morgan's bank to act as a "trustee".

This is also a difficult task.

After the two finished discussing, Mr. Potter looked at Larry with a very serious expression.

"Actually, I only did a lot of the administrative work. Larry, you are the most crucial part. We need to get the cooperation of both of you as much as possible for our first fundraising to succeed."

Larry didn't rush to answer, but instead thought through the current situation before turning to Mr. Potter and saying,

"I think that Mr. Porter, your clients are the most important, because whether this matter succeeds or not does not depend on whether the process is smooth or the roadshow is qualified, but mainly on whether the major clients you have selected truly recognize your new identity as a fund manager."

In my opinion, you need to find a highly respected and virtuous person who can lead the investment effort. Their willingness to step forward and invest first will play a crucial guiding role. Do you have such a person in mind?

Without any hesitation, Mr. Potter nodded and said, "I have!"

(End of this chapter)