On the profitability of SPECTRE Capital LLP
And why Spectre should consider diversifying their James Bond idiosyncratic risk.
You know Spectre. It’s the fictional global criminal syndicate and terrorist
organization featured in the James Bond novels by Ian Fleming.
It’s also the title of the latest James Bond movie featuring Daniel Craig to be released on October 26.
But, in an era where it’s becoming quite hard to differentiate a classical Bond villain from a modern fantastical corporate billionaire – such as those who want to nuke mars, start colonies in space, control all the data and generally run the world — it’s worth asking whether Spectre as an organisation might actually be a profitable unicorn, decacorn investment option? Could it be run like a conventional VC firm?
What madcap bond villain schemes would and would not get funded?
What would the returns on a long-term position in Spectre Capital LLP be like?
The governance would presumably look like this?
Lucky for us, FT Alphaville reader Simon Warner has crunched the theoretical business model and come up with a good hypothesis on the likely returns of some of those madcap ventures based on past performance and what not. Here’s a sample of his extremely readable analysis (our emphasis):
Take Hugo Drax as an example, he dared to put colonies in space before Elon Musk had even finished primary school and tested the Bank of England’s reserve decades before the Quantum Fund ever thought it could do the same:
According to Warner, VCs claim to add value by sourcing deals, helping entrepreneurs in areas where they lack expertise and by helping businesses scale. Spectre’s business model is not dissimilar:
Warner says Blofeld’s HR policies are unconventional but his commitment to the culture of the organisation is without question. Furthermore, his determination to weed out even high performing partners who do not demonstrate a commitment to the whole team is admirable. The parallel to hedge fund investing and investment banking is not lost there.
Spectre returns equaled about 28 times average UK income in 1961, which was a reasonable sum but according to Blofeld “barely adequate remuneration for members’ services”.
So would the Thunderball plot (Plan Omega) get financed today based on the tests of a modern VC?
Given that the pay off was about $1.73bn in today’s money, Warner says it would definitely have qualified as Spectre’s first attempted “unicorn” venture.
Here’s what the capital costs would have looked like:
All of which represents a step change in Spectre’s risk profile, since the venture would risk more than 200 per cent of the firm’s capital and they would have to be open to new investors to finance the whole project.
After accounting for personal expenses and the equity stakes of operatives, Warner is left with a 71.45 per cent stake for Spectre or a potential return of 46.55m for a capital investment of £3m, which is 23.13 times.
We can therefore conclude that if Spectre was a modern day VC, it would have approved financing for the Thunderball caper.
With hindsight, of course, Warner says it’s clear Spectre’s risk management was lacking. James Bond could have been risk accounted for.
For example, had Blofeld partnered with Auric Goldfinger and co-funded the Goldfinger and Thunderball ventures simultaneously, a far superior risk adjusted return would have been achieved. Most importantly, he concludes, the Bond risk factor could have been diluted:
Rise of the Bond villains – FT Alphaville
What can James Bond’s nemeses teach us? – The Economist
Casino Royale was all about the financial crisis – The Economist
You know Spectre. It’s the fictional global criminal syndicate and terrorist
organization featured in the James Bond novels by Ian Fleming.It’s also the title of the latest James Bond movie featuring Daniel Craig to be released on October 26.
But, in an era where it’s becoming quite hard to differentiate a classical Bond villain from a modern fantastical corporate billionaire – such as those who want to nuke mars, start colonies in space, control all the data and generally run the world — it’s worth asking whether Spectre as an organisation might actually be a profitable unicorn, decacorn investment option? Could it be run like a conventional VC firm?
What madcap bond villain schemes would and would not get funded?
What would the returns on a long-term position in Spectre Capital LLP be like?
The governance would presumably look like this?
