Swans Do Not Sing Sweetly

The term “swan song” has come to mean “a final gesture, effort or performance given just before death or retirement”. Early in its history the term became associated with the myth that such a final song was expected to be soaringly beautiful and moving.

In fact, the noise that a swan makes both during and at the end of its life is not sweet at all but rather a kind of “honking, grunting and hissing.”

The swan song of the TRE Observer is neither the sweet and beautiful finale of the myth nor (I hope) an unlovely grunting and hissing.

It’s more a weary sigh.

In a few days TRE will mark the 4th anniversary of its first auction.

It’s been a long 4 years!

A lot has happened: some of it good, some not. A lot has been learned: some lessons have been expensive, some maddening and some just disconcerting; but all have been instructive.

Our interest in TRE, aside from the purely intellectual, has been in its potential to support an asset management business whose revenues would be generated from investing in TRE auctions on behalf of those who would pay a fee for the service.

Four years on, we are not close to the point where that is a feasible proposition. Maybe four years from now it will be, but we don’t have another four years to invest in the experiment.

So we are bowing out.

There is a lot that can be said about the reasons that TRE volume has disappointed. (It now looks like the exchange might achieve in 4Q 2012 the annualized volume projected for 4Q 2009.) And it’s hard, having spent so much time and effort on this project, to see a recent uptick in new Seller acquisition and in total auction volume and say it’s just “too little too late” for our purposes.

Bu it is, in fact, too little and too late for us.

Current returns from TRE auctions are roughly half the level we saw in the first few quarters of our experience with the platform. All else equal, that doubles the size of funds-under-management required to generate a minimal level of gross income to the asset management function.

That compounds the problem created by the much slower than expected volume ramp.

It might be argued that, after a summer of very low returns caused by excess liquidity, the current volume increases; coming as they do with concurrent yield increases; ought to make us willing to wait a bit longer. After all, we’ve lived through the lean times: why sit out the fat ones?

Well, as Aunt Bertha said, fat is relative.

It’s true that increased returns do compensate for some increased risk but, as I’ve written to my partners, we’ve just moved back from the ridiculous to the marginal.

But auction risk is not the only one faced by the TRE Buyer. While increased return might better compensate for some of the auction risk, it does not compensate for increased organizational and management risk.

TRE management changes have inserted a critical unknown into the risk equation.

It is quite possible that the future direction of the enterprise will be constructive for both its owners and its participants. We sincerely hope that it will. But it’s also possible that it won’t.

New leadership will take time to grapple with the issues that have hindered the healthy growth of the business. It will take time to decide how to move forward and even more time to determine whether those decisions have been correct.

If all goes well and those decisions are correct and their execution is disciplined and effective, then maybe a volume level sufficient to support an asset management business might be reached in a few more years.

But there’s also a chance that all will not go well -- and if it does not, the next move of the owners is unpredictable.

I began my investment career in a very bad real estate market. It became a commonplace during those years to observe that it might be the second or third or even fourth owner of a project who would ultimately make money from it.

The same is true, I believe, in the case of TRE. I continue to believe that the TRE concept was brilliantly insightful. But management did not execute as brilliantly as it dreamed.

Maybe the next generation will -- or the one after that. But, like a number of the very talented people brought together in the initial TRE team, who just couldn’t wait any longer, neither can we.

So, with all best wishes to TRE, to its owners and managers and to the communities of Buyers and Sellers with whom we’ve had the pleasure of exchanging ideas and support, the TRE Observer now signs off with a swan song that is neither soaring and lovely nor a grunt and a groan; but just with a bit of a weary and hopefully wiser sigh.

Good luck, and be careful out there.