2 June 2009
by Michael G. Clark, Principal
From the time we sent An Awakening out in January until now, the government has taken unprecedented steps towards the goal of stabilizing the U.S. economy. This herculean effort/spending binge has been met with an overall increase in confidence by the marketplace that can mainly be attributed to the diminished fear of the Great Depression 2.0. However, America’s rebound in confidence and the rise of the stock market should not be a bellwether of an imminent return to economic sanctity.
Talks of “green shoots” have dominated the press, but let us not confuse a lack of bad news with growth, or an increase in confidence with progress. Jeffrey Rosenberg of Bank of America states in the Financial Times on May 20, 2009, “The price for that near-term stability is long-term below-trend growth and above-historic-norm unemployment – The Great Recession.” To Mr. Rosenberg’s point, there is a price for stability and the bill has yet to come. So much of the conversation has been about short-term stability that we have failed to properly address an equally important aspect – long-term growth. We are in dire need of real economic growth and nobody seems to know from where it will come.
In the past we had the industrial revolution and more recently the computer revolution. What is our next revolution? Without a strong growth catalyst, stagnation is a likely and highly undesirable consequence. The good news is that the U.S. has a long history of proving its uncanny ability to compete, create and innovate.
An important concept crystallized in my head six months ago – distressed investing, all the rage in today’s economy, has so many meanings and styles that the phrase on its own has little meaning. Is it macro, micro, growth or what we call value-add repositioning? Earlier this year, Meridian began a partnership with a firm called GPO Capital. The premise behind GPO is to provide assistance, executive leadership and capital to emerging private equity managers dedicated to repositioning the distressed sectors of the United States.
Bruce MacFarlane, a founding partner of GPO and our Chairman, has stressed that the key differentiator for GPO is its focus on partnering with firms that create value and solve problems versus those simply focused on trading distressed assets. The model calls for actively working the investment, solving problems and building sustainable and valuable assets. His definition of distressed investing struck me profoundly.
Every firm that is in acquisition mode is capitalizing on distress, but few firms have talked about how they intend to create value. The “D” word has been so perverted in the past twelve months that it is used interchangeably to describe everything from people buying homes at auction, to investors buying blue chip stocks at historical lows, to people getting great deals on hotels and handbags. In a reversal of sentiment from the past decade, getting things on the cheap seems to be in vogue. “Distress” is now trendy.
The problem is that this trend will not lead to growth. There is a difference between generic distressed investing and the value-add style of investing that Meridian and GPO advocate. Both start with an acquisition at distressed pricing, but value-add investing creates further value over price arbitrage. Many investors look to buy assets at prices that they deem to be below-market and wait until the markets improve to sell at a profit. This is simply a trading strategy – and other than creating some liquidity for a troubled seller who in turn can utilize that capital – there is little value creation in that strategy.
Additionally, a typical distressed investor is solely at the mercy of the macro environment and hopes that the price he/she paid is less than what prices are in the future. “Distressed repositioning,” or value-add investing, combines distressed investing with expertise and hard work to fundamentally transform the investment on a micro level. It would be the difference between buying the bonds of a company at a discount and selling them a year later when the bond market improves, versus buying the bonds, obtaining control of the company at a discount, overhauling management, re-envisioning the product line, honing the value proposition of the company, increasing profit margins and building a sustainable company that produces economic goods demanded by the marketplace.
In distressed investing, you control one variable, entry price, and you are hoping for an overall improvement in the macroeconomic environment. In the distressed repositioning style of investing you control many variables on a micro level, and are not solely dependent on a macroeconomic turnaround. If the macro environment improves it is a bonus. In fact, if enough buyers incorporated the distressed repositioning style of investing, the results would directly drive a turnaround in the macroeconomic environment.
The largest “distressed investor” today is the U.S. government. The problem is that the government is notoriously terrible at repositioning and building out their investments. Injecting capital into banks, saving companies from bankruptcy and bailing out the consumer may be a necessary antecedent for growth, but it will not be the generator. Typically we tend to think of repositioning in reference to companies, delinquent debt or real estate. This time it is our country that needs restructuring and repositioning.
