Private Equity Weekly Review

BCE has received confirmation from Industry Canada that all the conditions laid out in the decision of April 8, 2008 have been fulfilled. The marks a positive step towards closing the deal as all regulatory hurdles have been overcome.

Private equity is seeing some healthy signs of recovery as private equity giants like Blackstone, Carlyle, and Bain all made acquisitions this week. The largest deal was made by Blackstone that made a $1.67 billion buyout of Apria Healthcare Group, which was followed by PepsiCo Inc.’s acquisition of JC Lebedyansky, a Russian juice company. See a list of last week’s largest deals here:

Tremors from the credit crunch can still be felt to this day in as far away places as Japan. Deals are getting done, but at lower multiples. Before the liquidity problems in the market, prices paid were at multiples of 10x the annual earnings of Japanese companies. D&M Holdings was sold to Bain this week at 6.7x. This is an indication of not only how much competition there is in the market for good deals, but of the large sums of capital competing for the same prizes.

By Jeff Watson, Loewen & Partners

Private Equity Digs Deep Down Under

A report from Australia confirms that private equity is continuing its metamorphosis as it seeks innovative means of reaching targeted returns. The private equity market is still active, though not to the same degree as 12 to 18 months ago. Firms are continuing to work on their portfolio companies, complementary acquisitions deals for existing portfolio companies, and of course, the growing popularity of acquiring distressed debt.
Posted by Jeffrey Watson, Loewen & Partners

Make the world a better place

"In a way, the world is a great liar. It shows you it worships and admires money, but at the end of the day it doesn't. It says it adores fame and celebrity, but it doesn't, not really.
The world admires, and wants to hold on to, and not lose, goodness. It admires virtue. At the end it gives its greatest tributes to generosity, honesty, courage, mercy, talents well used, talents that, brought into the world, make it better.
That's what it really admires. That's what we talk about in eulogies, because that's what's important.
We don't say, 'The thing about Joe was he was rich.' We say, if we can, 'The thing about Joe was he took good care of people.'"—Peggy Noonan, "A Life's Lesson," wrote this at the passing of one of her journalist colleagues, Tim Russert.
I credit Peggy Noonan for Ronald Reagan's success as she wrote many of his speeches, bringing back that combination of big vision but pulling it back down - like a kite string - to how the big idea applies to each of us.
Are you using your talents to build up the people in your team, to create a great place to work and in your own way, making the world a better place? If so, hats off to you. Keep going.
The private equity money will recognize your tenacity to keep adapting to how to apply your talents to make the world a better place. This spirit is the essence of good management and good teams get the best finance partners.

Is Your Company As Much Fun?

I recently ran a strategy workshop for a large NGO. They get given a cool $11 million grant from the government every year plus their work contracts are bought by the government. That is a lot of support from tax payer money. The NGO staff work in a beautiful office building and the culture exudes quiet competence. Their skills and staff are impressive and I have to say, I had a great time working with the top team. What a lovely group of happy, proud and smart people.

Attending the strategy workshop was a branding expert. As the top management team went through their branding exercise, choosing key words to describe their business, this consultant talked about MARS - the venture capital incubator for uprising start ups. He spoke about how there is a sense of urgency with crackling energy in the air. The core brand MARS has developed is "speed to market". The brand expert could see that the NGO needed that same fire to the feet urgency to get their many products to market rather than dotting every i and making it 100%. In the real world of finding customers to transfer their cash from their wallet to your hand, there is real pressure.

This NGO might want to be speedier but everything in their business model cuts them the slack to not feel pressured about making money from satisfied clients. They are enjoying making Canada a better place - seriously - and they have made Canada a better place in their way. Plus their culture is very supportive, making it a truly marvelous place to work. Except that employees now push back at any mention of the D word - dollars.

I think we all need to understand the enormous differences in culture that develops and grows from the forces and demands exerted on the staff and owners. In the case of the NGO, there ain't ever going to be a sense of urgency because if some division has a shortfall, guess what, it doesn't matter. The bank is not going to threaten the owner and the staff will get their payroll paid. Where is the force to push for urgency?

These not-for-profits provide a great job environment. I looked around the room at the impressive team. They were more intellectually rigourous and more open to discussion of sticky issues than many management teams. It was almost like being at a Club Med resort because everyone was so relaxed and - hey, tomorrow was another day making a difference for Canada.

