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May 28, 2010

Favorite Albums of the Decade (2000-2009) – #6 – Ryan Adams – Heartbreaker – 2000

 Heartbreaker                                                                                  

“Up here in the city [it] feels like things are closing in
The sunset ‘s just my light bulb burning out
I miss KENTUCKY and I miss my family
All the sweetest winds they blow across the south

Oh my sweet Carolina
What compels me to go
Oh my sweet disposition
May you one day carry me home”

In my most recent post in this series I talked about Beck’s Sea Change, a break-up record felt at first listen, a super-sad extravaganza that came as a wonderful surprise, especially considering its source.  I was used to Beck being great musically, ironic lyrically, and weird generally, but rarely authentically sad.

Ryan Adams, on the other hand, is always sad about something, usually girls, break-up records being his forte.  Where does all of this sadness come from?  Have you ever spent any time in a small southern town like Ryan’s hometown of Jacksonville, North Carolina?  These are places where sadness reins, a fundamental part of the environment, hanging there inside the thick, hot, humid air.  These are also places drenched with quiet, where the slightest sounds feel amplified, an approaching car moving along a gravel road (Lucinda), the crickets and the bullfrogs calling from the trees in the dark, a lone acoustic guitar from off in the distance, cutting its way through the last rays of sunset.

This sad, slow, sparse feel of the rural south is the mood that is beautifully captured on Heartbreaker, with the primary tools of southern folk music, acoustic guitar and trampled-on voice.  The opening track, a misleading, fun-sounding, Elvis-like romp announces the subject, To Be Young (Is to Be Sad, Is to Be High), and stands along with the fight-riddled Shakedown on 9th Street (I was just gonna hit him but I’m gonna kill him now) as the two up tempo rockers on the album.  As terriffic as these two tunes are, the heart of the set sits in the sparse, country folk of songs like My Winding Wheel, Oh My Sweet Carolina, In My Time of Need and the underground hit of sacraficial-heartbreak-to-the-max, Come Pick Me Up.

This album stands up nicely against classics like Neil Young’s Harvest and Nick Drake’s Pink Moon and it is on my list primarily because it I listen to it so much.  It’s permanently in my car, and I break it out regularly for long drives.  Adams followed it up with the almost as good, but maybe a little bit too long, Gold in 2001, beginning an incredibly prolific decade constituting 10 full-length studio releases.  I own and listen to them all, but Heartbreaker remains my favorite, an excellent starting point for anyone interested in Adams and folk-country-rock music at its best.

Notable(s):

My favorite track on the album is Oh My Sweet Carolina, a harmonious love song featuring Emmylou Harris on backing vocals.  Here’s a really super sad version of the song with just Ryan and his acoustic guitar.

During my Miles High Artists days I got the chance to spend some time with Ryan.  He is very close friends with Jesse Malin and produced Jesse’s 2003 release The Fine Art of Self Destruction, which is a great record in and of itself.  Ryan plays guitar on the record and other releases by Jesse including The Heat and Glitter in the Gutter.

Ryan’s band, Whiskeytown, was a peer to and competitor with Uncle Tupelo (Jeff Tweedy’s band prior to Wilco) and there exists and underlying rivalry between Ryan and Jeff for tops in the Alt-Country genre.  My favorite Whiskeytown album is Strangers Almanac (1997), with standout tracks Inn Town and Everything I Do.

Ryan’s solo discography from this past decade is massive, averaging about 1 release per year, and spanning a number of genres, including an all out rock album (titled Rock ‘n Roll).  Recently he has been sharing the bill with his touring band the Cardinals.  The double disc set Cold Roses, by Ryan Adams and the Cardinals, shows off Ryan’s Jerry Garcia-esque guitar chops and Grateful Dead song writting influences, affects that have been working their way into the longer, generally terrific jams featured in his live shows.

Next we move away from the songwriters for a while and back to the bands, including couple of hipster transplants to the now very active alternative music scene in Brooklyn (and New York City)…

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May 25, 2010

Defending the Carried Interest (Capital Gains) Tax Incentive

Filed under: Finance,Venture Capital — Steve Krupa @ 8:41 pm
Tags: , , ,

Today I intended to write an editorial, of sorts, in opposition to the US government’s proposal to raise the tax rate on Carried Interest earned by investment partnerships.  This tax increase targets partners of VC and Private Equity funds and is imbedded in a current bill proposed by the House of Representatives called The American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213).