We may have taken steps to stabilize the U.S. for the time being, but we now need to reposition it for growth. Howard Marks, founder of Oaktree Capital, is known for his intelligent views on the world. In one of his widely praised memos, he claims, “Of the two things I think are most wrong about American business, the worst is short-termism. Companies are rewarded for short-term success and penalized for short term failure, whereas few people ask about the long term.” I think he would agree that our country’s success will depend on our ability to blend the demands of short term stabilization of the economy with the creation of economic engines of long term growth. Now is the time to build the engines.
Michael G. Clark is a Managing Director at Meridian Development Partners, a real estate private equity firm in New York focused on repositioning corporate real estate assets. He is an adjunct professor at Columbia University’s Masters of Real Estate Program where he teaches Development Case Studies, Private Equity and Real Estate Development. He can be reached via email at michaelc@meridiandp.com.
Monday, June 1, 2009
Thursday, January 8, 2009
2008 - An Awakening
8 January 2009
by Michael G. Clark, Principal
The decline of Rome was the natural and inevitable effect of immoderate greatness. Prosperity ripened the principle of decay; the causes of destruction multiplied with the extent of conquest. —Edward Gibbon, The Decline and Fall of the Roman Empire
One of Meridian Development Partners’ New Year’s resolutions is to provide regular commentary on many of the changes that will reshape economic behavior and define opportunities and risks over the coming years. This particular piece is intended to provide a broad-based reflection on 2008, as well as set the stage for future focused commentaries on specific initiatives and their implications for real estate investing. Our goal is to generate an ongoing dialogue and debate with our colleagues and partners. Through this we hope that our knowledge will be expanded and that we will all come out a little bit smarter for it.
2008 was the year that so many of us wish to forget, but that we should always remember - for it was the best year of the century. If only the Romans had a year like 2008 to bring them back to reality and stir the spirit of the Republic into action, it might have survived another 1000 years. 2008 was not the year any of us wanted, but in retrospect it may have been the year we needed.
Americans are going through a painful economic purge that no one is pleased with, but one that will prove to be a valuable process in the long run. A 2007 report from the GAO office in Washington extolled the myriad problems we face: imprudent fiscal policy; chronic under-investment in infrastructure, healthcare and education; declining moral values and political civility; and an overextended military in foreign lands.
These issues have not been addressed in a meaningful way since the report was issued. This year gave us the shock we needed and the financial stress gave us a feeling of vulnerability that shook the pillars of America’s foundations. This low - while financially and mentally painful - may drive the changes necessary to ensure our place as a leader in a world where we strive for an ever-improving quality of life. Perhaps through our sheer determination and force of will, 2009 will be the start of the journey that can effect the changes necessary to repair our crumbling system and awake the primordial American spirit from its slumber.
Before things can get better, they have to get worse. Although 2008 might not have been the economic bottom for the U.S., it was an emotional bottom. Out of hardship comes strength; out of difficulty comes clarity, and Americans have proven time and time again that we still have the indomitable spirit that our forefathers showed some 232 years ago.
The Emperor wore no clothes. Hans Christian Andersen’s 1837 tale of the irrationality of mob mentality ended with the Emperor finally realizing that he was parading stark naked down Main Street after being fooled by some cunning swindlers. While everyone could see that the emperor was naked, nobody wanted to speak out for fear of sounding foolish. Instead, they chose to believe the lie foisted upon them. It took an innocent child, unclouded by pride, to expose the absurdity.
In the U.S., we suddenly realized after years of delusion that many aspects of our financial system were mostly smoke and mirrors. This illusion stunned the most brilliant of people and moved our country into rarely chartered territory. We came to realize that many of the building blocks of our financial system and economy more closely resembled papier-mâché than concrete. Somewhere along the way we went from being a nation of entrepreneurs, industrialists, upstarts, innovators and visionaries to one of financial engineers, quantitative manipulators, overzealous bankers, greedy brokers and zero-sum-game capitalists.
In 2008, we found out that that the most powerful economy in the world had elements that looked more like a Ponzi scheme than a mighty economic engine of growth. While it is disturbing to think we were walking down the street naked, we have the ability to clothe ourselves once again and return to common sense in 2009.
An opportunity in a sea of calamity. John Kenneth Galbraith whimsically said, “What history teaches us is that we do not learn from history.” 2008 could prove to be the most important year of the century if we prove this maxim false. The key question is, will 2009 be the year that spurs a return to the true spirit of capitalism, democracy and progress that founded this country? Or will it be another time when we treated the symptoms and simply moved to the next boom and inevitable bust on our way to another bigger and more ominous crisis?