When I work with early stage companies, there is none of that laid back, let's think about it and reach consensus attitude. It's time to make money or bust. It's a fight every day. That's why MARS has to make "speed to market" a core part of its brand rather than making Canada a better place. There is just not the luxury of being socially responsible.

Is it dangerous for the Canadian economy to have so many great people working in these tax backed companies rather than having to make their way in the commercial world? Maybe these NGOs are keeping the great talent for themselves rather than the economy which makes the revenue to pay the taxes that then get passed to the NGOs. Whatever. I honestly can say I enjoyed myself so much I think I'm going to get myself a job at a not-for profit. Then I can stop worrying about making customers satisfied.

Mind of the Entrepreneur

Eager to start my entrepreneurial career, back in the early days, I asked a seasoned entrepreneur what founding a company felt like. I think I expected him to use words like “Freedom!” “Excitement!”, “Satisfaction!”
Instead, the main word I recall from our lunch was “Ignorance.” Specifically, he related to me a cautionary tale: The best talk he’d heard at a conference on business start-ups he’d recently attended focused on ignorance as the key to entrepreneurship. What the conference speaker meant was that if the average entrepreneur truly knew how hard it would be to build a company, nobody would ever begin. It takes ignorance to want to start a company from scratch.
My friend’s weary look, four years after founding his company, told me he wasn’t kidding. In all my excitement to begin, I’m pretty sure I had no idea what he was talking about.
A few weeks later, I visited my bank manger.
Before I even sat down, she commented to me: “You’ve got the grin of someone who just started her own company.”
“Yup!” I said, smiling.
She said, wisely I now understand, “You’re going to lose that smile. But hopefully, some day, you’ll be able to get it back.”
The optimism of that meeting has not left me in the subsequent years, but I have certainly had the smugness challenged. I’ve come to appreciate their thoughts. Business is tough and not for the faint hearted.

Returns for Private Equity Will Surpass 2007

Stephen Schwarzman, CEO The Blackstone Group, a private equity firm, says that now is a good time for deals in the industry. Despite turmoil in credit markets and weakness in the U.S. economy, according to Mr. Schwarzman, returns for deals made now could far surpass the deals of 2007.
“The heyday of 2007 was pretty remarkable in terms of the kind of credit one got,” Schwarzman says. “It’s unclear whether the deals done during that period will offer the best returns for private equity investors.”

- Jeff Watson

Worries of Limited Partners

Reuters published a story this week discussing the growing concerns of Limited partners – large pension funds and other institutional investors that pour money into private equity funds. They are worried that their returns are at risk as buyout firms drift from their expertise amidst the credit crisis. Some buyout firms are now starting to pursue investments in emerging markets, taking minority stakes in public companies or buying debt of their portfolio companies.

- Jeff Watson

Investment Banking Fees Plummet

In his blog, Taom Traulli notes that bulge bracket investment banks have seen their advisory fees fall significantly. Goldman Sachs, an investment banking firm, earned $1.5 billion in fees last year. This year that number has fallen 77% across the industry.

- Jeff Watson

BCE will reward shareholders

According to David Friend of the Canadian Press, investors are shying away from BCE stocks and the risks of its current quagmire. He goes on to point out that though the stock price is likely to fall because the chances of another potential buyer entering the fray seems unlikely, there is still an upside according to an analysis of BCE's position in the latest issue of the Investment Reporter, an industry newsletter.
"Should the takeover fall through, BCE shares would likely drop, but after that, they should recover. After all, BCE would likely reward its shareholders with a special dividend, higher regular dividends or share buybacks," the publication said.

- Jeffrey Watson

Private Equity's Image

Private equity has an image problem with unions and employees of the big, public companies who say that PE destroys wealth by stripping out company assets and downsizing. One of my favourite PE people is David Rubenstein, head of one of the largest PE firms in the USA, Carlyle. He has a quiet sense of irony and self depreciating humour clearly evident as he he asked, "What, no demonstrators?" referring to the crowds following him around to public appearances. He gave a speech describing PE to the new President of the USA. Peter Lattman at the Wall Street Journal tells us about his 10 points to make to Barrack Obama next January, 2009.
Probably the big plus about PE is that, as David Rubenstein of Carlyle says, is that it is not your father's PE. In other words, that Gordon Gehko type barnstorming share holders' meetings and selling off the company assets is not today's PE fellow. Here's a taste of what the WSJ reports on David Rubenstein's speech:
No. 1: This is not your father’s private-equity industry. Rubenstein would remind the leader of the free world that the industry has grown tremendously and now is a vibrant part of the U.S. economy.
No. 2: Private equity is the principal source of high returns for pension funds. Don’t think about the Schwarzmans, Kravises and Rubensteins of the world when you think about making changes to the private-equity industry. Instead, think about the pension funds and the people with stakes in them.