Lucky for us, FT Alphaville reader Simon Warner has crunched the theoretical business model and come up with a good hypothesis on the likely returns of some of those madcap ventures based on past performance and what not. Here’s a sample of his extremely readable analysis (our emphasis):
The track record of Ernst Stavro Blofeld’s SPECTRE organisation is analysed and quantified. I find that within the timeline of the books, prior to Thunderball, SPECTRE produced annualised returns of 119% and a multiple of invested capital (MoIC) of 10.5 times. This track record compares favourably to the available data on real world venture capital (VC) returns.As Warner points out, the Ian Fleming Bond series features many potentially profitable ventures.
The SPECTRE project that forms the basis of Thunderball is assessed in detail. Data is extracted from the book and the film to form a full cost model of the project. This model allows us to calculate an expected return on capital from the project of 23.13 times. This expected return compares favourably with the typical investment criteria of VCs for 10 times.
The Thunderball project would be approved and funded. The quality of risk management at SPECTRE is poor. There is a high level of key person risk within the organisation. Blofeld is an extremely capable criminal but suffers from hubris. The organisation is unlikely to survive in his absence. The capital at risk in the Thunderball project was excessive and its failure resulted in a change in the business model.
In the timeline of the films, SPECTRE was forced to use considerably more external financing in subsequent projects. International criminal organisations such as SPECTRE should consider diversifying their James Bond idiosyncratic risk. If Blofeld and Auric Goldfinger had shared the risk of their projects they would have diversified Bond risk and it is highly probable that they would have generated vastly superior risk adjusted returns.
Take Hugo Drax as an example, he dared to put colonies in space before Elon Musk had even finished primary school and tested the Bank of England’s reserve decades before the Quantum Fund ever thought it could do the same:
Drax is a commodity trader who has made a fortune by cornering the market in Columbite, a metal that is supposed to be used in the manufacture of jet engines. It is possible that Fleming’s time in the City gave him this idea as during his time at Cull and Company the firm floated a trading company that attempted to corner the pepper market. Towards the end of Moonraker, Drax shorts Sterling ahead of his dastardly plot being put into operation. However, he foolishly uses his own trading company as the broker and as the Bank of England intervenes to support Sterling, it sees the source of the selling pressure. Ironically, the Drax name lives on in the trading world today as JB Drax, a leading broker.But is Spectre anything like a VC fund?
According to Warner, VCs claim to add value by sourcing deals, helping entrepreneurs in areas where they lack expertise and by helping businesses scale. Spectre’s business model is not dissimilar:
SPECTRE sources ideas for criminal ventures and implements only the best, it contributes to the success of its ventures by providing expertise (e.g. connections with hit-men), operates globally and helps connect the members with new and bigger opportunities for criminality.Blofeld’s skill-set and experience, meanwhile, also matches up quite nicely with the skill-sets expected of the greatest modern information industrial military complex leaders:
One critical difference with a typical VC firm is that SPECTRE personnel conceive and operate each venture. This is contrary to the normal model of VCs taking stakes in companies run by largely independent management.
A second difference between SPECTRE and most VC companies is that SPECTRE operatives are all partners in the business. VCs source the bulk of their capital from passive external investors. Incentives for VCs come from management fees and carried interest (a share of the upside of the fund). SPECTRE appears to be funded by its managing partner, Ernst Stavro Blofeld, with each of the other active partners also participating in the return that the firm generates.