Maybe this time the pain is so intense, the fear so prevalent, the feeling of mortality so pervasive, that we band together and make the changes that are so often talked about but so rarely implemented; changes in our education system, large scale improvements to our infrastructure, an overhaul of our healthcare and social security systems, etc. There is no doubt that paying for progress will prove to be as difficult a task as any we face. Figuring out how to pay for change, while not mortgaging our country into bankruptcy, will be one of the great challenges of this century.
Perhaps 2008 was calamitous enough to provide the unity necessary in the coming years to solve the great challenges of our generation. In a year that saw the historic election of President-Elect Obama to the highest position in the nation, it seems that there might be enough political and social will to address the serious maladies that afflict us.
While we understand 2008 provided immense economic losses and personal heartache, we also believe that 2008 will prove to be a historic year in American development. Alexander Graham Bell said, “When one door closes, another door opens; but we so often look so long and so regretfully upon the closed door that we do not see the ones which open for us.”
2009 will be the start of a decade of large scale changes, and we are only limited by the boundaries of our imagination as to what opportunities we can create out of this momentous time in history.
Intellectual Reallocation. We have seen a “brain drain” of our most talented students and future leaders into the financial sector where their brilliant minds created the financial “innovations” that led us down the current path. Imagine a world in which the brightest minds were competing against each other to cure diseases, invent techniques for creating potable water and identifying renewable energy solutions. We live in a capitalist society, so nobody expects them to work for less money than they are worth, but surely biotech and alternative energy solutions can create enough economic energy to compete with the world of financial manipulation.
2009 should be the year when we facilitate policies to enable future innovative technologies to maximize their profitability. Let us pay the best and brightest to invent effective and profitable cancer treatments, simultaneously saving millions of lives and creating great profits for the company and people that created the cure. Our system is surely inefficient if our brightest young professionals must choose between making $2 million per year creating algorithms for complicated derivative formulas with no clear value creation proposition and making $50,000 a year helping commercialize an alternative energy source that will bring extraordinary value worth trillions of dollars to our economy and society. Maybe the worlds of finance and science could learn from each other with finance becoming more value added, and science becoming more profitable.
Perhaps a young sophomore in college at Columbia University will look at the maladies of 2008 and choose biochemistry as a major over finance, and will be the one to end the AIDS epidemic in 10 years. Maybe it will always be possible to make obscene amounts of money creating little value, but perhaps the playing field has leveled just a bit so that our brightest can dedicate themselves to creating value for the world, not just themselves.
Values. The youth of today have a sense of entitlement that many in the older generation do not understand. Nowhere is it written that upon graduation from college you deserve a six-figure salary, when you have not proven a thing. A silver lining in the dark economic clouds is the attitude shift that is happening all over the U.S. There is nothing like the loss of over 2.7 million jobs and counting to make you thankful for the one you have. People under 40 years old have never seen a cycle. They have seen unprecedented economic expansion over the past 15 years. The future leaders of our world will be well served to learn what hard times mean, and that none of us is entitled to anything other than life, liberty and the pursuit of happiness (and even those are not afforded to many outside of democratic societies).
Struggle can be a good thing, because it teaches us what is really important in our lives and restores the humility that so many of us have lost. With a savings rate of less than one percent, maybe Benjamin Franklin’s advice of “a penny saved is two pence clear” will actually mean something again. Perhaps this time of struggle will help us remember the values that are in the core of our Americanism. Lately we have fallen into a short-term view on life. It is time to return to the essential truths and remember that nothing worthwhile or long lasting can be achieved without hard work and sacrifice.
Infrastructure. U.S. infrastructure in 2005 was rated a "D" on a scale of A-F by the American Society of Civil Engineers. If you have ever traveled the subways in New York, you must wonder how the financial capital of the world can have an infrastructure system that could only have been considered cutting edge 75 years ago. We must repair our infrastructure; rebuild our roads, bridges and ports; build new and repair old mass transit; create a better wireless backbone; and heal our decaying school systems.
Ernst and Young, along with the Urban Land Institute, found that “2008 seemingly marks a critical juncture in a rapidly changing economic environment where new approaches to land use, infrastructure and energy efficiency will likely determine and possibly reorder the next generation of winners and losers - countries, companies, investors and peoples.”