Under the category of closing individual loopholes, the House provides the following summary of the provision:

Taxation of carried interest.  The bill would prevent investment fund managers from paying taxes at capital gains rates on investment management services income received as carried interest in an investment fund… the bill would require investment fund managers to treat seventy-five percent (75%) of the remaining carried interest as ordinary income (50% for taxable years beginning before January 1, 2013). This proposal is estimated to raise $18.685 billion over 10 years.”

In the course of my beginning to research this topic, I remembered that my partners and I had already addressed this issue in a letter we wrote back in March of 2009.  Below is an edited version of that letter, altered slightly to bring it up to date.  It reads much like an editorial, but I believe it succeeds in making its point.

 ________________________________________

Venture Capital and Carried Interest 

The Congress proposes to increase the capital gains tax rate on Carried Interest earned by principals of venture capital firms from the current standard capital gains rate to a hybrid rate weighted more toward the marginal tax rate on ordinary income.  As with all tax rate increases, we believe that this one will serve as a long-term disincentive, in this case to the formation of capital around innovative start-ups, one of the key historical drivers of job creation in the US economy (according to National Venture Capital Association, in 2005 companies that received venture capital from 1970-2005 accounted for 10 million jobs – approximately 9% of the private workforce – and $2.1 trillion in revenues – approximately 17% of GDP).

Unlike other forms of investing, venture capital investment does not involve intricate financial engineering and it does not rely on financial leverage and market arbitrage to generate gains.  Venture capital is about investing equity in young companies for long-term results.  Most venture capital investments are made in companies with less than $50 million in revenues and are held for periods between 5 and 7 years (although some are held much longer), distinguishing them as intrinsically unique, long-term, growth oriented equity investments.

It is expected that for the foreseeable future venture capital will be deployed in clean and alternative energy technologies, a host of computer science-oriented businesses, bio-medical technology and healthcare services and information technology.  These are the precise areas of innovation necessary to solve some of the key issues in our economy and these are the very businesses that seek employees with advanced skills in biology, mathematics, engineering and computer sciences, a major thrust of our government’s education initiative.

In a well-run investment model the venture capitalist operates in partnership with the entrepreneur, focusing on long-term company building, as opposed to the buying and selling of portfolio securities.  The venture capitalist puts its own capital at risk and raises additional funds by advocating investment in the sector to large institutional investors, many of which, like endowments and pension funds, are tax-exempt.  Once the funds are raised, the venture capitalist screens an enormous pool of new ideas to tease out those with the best investment prospects (less than 1% of venture ideas ultimately get funded by venture capitalists).  After the initial investment is made, the venture capitalist supports each new company and its entrepreneur by providing follow-on financings and working with the company as a board member and advisor on matters of strategy, human resources development, sales, marketing, finance and business development.  It is not until the long-term success of the company is achieved that the venture capitalist earns a financial reward for its efforts in the form of a capital gain, known primarily as Carried Interest.  Along the way there are plenty of chances for failure.  Despite the best efforts of all involved, most venture-backed companies ultimately fail, but those that do succeed pay-off well in excess of the failures, rewarding entrepreneurs and venture capitalists for working through substantial financial and operating risk.  Venture capital investment represents absolute value creation, not “zero-sum” value transfer.  The resultant output to the nation is permanent innovation and job creation. 

So why would the House propose to penalize venture capitalists with a tax increase to Carried Interest?  It seems counter productive and will not lead to stimulating innovation (further in and of itself it doesn’t raise much money – $18 billion over 10 years is less than 0.04% of the federal budget over that same period time).  During the campaign President Obama committed to eliminating the capital gains tax for investment in small businesses, clearly supporting the notion that tax incentives stimulate investment activity.  Yet, a carried interest tax increase on venture capitalists would operate in complete opposition to this goal.  The truth is, the venture capitalist and the entrepreneur are long-term partners and should be treated the same.

Today venture capital is a highly competitive global business.  Innovation will develop where there is unity between the talent available to build new innovative businesses and the incentives for capital investment.  We see other countries narrowing the global education gap and providing very compelling capital incentives (e.g. – China is investing heavily in education and does not tax capital gains at all).  Currently, the United States has the most advanced and effective venture capital infrastructure in the world and we believe that this is one of this country’s great competitive advantages, portending future success beyond our current financial difficulties.  As such, we would urge Congress to look for ways to maintain and enhance venture capital as the National Asset that it is and not to penalize suddenly those venture capitalists whose past and ongoing work is in complete harmony with America’s long-term economic objectives.

