You may be surprised to learn that many years ago I was a casino manager. For those who know no better, this conjures all sorts of visions: Vegas, excitement, Robert De Niro and gangsters. I can assure you, they are all a Mirage. In fact what my experience revealed was insights into the dark worlds of highly regulated industries and the intuitive mistakes of the human mind. It is the latter which I believe provides a warning for owners of some of the 120 companies in the SIPP businesses – and gamblers.
When occasionally I’m quizzed about it, some people seem truly surprised that the casino games aren’t rigged and that the house’s edge is, as they see it, so thin. This leads them to ask two questions: is there a way to win (I can think of 3) and do people win? The second question is an interesting one.
I have seen many people winning but a great deal fewer win. When thousands walk through the doors, you shouldn’t need a degree in statistics to realise that some will have a lucky run. The thing with a luck run though is that you will only know when the peak was once all your money is gone. Twenty-twenty hindsight: it’s a curse. Here’s a salutary tale – there were many.
“You only know when the peak of your lucky run was
once all your money is gone”
Picture a student sitting at the blackjack table with £2,000 of winnings in front of him (remember too that this is c. 1997). He probably came in with £50 at most. At this point he’s thinking about what he’s going to do with this money – maybe, buy a new car. Yes, his new Escort XR3i is going to get him noticed by the girls on campus in a way his rusty Austin Metro never has. He’s mentally running on ahead: if he could win another £2,000, imagine the possibilities!
Moments later, there’s £1,800 in front of him, then £1,500, £1,200, £1000. It’s rapidly headed south. Does he stop? Hell, no! In his mind, he’s not winning £1,000: he’s just lost £1,000 (and his sense of pain and stress is soaring). He wants his XR3i back and acts with growing rashness. It’s not possible to keep precise tabs on every punter but I’m pretty sure he went home with empty pockets.
So what about SIPP providers? Putting a value on a SIPP business is not straight-forward. There have been a few precedents though fewer than many, myself included, expected. One such precedent was the sale of Suffolk Life to Legal & General in April 2008. Several industry people have told me how brilliant the management’s timing of the sale was. The fact is L&G paid £62m for a business with 11,000 SIPPs. After allowing for cash on the balance sheet, that represented around £4,250 per SIPP.
Of course this is a very simplistic valuation measure and takes no account of numerous accounting measures or qualitative factors such as brand and systems. You should not be surprised that other deals have been done at other times at quite different valuations. Nor, I would suggest, should you be surprised if other business owners have performed some crude mental valuations of their own businesses based on the most favourable figures to hand.
I contend that many SIPP firms looking to sell may find that they are holding fewer chips than they were previously and, just like our student friend, they may continue to lose in the future rather than build on their stockpile. My casino experience also leads me to believe that, pained by the illusion of loss, they will strongly resist settling for less than the figure in their heads. Very few will play their cards right.