In fact, this same study ranks the U.S. in a category called “coasting on prosperity.” How apropos, as it seems that this is the exact affliction that affects nearly all aspects of our lives. It is exactly the calamity that 2008 should change. Leaders do not stay on top by coasting. Many attribute laziness as the single greatest reason for the fall of Rome. Well-fed and happy, the Romans simply coasted on their prosperity.
The good news is that it is likely that we will see upwards of one billion dollars of investment in our infrastructure in the coming years. We need to ensure that this is a first step and not the ultimate step, as our infrastructure needs have been neglected for so long that the money will not go far.
Immigration. We need to formulate a better immigration policy. We used to be known as a “melting pot.” We took the best the world had to offer, opened up our arms to brilliant, young, eager foreigners who ultimately changed our country for the better. We also need to ensure that people who do come over here pay their taxes and become contributing members to our society.
In our legitimate need for safety and security, over time our openness has given way to mistrust and protectionism. We must streamline our system so the right people - who come to the U.S. for the right reasons - are welcome. If not, we may miss out on this century’s Albert Einstein, architect I.M. Pei, naturalist John Muir, publisher Joseph Pulitzer, or Nobel Laureate Subranhmanyan Chandrasekhar.
We must devise a way to better embrace immigrants and integrate them into our society while also protecting our own jobs and standard of living. Innovation occurs when ideas, cultures and worlds collide. Competition is the lifeblood of America.
Energy. Paying four dollars a gallon for gas prompted outrage and established near unanimous consent that we must pursue energy independence with a vengeance. But just as soon as gas prices moved towards heights never seen before and the fervor for action reached critical mass, prices plummeted back down below $1.50. We have moved in and out of our energy rut for decades, pledging action when energy prices are high and then not following through when inevitably gas prices drop.
We must take a long view on energy and end our self-destructive policy of enriching the Middle East, sacrificing our national security and throwing away our wealth. Becoming the leader in alternative energy will allow us to prosper from whatever the new “oil” of the 21st century becomes and control our own fate, without relying on the Middle East for our energy needs. While we are at it, let’s figure out how to do so in an environmentally friendly way.
The Environment. Making profit is a prerequisite of any investment. Companies should not be in business if they are not profitable. However, we must think about our businesses with a mind for the social and environmental benefits we create. We must not treat the world as if resources are unlimited. The Earth will outlive us and leaving it in shambles for the next generation is irresponsible and unacceptable. Just as in our corporate views, we need a longer-term view on the Earth.
It is a very real fact that water supplies are diminishing across the world. Perhaps golf courses in the desert aren’t the best use of the water that we do have. Corporations should not only have to battle to compete in delivering quality and affordable products and services, but they should also have to compete in the creation of social and environmental benefits - the American public will demand it.
If that isn’t enough motivation, The Hill, a congressional newspaper summed it up best when it wrote that “Going green is also good for profits and patriotism. If America leads the world in energy efficient technology manufacturing and installation and renewable energy production, the country as a whole will benefit. That means more industry, more exports, more jobs, more money and, consequently, more pride.”
Science and Engineering. We have to change our policy on science and engineering so that we can maintain our position as leaders of the New Economy. For more than a century the U.S. has been the leader in scientific discovery and innovation; however, we are at a critical juncture and face losing this extremely important position. We are graduating fewer students in science and engineering as a proportion to our population than most of our Asian counterparts; moreover a large proportion of those graduating in the U.S. are foreigners who then return to their home country.
We have failed to increase our government allocation to important early stage Research and Development (“R&D”) in which the private sector will not invest, and have failed to provide proper incentives to spur more private sector investment in all areas of science and engineering. Will we finally allocate the necessary money, policy innovation and resources to science and engineering that may provide the future innovations that will change the world, cure diseases, repair the earth, ease suffering and solidify our place as an economic superpower? The U.S. is barely spending one percent of its GDP on R&D while countries in Asia are spending upwards of ten times that amount. Biotech, nanotech, alternative energy and new water sources would seem to be pillars of future prosperity.
Shouldn’t we lead the charge?