May 15, 2010

Psilos’ Annual Outlook on Healthcare Venture Capital Investing

Last week my firm Psilos Group released its collective annual outlook on the state of healthcare venture investing.  The Outlook serves as our public statement outlining areas of opportunity in IT-Enabled Healthcare Services, Healthcare Information Technology and Medical Devices, Diagnostics and Instrumentation.

 

Psilos Group Calls Health Reform Legislation
“An Opportunity for an Industrial Revolution in Healthcare”

Quality and Cost Innovations Critical to Addressing Healthcare Inflation;
Premier Healthcare VC Firm Outlines Six Opportunities to Drive Meaningful Change

NEW YORK, May 12, 2010 – It is time for an “industrial revolution” to change the underlying costs and structural inefficiencies in the healthcare industry, according to a new report issued today by healthcare venture capital firm Psilos Group (www.psilos.com), and the recently enacted Patient Protection and Affordable Care Act (PPACA) affords healthcare entrepreneurs and investors an unusual opportunity to respond with innovation.

The report addresses the challenge of adding 32 million newly insured Americans to the “bad economics” of U.S. healthcare, but suggests that reform can “catalyze healthcare innovation that improves quality and reduces cost, if only investors, policy-makers and companies rise to the challenge before us.” The report calls for accelerated development and adoption of innovative solutions and technologies that will deliver real value for each healthcare dollar spent by the federal and state governments, U.S. corporations and individual healthcare consumers.

“We cannot simply go on investing in incremental changes to approaches that have failed repeatedly,” said Dr. Albert Waxman, Psilos’ senior managing member and CEO. “If done well, new medical technologies and disruptive models of delivering healthcare services can be the foundation for new businesses based on 21st century information technology.

“A real healthcare industrial revolution would go a long way towards eliminating the 30 percent waste and error in our current system, improving national competitiveness and creating new products for global exportation.  The return for the U.S. will be a vibrant healthcare economy that enhances the public good and private enterprise at the same time.”

As part of its second “Annual Outlook” on healthcare economics and innovation, Psilos notes that failure to establish a culture of innovation in healthcare delivery will lead an existing $2.5 trillion industry to continue to inflate to over $4.5 trillion by 2019, as projected by the Center for Medicaid and Medicare Services (CMS). Psilos highlighted six specific areas where innovation can bring about near-term, high-impact and high-return changes to improve the U.S. healthcare system. These include:

  1. An efficient system to prevent and manage chronic illness, which accounts for 78 percent of all our healthcare expenses. Technology can help improve care management to prevent costly procedures and to incentivize consumers to live healthier life styles.
  2. Error reduction in inpatient, ambulatory, and post-acute care. These errors are most often the result of poor information flow and imperfect human behavior. Innovative solutions to help care administrators avoid costly and tragic mistakes have begun to emerge and have demonstrated positive clinical outcomes.
  3. New technology and benefit plans to deal with the diabetes epidemic, which costs an estimated $170 billion annually in the U.S. Improved diagnostic solutions and healthcare management programs will go a long way in controlling the spiraling costs.
  4. New medical technology to enable earlier, better diagnosis and thus earlier intervention with high-cost, high-morbidity diseases. Continued innovation around technologies that help identify diseases earlier will have a vital financial and clinical impact.
  5. Medical devices to foster less invasive and more effective surgical interventions. New minimally invasive surgical technologies will enable care givers and hospitals to provide treatment options that reduce inpatient use and result in fewer negative side effects and better clinical outcome.
  6. Expanded adoption and investment activity in healthcare information technology. This includes venture investments to recognize and sponsor entrepreneurs committed to developing modern solutions that bring about the much-needed innovations to put the U.S. healthcare economy on track for a successful future.

For more details, please review the Psilos Annual Outlook at: www.psilos.com/outlook.