Check out the article and read the blogs below to see just how misinformed smart WSJ readers can be.

Would You Invest in This Man?

Welcome to Guest Blogger - Ingrid Mida Masak.

In all the research I did this week, I am left with a tremendous sense of respect for Yves Saint Laurent and his revolutionary fashion ideas and proven business success. There are many lessons to be learned from the career of this talented designer:

1. A degree is not required.

Yves only attended the prestigious Chambre Syndicale school of haute couture for three months before quitting. He emerged as a promising young designer by winning the first prize for a cocktail dress design in a contest sponsored by the International Wool Secretariat. He was only 17 years old when he was hired by Christian Dior.
2. Be innovative.

YSL was one of the first to use couture as a laboratory. Although many of his design innovations endure today, he was not without his share of flops. As I mentioned yesterday, his introduction of street fashion in 1962, ie., the leather jacket for women, was considered a failure and resulted in his dismissal from the house of Dior. As well, he included knickerbockers in his collections more than once. During an interview on France-Info radio, his business partner Pierre Berge said "Saint Laurent was a true creator, going beyond the aesthetic to make a social statement. In this sense he was a libertarian, an anarchist and he threw bombs at the legs of society. That's how he transformed society and that's how he transformed women."
3. Failure can be the path to something bigger and better than you ever imagined.

After YSL was dismissed from Dior and conscripted into military service, he was hospitalized for depression and subjected to such horrors as electroshock therapy. Enduring the public humiliation of being fired and the shame of being in a mental hospital did not mean the end of Saint Laurent's career. Without this break from the house of Dior, it is conceivable that he might never have enjoyed the success that he did.
4. Know your strengths and find a partner whose strengths compliments your weaknesses.

Yves Saint Laurent was a true artiste - creative, sensitive, and fragile. Undoubtedly it was his partner Pierre Berge who was the mastermind behind the business success of the house. In 1966, the house of YSL opened the first ready-to-wear Rive Gauche boutique by a couture designer on the Paris Left Bank. This move was instrumental in the development of the idealogical shift that fashion was no longer just for the rich.These lessons are applicable not only to the big business of fashion but to the business of life.

In writing this post, I myself have learned about taking risks and living your dream. Merci Monsieur Saint Laurent! --

Posted By Ingrid M. to The Passionate Fashionista at 6/06/2008 08:42:00 AM

Does Private Equity Care About Public Relations?

While most of us private equity types can not jet over to Switzerland for the world’s top economic conference at Davos, we can now get a view into many of the panels with their “celebrity business people” thanks to You Tube postings. Here is one of my favourites featuring David Rubenstein of Carlyle, a top private equity firm in the USA. He explains why his company investments into private companies have done so well. Despite the charm offensive, the first questioner, a Spanish journalist still wants to know how private equity will affect unions. Rubenstein manages to show that private equity has a heart and a sense of humour.

It does raise the issue that private equity needs to do a better job with public relations and, as Rubenstein says, "talking about what private equity does and how it works." My book Money Magnet certainly recognizes that family businesses do not know enough about it and the broader options it offers. Rubenstein does go on to emphasis that the name private equity is a bad one as when they bought Hertz from Ford there was far more disclosure required as it was no longer buried in a large company's financial statements. The same laws and legislation applies to privately owned business as to the public ones. Just because a company partners with private equity does not mean it is spirited away to a deep, dark cave.

Link:Watch Davos.

Such Shocking Performance!

I chatted to a fund manager about the fact that 90% of Businesses in the USA are Still "All in the Family" or family owned. In Canada the figure is given as 75% to 80%. This is still very high. When I made a call to a my friend, Mr. Fund Manager, he had his worthwhile version of why this is the case:
Me: So why are 90% of all business in America held by families and are private?