Myriad Other Pursuits. There are changes and opportunities arising in so many areas - such as healthcare, education, finance - that it would be difficult to address all of them in such a cursory commentary. Progress will not come without some discomfort, as our national debt spirals out of control, politics play out over the future of our country and increased competition from other countries heats up.
Nonetheless, progress is occurring as we speak, including everything from brownfield funding initiatives to healthcare bills that improve the level of care hospitals deliver. In a changing world there are many opportunities for investment. We will touch on many of these throughout the year, giving attention to those topics specifically related to real estate investment decisions.
Conclusion. Like the Roman Empire that fell as a consequence of its greatness, the United States is finding that the consequences of prosperity can be painful. Now it is up to us to reinvent ourselves, restore the intrigue, the ideals and the ingenuity of the American spirit. The next ten years will test our mettle. It will be tough to maintain the wonderful standard of living to which we have grown accustomed and it will not come without personal sacrifice.
But, unlike the Roman Empire, we have a chance to learn from our mistakes and have a short window of time to rectify them. 2008 will be looked at as a terrible year by many, but we see it as a once-in-a-lifetime opportunity for effecting change. The 2008 financial meltdown provided more than a warning sign for the U.S., it provided a slap in the face. This is our chance to slap right back. This is our chance to invent the future.
We are still a nation where young entrepreneurs are toiling tirelessly in their basements in hopes of creating the next Microsoft; where a young man living below the poverty line is studying each night so that he can be the first of his family to go to college; a nation that values progress so much that only 50 years after racial segregation was legal we have elected a minority to our highest and most prestigious office. We are a democracy, we are hopeful and we are a nation filled with limitless possibility.
Meridian’s New Year’s Resolutions. In reflecting on 2008 and our beliefs above, Meridian has developed some New Year’s resolutions and reinforced some of our basic tenets for 2009:
by Michael G. Clark, Principal
The decline of Rome was the natural and inevitable effect of immoderate greatness. Prosperity ripened the principle of decay; the causes of destruction multiplied with the extent of conquest. —Edward Gibbon, The Decline and Fall of the Roman Empire
One of Meridian Development Partners’ New Year’s resolutions is to provide regular commentary on many of the changes that will reshape economic behavior and define opportunities and risks over the coming years. This particular piece is intended to provide a broad-based reflection on 2008, as well as set the stage for future focused commentaries on specific initiatives and their implications for real estate investing. Our goal is to generate an ongoing dialogue and debate with our colleagues and partners. Through this we hope that our knowledge will be expanded and that we will all come out a little bit smarter for it.
2008 was the year that so many of us wish to forget, but that we should always remember - for it was the best year of the century. If only the Romans had a year like 2008 to bring them back to reality and stir the spirit of the Republic into action, it might have survived another 1000 years. 2008 was not the year any of us wanted, but in retrospect it may have been the year we needed.
Americans are going through a painful economic purge that no one is pleased with, but one that will prove to be a valuable process in the long run. A 2007 report from the GAO office in Washington extolled the myriad problems we face: imprudent fiscal policy; chronic under-investment in infrastructure, healthcare and education; declining moral values and political civility; and an overextended military in foreign lands.
These issues have not been addressed in a meaningful way since the report was issued. This year gave us the shock we needed and the financial stress gave us a feeling of vulnerability that shook the pillars of America’s foundations. This low - while financially and mentally painful - may drive the changes necessary to ensure our place as a leader in a world where we strive for an ever-improving quality of life. Perhaps through our sheer determination and force of will, 2009 will be the start of the journey that can effect the changes necessary to repair our crumbling system and awake the primordial American spirit from its slumber.
Before things can get better, they have to get worse. Although 2008 might not have been the economic bottom for the U.S., it was an emotional bottom. Out of hardship comes strength; out of difficulty comes clarity, and Americans have proven time and time again that we still have the indomitable spirit that our forefathers showed some 232 years ago.
The Emperor wore no clothes. Hans Christian Andersen’s 1837 tale of the irrationality of mob mentality ended with the Emperor finally realizing that he was parading stark naked down Main Street after being fooled by some cunning swindlers. While everyone could see that the emperor was naked, nobody wanted to speak out for fear of sounding foolish. Instead, they chose to believe the lie foisted upon them. It took an innocent child, unclouded by pride, to expose the absurdity.