May 11, 2010

The Coming Age of (Health Insurance) Exchanges

Bryce Williams, CEO of Extend Health, a Psilos portfolio company, has written an interesting piece for SHRM (Society for Resource Management) that explains the primary benefit of a heath insurance Exchange, namely its ability to allow individual purchasers of health insurance to buy exactly what they want in a competitive market (buzz words to keep in mind: personalization, choice, competition, consumerism, to name a few).  Bryce’s company Extend Health demonstrates these benefits to its customers today, every day, and has been doing so for several years now, even before the enactment of healthcare reform, first in Massachusetts’ and now nationally, where in both cases the role of the Exchange takes prominence as a tool for expanding health insurance coverage.

So how does an Exchange work?

In the case of Extend Health, the users of its private Exchange are Medicare beneficiaries (aged at least 65 years) that receive supplemental health insurance from their former employers as a negotiated retiree benefit.   The Exchange enables these retirees to purchase an individual Medicare Advantage Plan (MA for short, which is similar to a HMO or PPO for Medicare) or Medicare Supplemental Insurance (Med Sup or MediGap for short, and it is what it sounds like, supplemental insurance that covers many of the coverage gaps in the standard Medicare package).  Today, both MA and Med Sup products are sold to individuals by most major national and regional health insurance carriers (United Healthcare, Blue Cross / Blue Shield, Aetna, et al).  Extend Health works with the former employers to establish individual accounts on behalf of each retiree, usually a Health Reimbursement Arrangement (HRA) or something similar.  The former employer funds the individual HRA(s) in lieu of purchasing a group health policy from one insurance carrier that covers all of the retirees (typically referred to as a Group Plan).  The retiree then uses the money funded into the HRA to purchase any MA or Med Sup policy offered on Extend Health’s Exchange (as of this writing Extend Health offers over 1900 policies from over 60 insurance carriers).

Operationally, and from a consumer’s perspective, Extend Health’s Exchange works the way most non-healthcare related consumer purchases work, which, oddly, makes it very unique in the healthcare world.   Retirees can access information about all available plans online at Extend Health’s website.  While the website is enabled for transactions, almost all of Extend Health’s customers make telephonic appointments with a licensed benefit advisor.  During these appointments, which usually last about 30-45 minutes, retirees review their budget and healthcare needs with the advisor and ultimately select and purchase health insurance coverage.

Today Extend Health has over 45 corporate customers (a/k/a the former employers) and has helped more than 250,000 retirees compare and choose a MA or Med Sup plan that meets their needs.  After this much experience the evidence is clear that the aggregate cost of individual insurance purchases is significantly less than the cost of a Group Plan, in some cases up to a 35% reduction in cost to the former employer and $500 per year for the individual retiree.

In his article Bryce sites the following as among the reasons for the savings:

  1. Consumerism and Personalization:  Retirees purchase the precise insurance benefit that they want.  The money in the HRA is theirs to spend on healthcare and as such they naturally spend it wisely and avoid waste.
  2. Geographical Efficiencies and Competition:  As an example, individuals living in Florida do not require primary provider networks in other states, and as such it is cheaper to buy local health insurance individually than through a national or multi-regional Group Plan.  Further, local competition for the individual business drives pricing rather than Group Plan underwriting by a national carrier.
  3. Guaranteed-Issue:  With few exceptions, MA and Med Sup plans are “guaranteed-issue” coverage, which means that no one who is eligible for Medicare can be denied coverage, eliminating an economic advantage of the Group Plan, namely the underwriting of large groups to enable expansion of coverage to high-risk individuals.

Psilos’ investment in Extend Health demonstrates our belief in the economics of Exchanges and the power of a true consumer, and I expect that over time Exchanges will evolve into one of the primary ways people access health insurance in the US.  In the market for employer funded retiree health, the Group Plan no longer makes economic sense, and today the Exchange model is facilitated by the Guaranteed-Issue structure of the Medicare market.  As 2014 approaches and the insurance market for people under the age of 65 begins to trend toward a Guaranteed-Issue structure because of the deployment of risk-pools and the prohibition on denying coverage for “pre-existing conditions” (as outlined in PPACA), I expect Exchange models to offer a viable option for corporations to provide insurance to their active employees.

We know that the Exchange model empowers the consumer and drives greater competition.  As such, I expect it to serve as a force to inspire the innovation in healthcare delivery necessary to reduce healthcare inflation and promote greater service quality.  Over time, I believe its practical and effective economics will become irresistible to a society desperate to reduce the total cost of healthcare.

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