Mr. Fund Manager: Because the returns are generally too low to cover a true imputed cost of capital (currently some 9% - 3.5% risk free rate plus 5.5% equity risk premium - for an ungeared company) - markets would not stomach such underperformance....
Me: I think it's more about not wanting anyone else to hold the steering wheel - power and control. Still...I am stunned by this figure.
Mr. Fund Manager : Perhaps that too. But I am always amazed at how most private companies ignore the true cost of capital (because then can get away with it!) and as such produce little positive EVA...
Me: Yes - VERY true. I hate to be sweeping with generalizations but what you say is valid. Private business owners generally do not look at cost of capital or EVA. Only one CEO has even mentioned that on a first meeting when we discuss how to access capital.

Mr. Fund Manager: Interesting point. So what’s new at your end?

Me: We are getting a flood of new private equity funds hitting the market and calling us for companies.

Mr. Fund Manager: So much for the slow down. Are you free for lunch next week?

What's Wrong with Canadian Private Equity?

Another one bites the dust - one of my favourite Canadian success stories is Ace Bakeries which just sold to an American private equity fund. Caroline Alphonso tells the story in her article in The Globe & Mail. Linda Haynes is the partner (wife) of Martin Connell and they are at retirement age so, understandably, want to sell.
At the risk of sounding xenophobic - OK, I'll spit it out. For crying out loud, why not give Canadian private equity a chance? IMAX, another beloved Canadian icon, was sold to American private equity partners and it was a rocky ride and we are all watching Lululemon. In comparison, private equity companies here in the Canada do a great deal for their companies. If there is a bump in the road with Ace Bakeries, it's a plane flight from Chicago to sort out the hassle and is there the same emotional commitment? Adam Smith, my favourite Scottish writer of The Wealth of Nations, was actually a professor of philanthropy. Yes, he was and it taught him pay a great deal of attention about this emotional side of humans and how it drives our work.
This emotional underlay, is the foundation of his book which is still a definitive text on how companies grow and how they get extinguished. Linda and Martin talk about their philanthropy in the Globe & Mail interview, but I would ask how much they thought about their employees and the Canadian economy by selling to American investors when there are so many fine Canadian private equity companies? Did they even try?
OK - I spoke to Linda and she tells me that one of their Board members had a relationship with a company in Chicago and they found a private equity buyer. There were 40 companies bidding on ACE. The private equity firm that bought ACE from this auction is not in the food business. I guess if you are selling, Linda tells me it's like an old affair - it's over, move on, no looking back. I get that - fair enough.

The Delecate Art of Delegating

Throwing that ball up and passing it to your people to catch is tough. Delegation is a thorny issue for many bosses who prefer to do the job themselves. But a good leader gets more satisfaction when able to get others to do tasks at expected high standards.The worst thing a boss can say is "It's going to take me two hours longer to explain this to my employee than if I just do it myself." Then you justify this to yourself: The quality and standard is better, plus the job is done.

But what about the employee? Where is their challenge, their opportunity to grow?The owner of a teen computer camp shared with me his frustration over his staff and their botched efforts at doing the job. How could he motivate his team to work at, or close to, his level? If the boss had used a little bit of emotional savvy, he would have seen the employee physically deflate, her spirits sinking faster than when the judge told Paris Hilton she had to do time, again.

What this approach to delegating misses is that a few hours of rigorous coaching will save hundreds of hours over the next year, freeing up time for revenue- generating tasks and for taking more responsibility yourself. A reputation for teaching is gold. Star performers gravitate toward companies that train skills and push them to embrace scary tasks that challenge. Bill Gates, despite his questionable haircuts, set an outstanding performance level for programmers; this itself attracted talent. But Gates was able to balance the creative tension of setting the standard by encouraging the programmers to meet – and overshoot – expectations.

As the boss, your role is to instill the highest standards of performance and adherence to a shared vision of excellence. Only then can you up the ante and really let go. If you are having problems delegating, mull over these three questions:

1. Am I recruiting in the same old places, in the same old way? I read a business plan for a nail manicure franchise and was astounded by the suggestion to hire university students part time. That's when it hit me that many more people are going to university and ending up in low end jobs. To help their graduates, universities have terrific job posting internet services. The teen tech camp owner hired students from Waterloo's co-op program who were thrilled to work in a tech environment rather than flip burgers (or paint nails).Make it a rule to hire people who are smarter than you. In the interview, talk about the high level of work expected until their eyes pop. The stars will be excited by the expectations, and you don't want the ones who say "no" anyway.