In the U.S., we suddenly realized after years of delusion that many aspects of our financial system were mostly smoke and mirrors. This illusion stunned the most brilliant of people and moved our country into rarely chartered territory. We came to realize that many of the building blocks of our financial system and economy more closely resembled papier-mâché than concrete. Somewhere along the way we went from being a nation of entrepreneurs, industrialists, upstarts, innovators and visionaries to one of financial engineers, quantitative manipulators, overzealous bankers, greedy brokers and zero-sum-game capitalists.
In 2008, we found out that that the most powerful economy in the world had elements that looked more like a Ponzi scheme than a mighty economic engine of growth. While it is disturbing to think we were walking down the street naked, we have the ability to clothe ourselves once again and return to common sense in 2009.
An opportunity in a sea of calamity. John Kenneth Galbraith whimsically said, “What history teaches us is that we do not learn from history.” 2008 could prove to be the most important year of the century if we prove this maxim false. The key question is, will 2009 be the year that spurs a return to the true spirit of capitalism, democracy and progress that founded this country? Or will it be another time when we treated the symptoms and simply moved to the next boom and inevitable bust on our way to another bigger and more ominous crisis?
Maybe this time the pain is so intense, the fear so prevalent, the feeling of mortality so pervasive, that we band together and make the changes that are so often talked about but so rarely implemented; changes in our education system, large scale improvements to our infrastructure, an overhaul of our healthcare and social security systems, etc. There is no doubt that paying for progress will prove to be as difficult a task as any we face. Figuring out how to pay for change, while not mortgaging our country into bankruptcy, will be one of the great challenges of this century.
Perhaps 2008 was calamitous enough to provide the unity necessary in the coming years to solve the great challenges of our generation. In a year that saw the historic election of President-Elect Obama to the highest position in the nation, it seems that there might be enough political and social will to address the serious maladies that afflict us.
While we understand 2008 provided immense economic losses and personal heartache, we also believe that 2008 will prove to be a historic year in American development. Alexander Graham Bell said, “When one door closes, another door opens; but we so often look so long and so regretfully upon the closed door that we do not see the ones which open for us.”
2009 will be the start of a decade of large scale changes, and we are only limited by the boundaries of our imagination as to what opportunities we can create out of this momentous time in history.
Intellectual Reallocation. We have seen a “brain drain” of our most talented students and future leaders into the financial sector where their brilliant minds created the financial “innovations” that led us down the current path. Imagine a world in which the brightest minds were competing against each other to cure diseases, invent techniques for creating potable water and identifying renewable energy solutions. We live in a capitalist society, so nobody expects them to work for less money than they are worth, but surely biotech and alternative energy solutions can create enough economic energy to compete with the world of financial manipulation.
2009 should be the year when we facilitate policies to enable future innovative technologies to maximize their profitability. Let us pay the best and brightest to invent effective and profitable cancer treatments, simultaneously saving millions of lives and creating great profits for the company and people that created the cure. Our system is surely inefficient if our brightest young professionals must choose between making $2 million per year creating algorithms for complicated derivative formulas with no clear value creation proposition and making $50,000 a year helping commercialize an alternative energy source that will bring extraordinary value worth trillions of dollars to our economy and society. Maybe the worlds of finance and science could learn from each other with finance becoming more value added, and science becoming more profitable.
Perhaps a young sophomore in college at Columbia University will look at the maladies of 2008 and choose biochemistry as a major over finance, and will be the one to end the AIDS epidemic in 10 years. Maybe it will always be possible to make obscene amounts of money creating little value, but perhaps the playing field has leveled just a bit so that our brightest can dedicate themselves to creating value for the world, not just themselves.
Values. The youth of today have a sense of entitlement that many in the older generation do not understand. Nowhere is it written that upon graduation from college you deserve a six-figure salary, when you have not proven a thing. A silver lining in the dark economic clouds is the attitude shift that is happening all over the U.S. There is nothing like the loss of over 2.7 million jobs and counting to make you thankful for the one you have. People under 40 years old have never seen a cycle. They have seen unprecedented economic expansion over the past 15 years. The future leaders of our world will be well served to learn what hard times mean, and that none of us is entitled to anything other than life, liberty and the pursuit of happiness (and even those are not afforded to many outside of democratic societies).
