First thing on the morning of Friday, May 29, we encountered something that was brighter than the sun: the stacks of gold bars sitting in the New York Federal Reserve Bank gold reserve vault. The vault is dug so deep that it is sitting on the bedrock of the Earth itself, as the vault and the gold that it contains weighs many tons and needed a strong foundation–and of course for good safety measures.
New York Federal Reserve Building
We learned that not all of the gold that is stored in the vault actually belongs to the U.S., but actually to other foreign institutions and sovereigns. The New York Federal Reserve Bank provides a custodian service to help store and safeguard these gold assets for others for free, and only charges a nominal fee of $1.75 to move/transport a gold bar. The value of each gold bar is primarily determined by the purity of the gold bar, the weight of the gold bar, and obviously the price of gold.
Next, we met with Alexander Heil, Chief Economist at the Port Authority of New York and New Jersey, which is a self-sustaining entity whose main function is to provide transportation services for commercial activities. Revenues are generated from road tolls, train ticket charges, shipping fees, and aviation fees, which are used to offset expenses like employee compensation, contract services, and financing new transportation projects.
To raise capital from debt markets, the Port Authority issues Consolidated Bonds & Notes, which have a first lien on consolidated multiple revenue streams as compared to that of an individual revenue stream. This allows for cross-subsidization among the different revenue streams, as there are some revenue streams which are loss-making, such as train transportation (a.k.a. PATH). This is a political policy decision to operate such revenue streams at a loss, to make it more affordable for the low-middle income demographic.
After a short lunch break, we congregated at the office of Clayton Dubilier & Rice (CD&R) to learn from one of its Partners, Tom Franco. CD&R is a private equity firm, whose competitive advantage is that it only invests in companies which meet their requirements (e.g. being a market leader) and specialize in operational value improvements. The first reason is that only a market leader can better capitalize on economies of scale and have a greater ability of inorganic growth (i.e. the acquisition of smaller companies). The second reason is that CD&R has a committee of operating partners who were previously top management personnel from successful companies (e.g. Unilever, GE, Disney, etc.), who use their accumulated experience in these industries to solve operating problems and guide the management personnel of these acquired portfolio companies.
Last but not least, we had the opportunity to meet with Chris Gunther, Managing Director, and Dr. Rudiger Stucke, Director and Head of Quantitative Research; both are in the Fundraising and Investor Relations division of Warburg Pincus. Warburg Pincus is one of the oldest and largest private equity firms in the industry. Their main specialization is in growth equity in the technology, healthcare, financial services, industrial, and energy industries, preferably in companies which have a predictable and steady cashflow and use the business-to-business (B to B) business model. However, due to its immense size, the changing economic landscape, and emerging markets such as China and India, this is not a strategy that is strictly adhered to.
Guest Bloggers: Jacob Ng, Sijia Song, Yangyan (Susan) Duan (GMF 2015)
This is the ninth in a series of 10 blogs chronicling the experiences of 31 Global Master of Finance (GMF) dual degree students during their two week long immersion course in Washington, DC and New York. Each blog will be written by a small subset of students during their experience.
Images: Flickr Creative Commons, Ken Lund, Federal Reserve Bank of New York, Manhattan; Bullion Vault, gold bar
