Leasco Data Processing Corp. – Asset Depreciation and Access to Capital, Cash Conversion Cycle

There are many ways to finance the early phase and growth portion of any enterprise’s lifecycle, whether it be with bank loan, private loan, credit, equity and many more financing channels. In the traditional venture capital model, LP provides capital to GP which then selectively deploy those capital into supposedly high growth targets, and those targets will go on and invest in the capital need near the top-line (COGS) and/or the bottom-line (OpEx)

 (bearing in mind the power law, one that indicates an overwhelming % of the capital gain will come a highly selectively few opportunities i.e. out of a portfolio of 50 companies, 5% will do 40x return, 20% will do 5x return and 75% will do < 1x return. And the 1x part of the return distribution curve can likely be attributed to the 1-2x liquidation preference norm) 

But those channels of funding often times comes with a bit more covenants and capital deployment restrictions, and as such, the best source of financing should come from the enterprise themselves. Companies that have done great in this sense includes Apple/Costco, Berkshire Hathaway and Leasco Data Process Equipment Corporation.

1. Apple/Costco – Currently operating with negative cash conversion cycle, which essentially means the company sells the inventory first, collect its receivables and THEN pay suppliers, so in layman term, they operate their supply chain and balance sheet highly effectively via the credits extended by their suppliers.
2. Berkshire Hathaway – One of the essences of BH is their ability to collect insurance premium upfront and deploy those into the capital market and then pay out claims in a future date and this is also known as insurance float. So from a financing perspective, the company does not have to dependent on 3rd party for financing as their customers are essentially financing this as close to zero cost of capital (other than the fact that they are generating sufficient return % between premium collection and claims payout).
3. Leasco Data Processing Equipment Corporation – This is a company founded by Saul Steinberg in the 1960’s as he discovered price arbitrage opportunity with IBM computers. Initially, the company prospered with two simple arbitrages:
   1. IBM prefer to lease rather than sell their products, and often time, at a substantial premium and them depreciating the assets aggressively over the next few years. Leasco would buy IBM computers, then in turn, lease them at slightly lower rates, but depreciating them much more slowly, allowing them report a higher profit (from an accrual accounting recognition perspective). This short-term burst in profits would give the company access to capital needed to grow the company.
   2. Secondly, the company also benefits from a tax law enacted in the early 60’s which gave companies 7% tax credit on capital expenses. The computers purchased were recognized as capex thereby, allowing the company to have higher FCF.