Struggle can be a good thing, because it teaches us what is really important in our lives and restores the humility that so many of us have lost. With a savings rate of less than one percent, maybe Benjamin Franklin’s advice of “a penny saved is two pence clear” will actually mean something again. Perhaps this time of struggle will help us remember the values that are in the core of our Americanism. Lately we have fallen into a short-term view on life. It is time to return to the essential truths and remember that nothing worthwhile or long lasting can be achieved without hard work and sacrifice.
Infrastructure. U.S. infrastructure in 2005 was rated a "D" on a scale of A-F by the American Society of Civil Engineers. If you have ever traveled the subways in New York, you must wonder how the financial capital of the world can have an infrastructure system that could only have been considered cutting edge 75 years ago. We must repair our infrastructure; rebuild our roads, bridges and ports; build new and repair old mass transit; create a better wireless backbone; and heal our decaying school systems.
Ernst and Young, along with the Urban Land Institute, found that “2008 seemingly marks a critical juncture in a rapidly changing economic environment where new approaches to land use, infrastructure and energy efficiency will likely determine and possibly reorder the next generation of winners and losers - countries, companies, investors and peoples.”
In fact, this same study ranks the U.S. in a category called “coasting on prosperity.” How apropos, as it seems that this is the exact affliction that affects nearly all aspects of our lives. It is exactly the calamity that 2008 should change. Leaders do not stay on top by coasting. Many attribute laziness as the single greatest reason for the fall of Rome. Well-fed and happy, the Romans simply coasted on their prosperity.
The good news is that it is likely that we will see upwards of one billion dollars of investment in our infrastructure in the coming years. We need to ensure that this is a first step and not the ultimate step, as our infrastructure needs have been neglected for so long that the money will not go far.
Immigration. We need to formulate a better immigration policy. We used to be known as a “melting pot.” We took the best the world had to offer, opened up our arms to brilliant, young, eager foreigners who ultimately changed our country for the better. We also need to ensure that people who do come over here pay their taxes and become contributing members to our society.
In our legitimate need for safety and security, over time our openness has given way to mistrust and protectionism. We must streamline our system so the right people - who come to the U.S. for the right reasons - are welcome. If not, we may miss out on this century’s Albert Einstein, architect I.M. Pei, naturalist John Muir, publisher Joseph Pulitzer, or Nobel Laureate Subranhmanyan Chandrasekhar.
We must devise a way to better embrace immigrants and integrate them into our society while also protecting our own jobs and standard of living. Innovation occurs when ideas, cultures and worlds collide. Competition is the lifeblood of America.
Energy. Paying four dollars a gallon for gas prompted outrage and established near unanimous consent that we must pursue energy independence with a vengeance. But just as soon as gas prices moved towards heights never seen before and the fervor for action reached critical mass, prices plummeted back down below $1.50. We have moved in and out of our energy rut for decades, pledging action when energy prices are high and then not following through when inevitably gas prices drop.
We must take a long view on energy and end our self-destructive policy of enriching the Middle East, sacrificing our national security and throwing away our wealth. Becoming the leader in alternative energy will allow us to prosper from whatever the new “oil” of the 21st century becomes and control our own fate, without relying on the Middle East for our energy needs. While we are at it, let’s figure out how to do so in an environmentally friendly way.
The Environment. Making profit is a prerequisite of any investment. Companies should not be in business if they are not profitable. However, we must think about our businesses with a mind for the social and environmental benefits we create. We must not treat the world as if resources are unlimited. The Earth will outlive us and leaving it in shambles for the next generation is irresponsible and unacceptable. Just as in our corporate views, we need a longer-term view on the Earth.
It is a very real fact that water supplies are diminishing across the world. Perhaps golf courses in the desert aren’t the best use of the water that we do have. Corporations should not only have to battle to compete in delivering quality and affordable products and services, but they should also have to compete in the creation of social and environmental benefits - the American public will demand it.
If that isn’t enough motivation, The Hill, a congressional newspaper summed it up best when it wrote that “Going green is also good for profits and patriotism. If America leads the world in energy efficient technology manufacturing and installation and renewable energy production, the country as a whole will benefit. That means more industry, more exports, more jobs, more money and, consequently, more pride.”