Blofeld was born on May 28th 1908 in Gdynia, Poland. Blofeld has superb credentials as a criminal and has the track record of an astute investor. He obtained an economics and political history degree from University of Warsaw before studying engineering and radionics at the Warsaw Technical Institute. He had a keen sense of the importance of information, getting a job in the Ministry of Posts and Telegraphs because “he had decided that fast and accurate communication lay, in a contracting world, at the very heart of power”, a statement as pertinent today as it was in 1961.Blofeld even got ahead with hacking skills:
He first made money from insider trading by watching the cables that he processed and trading on margin. His next business was a fake spy network that capitalised on selling information to the Germans the Swedes and Americans. He made USD200k before the start of the war. Blofeld clearly had a keen sense of risk management and closed his business before war broke out. He bought Shell bearer bonds with the proceeds and had them placed in a safety deposit box in Zurich. He then set up another espionage network in Turkey and finished the war with USD500k in Swiss banks before leaving for South America (Thunderball, Ch 5).As for the rest of the management team:
The rest of the SPECTRE management team are similarly well-established and proven criminals. They are a diverse group, complementing each other in terms of experience, skill set and geographic focus. Emile Largo is an experienced and expert Italian criminal who represented Italy in the Olympic foils (Thunderball, Ch 10). There are two scientists, Kotze (German physicist) and Kandinsky (Polish electronics expert). The other 18 members were deliberately recruited as six groups of three, selected from the world’s top criminal and subversive organisations. Members come from the Unione Siciliano, the Union Corse, SMERSH, the Sonderdienst of the Gestapo, General Tito’s Secret Police and Turks who worked with Blofeld during the war (Thunderball, Ch 5). This represents a well-credentialed and varied group with skills and contacts that allow SPECTRE to initiate and enact a varied of operations. There can be little doubt that SPECTRE represents a unique group of the world’s most skilled and seasoned crooks.And with respect to management style and respective shareholdings in the business:
Blofeld is the senior partner in the business and is supported by Emile Largo, the established successor. This is a highly capable management team and would inspire confidence in any potential external investor. However the depth of management talent in the organisation is shallow.Here, in any case, is a snapshot of Spectre’s investment record and performance to date based on information garnered from the 1965 film Thunderball :
The pay out model for SPECTRE is known, with 10% of revenue devoted to working capital and overheads, 10% to Blofeld and an even 4% to each of the other 20 members (Thunderball, Ch 6). These economics are largely comparable to the market for VC companies. The 20% of revenue that is paid to SPECTRE and Blofeld is in line with market norms for carried interest.
Warner says Blofeld’s HR policies are unconventional but his commitment to the culture of the organisation is without question. Furthermore, his determination to weed out even high performing partners who do not demonstrate a commitment to the whole team is admirable. The parallel to hedge fund investing and investment banking is not lost there.
Spectre returns equaled about 28 times average UK income in 1961, which was a reasonable sum but according to Blofeld “barely adequate remuneration for members’ services”.
So would the Thunderball plot (Plan Omega) get financed today based on the tests of a modern VC?
Given that the pay off was about $1.73bn in today’s money, Warner says it would definitely have qualified as Spectre’s first attempted “unicorn” venture.
Here’s what the capital costs would have looked like:
All of which represents a step change in Spectre’s risk profile, since the venture would risk more than 200 per cent of the firm’s capital and they would have to be open to new investors to finance the whole project.
After accounting for personal expenses and the equity stakes of operatives, Warner is left with a 71.45 per cent stake for Spectre or a potential return of 46.55m for a capital investment of £3m, which is 23.13 times.
We can therefore conclude that if Spectre was a modern day VC, it would have approved financing for the Thunderball caper.
With hindsight, of course, Warner says it’s clear Spectre’s risk management was lacking. James Bond could have been risk accounted for.
For example, had Blofeld partnered with Auric Goldfinger and co-funded the Goldfinger and Thunderball ventures simultaneously, a far superior risk adjusted return would have been achieved. Most importantly, he concludes, the Bond risk factor could have been diluted:
At worst, the chances of one project succeeding would have increased markedly and at best Bond would have spread his effort across both plots and they may have both been pulled off.Related links:
Rise of the Bond villains – FT Alphaville
What can James Bond’s nemeses teach us? – The Economist
Casino Royale was all about the financial crisis – The Economist
After all, it is not so difficult to identify the Spectre Corp. running in the real world: look at the Bank for International Settlements in Basel and their 'Committee'... Here is their charter idea, outlined in 1966 by Carroll Quigley at Georgetown University: "[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations.
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