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Financial engineering, private equity, LBOs, leverage and….domaining

February 22nd, 2010

I really like destroying commonly held perceptions. So here’s another shot: The future of domaining doesn’t lie in domaining per se, but in finance. Finance is where the new domain fortunes will be made. Knowing the domain game won’t be enough to make you rich anymore.

Let’s look at the development of domaining from a slightly historical perspective. The first guys in the biz (such as Scott Day) saw the value of domains as brands, gateways to the internet, that should be valuable one day. That was their edge. Then guys like Frank Schilling and Kevin Ham came in that understood the value of type-in traffic and built their empires around that (banking on the assymetry of information – most people didn’t understand it). That was their edge. Then came the big tasters. Their edge (already understanding type-in traffic) was in technology, acquiring tasting data and seeing the opportunity that many did not see.  From this “historical” point of view we can basically break this down into three evolutionary steps, let’s call it generations – that made a killing in the domain business.

So what is the fourth generation, the next evolutionary step? I believe it is going to be about combining domaining and modern day finance. That’s where the fourth generation domain fortunes will be created.

And that’s exactly where I think my edge is (not that I would want to put myself in the vanguard of this next generation :) ). You see, when I came into the domain business a little over two years ago, I saw it through a different lens than most people in the business. I simply saw domains as any other asset that creates a cashflow stream (predominantly from PPC). So there was a huge arbitrage opportunity.

This lied and still lies on the ability to raise debt for cheaper than the yield that a domain generates. Say you would buy a great generic for 10 years revenue for $1 million. The cashflow stream is hence $100k per year. Now if you have the ability to raise that amount in debt say at 6% p.a., servicing the debt is going to cost you $60k per year. So you get to pocket the difference (+you have the added benefit of the capital appreciation of the domains). Then you just need to find a way to scale this to make a lot of money. Obviously raising the debt against domains is very difficult so you really have to get creative.

Bringing in aspects of financial engineering is where the new fortunes in domaining are going to be created. However with the introduction of leverage, some fortunes may be also lost (that is the downside). So if you want to make a lot of money in domaining, stop reasearching just domains and look into how private equity works.

Lookig forward to hear your thoughts in the discussion.


Chased by venture capital

October 29th, 2010

I don’t know what’s going on but in the last two weeks we have been approached by 3 different midsize VC/private equity firms enquiring about investment possibilities in EO. Obviously we aren’t on the radar of the big names such as Sequoia Capital or KPCB, but it still is encouraging in a way. The dilemma we have is quite funny – we really don’t know what we would use the cash for. I don’t really believe in “strategic looking” acquisitions (think Oversee buying Moniker and SnapNames) since I think they rarely create value, only opportunistic small bolt on acquisitions. Also a partial exit for our investors or me isn’t that interesting, since we really don’t need the cash either (would result in another dillema – where to put the money). So I really wonder how this will play out. In a way it is good that you really don’t need the cash, since you can really be picky and only accept a really good valuation. It also might be good to wait another year or so because I believe things will heat up again and there will be more institutional money swirling around.