Science and Engineering. We have to change our policy on science and engineering so that we can maintain our position as leaders of the New Economy. For more than a century the U.S. has been the leader in scientific discovery and innovation; however, we are at a critical juncture and face losing this extremely important position. We are graduating fewer students in science and engineering as a proportion to our population than most of our Asian counterparts; moreover a large proportion of those graduating in the U.S. are foreigners who then return to their home country.
We have failed to increase our government allocation to important early stage Research and Development (“R&D”) in which the private sector will not invest, and have failed to provide proper incentives to spur more private sector investment in all areas of science and engineering. Will we finally allocate the necessary money, policy innovation and resources to science and engineering that may provide the future innovations that will change the world, cure diseases, repair the earth, ease suffering and solidify our place as an economic superpower? The U.S. is barely spending one percent of its GDP on R&D while countries in Asia are spending upwards of ten times that amount. Biotech, nanotech, alternative energy and new water sources would seem to be pillars of future prosperity.
Shouldn’t we lead the charge?
Myriad Other Pursuits. There are changes and opportunities arising in so many areas - such as healthcare, education, finance - that it would be difficult to address all of them in such a cursory commentary. Progress will not come without some discomfort, as our national debt spirals out of control, politics play out over the future of our country and increased competition from other countries heats up.
Nonetheless, progress is occurring as we speak, including everything from brownfield funding initiatives to healthcare bills that improve the level of care hospitals deliver. In a changing world there are many opportunities for investment. We will touch on many of these throughout the year, giving attention to those topics specifically related to real estate investment decisions.
Conclusion. Like the Roman Empire that fell as a consequence of its greatness, the United States is finding that the consequences of prosperity can be painful. Now it is up to us to reinvent ourselves, restore the intrigue, the ideals and the ingenuity of the American spirit. The next ten years will test our mettle. It will be tough to maintain the wonderful standard of living to which we have grown accustomed and it will not come without personal sacrifice.
But, unlike the Roman Empire, we have a chance to learn from our mistakes and have a short window of time to rectify them. 2008 will be looked at as a terrible year by many, but we see it as a once-in-a-lifetime opportunity for effecting change. The 2008 financial meltdown provided more than a warning sign for the U.S., it provided a slap in the face. This is our chance to slap right back. This is our chance to invent the future.
We are still a nation where young entrepreneurs are toiling tirelessly in their basements in hopes of creating the next Microsoft; where a young man living below the poverty line is studying each night so that he can be the first of his family to go to college; a nation that values progress so much that only 50 years after racial segregation was legal we have elected a minority to our highest and most prestigious office. We are a democracy, we are hopeful and we are a nation filled with limitless possibility.
Meridian’s New Year’s Resolutions. In reflecting on 2008 and our beliefs above, Meridian has developed some New Year’s resolutions and reinforced some of our basic tenets for 2009:
- Choose investments that match our values - community oriented, environmentally, economically and socially beneficial and profitable.
- Identify opportunities that involve the transformation of the manufacturing base of the industrial economy into opportunities for healthcare, education, energy and new communities.
- Maintain our commitment to our business model - value-added investing coupled with a thoughtfully crafted risk mitigation program - to protect our investments. Solving problems is how we create profit, mitigating risk at the inception of a project and continuing with vigilance is the most effective way to protect from losses.
- Foster partnerships with the communities we invest in. Working with communities creates better projects, engenders good will and support, and ultimately, makes investments more profitable.
- Listen and learn. Foster more interaction with our colleagues, competitors and investors. Intellectual curiosity is a way to help increase our odds of success.
- Establish our role as leaders in our New Economy though development of innovative ideas disseminated through speaking engagements and media.
- Build relationships with the thought leaders who are shaping the next century.
- Focus more time on our company culture. People are the backbone of success and we need to continue to invest the time and resources into our staff to build our culture one employee at a time.
Above all, we strive to continue making and achieving lofty goals. As Daniel Burnham said, “make no small plans for they have no magic to stir men’s blood.”
May 2009 be a memorable, exciting and prosperous New Year for you.
Michael G. Clark is a Managing Director at Meridian Development Partners, a real estate private equity firm in New York focused on repositioning corporate real estate assets. He is an adjunct professor at Columbia University’s Masters of Real Estate Program where he teaches Development Case Studies, Private Equity and Real Estate Development. He can be reached via email at michaelc@meridiandp.com.
Subscribe to:
Posts (Atom)