2. Have I really defined my standards?The process of delegating is as fragile and complex as weaving a spider's web. How are you going to teach your skills and level of expectations? How can you illustrate how the end result should look? How can you make sure employees get the job done – building a web to catch the flies – even if it's not quite how you would have done it yourself?With an early-stage business, such as the teen tech camp, there may not be enough in place to show how to do the job. Asking employees to come up with their role and the end result that they think is expected is one way to build up a training culture. Another tactic: Don't underestimate the role of storytelling and myths in building the results you expect. For centuries, little children have been told fairytales to prepare them for "real" life. It works. Business magazines are full of tales of how an employee ran through a burning building for their client. Get one of these stories in your culture too.

3. Am I prepared to let go?Ask yourself this: Do I really step away when I delegate? Once I've set the standards, do I really let go? Alarm bells should go off if you hear your employees saying, "We know you are just going to change everything we do anyway."

Working with managers and being one myself, my experience is that disasters happen when I have not been clear about the end result and I keep popping my head in randomly, interfering with the process.

Green Does Not Make It At The Till

Were you to count the copies of Naomi Klein’s book No Logo that sold globally, you would think that millions of consumers would be switching to green’s top values – curb your consumerism and if you have to buy, shop green. It’s easy to paint business as the only anti-green boogieman but surely the government (municipal, provincial, and federal) also plays a role. Must government only set rules, impose carbon taxes, freak out oil investors, and make doing business generally more difficult?
"Part of being green," says John Loewen, CEO of Loewen Partners, "is caring for the environment and for indigenous people." Tsonga Shoes became “green” and manufactures in an 80%-unemployment-riddled area of South Africa. On-site childcare and educational facilities were established in order to encourage the mostly female workers to create micro businesses and sell their shoes to Tsonga for a living wage. It was working well until, as all manufacturers around the world are discovering, consumers started responding to cheaper goods from China.Tsonga management visited China to look into combining manufacturing locations and were astounded by their discoveries.
The massive, half-empty shoe factory they visited had marble floors. Stunned, they asked the manager how he had raised the capital to build such a place. He told them the Chinese government had paid for the factory. Workers came from hundreds of miles away and stayed in dormitories for stretches of up to a year.
“How can we compete?” asks Russell Lindsey, CEO of Tsonga. “We can put a story about our Zulu shoemaker and her child in each shoebox, but ultimately, the consumer won’t buy Tsonga if cheaper shoes are available.”Indeed. Are those No Logo readers in fact rejecting Wal-Mart’s cheap goods for Bono’s sustainable (but pricier) line EDUN.
We seem to have ADHD consumers this side of the world who, once they enter a store, ignore Naomi’s advice and stampede for the latest lead-painted Barbies from WTO members, such as China. How does our government help our businesses compete and how do we reconcile the fact that green is difficult to achieve when competing with China’s support of their own manufacturers?
Our government talks of Toronto following London’s traffic access restrictions. A good idea for London, but Toronto has much fewer travel options in its infrastructure and few trains to link our cities. Indeed, our transportation seems to be planned by Monty Python with Hamilton’s train track from Toronto stopping 16km away from the city, while other trains pass through without stopping. A functional train for passengers between Hamilton and Toronto would reduce a wretched two-hour trek to 30 minutes. Attractive enough to leave the car behind – you bet!
Instead, our government’s priority is the bun fight about inter-provincial transfers. It’s hard to believe that Canada is one country. And who suffers? Entrepreneurs. With so much inter-provincial paperwork, it’s death by a thousand cuts. Take a lesson from business: Centralized IT departments charged each division service fees so as to share costs. In reality, however, division heads ended up arguing so much about the fairness of the system they eventually turned to outside IT companies to get the job done. Outsourcing became the norm and boomed. Perhaps we could outsource government action for basic transportation services because there is more argument about payment for services than green action. Indeed, it’s time for the government to create joint public-private partnerships with green as the goal.
Canadians balk at these sorts of private-public partnerships despite their success in other countries. Mike Harris’ Superbuild project demonstrated how business backs a project if the government provides initial financial support. When ROM received a $30M commitment from Superbuild, Frank Potter, chairman of ROM’s fundraising arm, said, "This lead investment from the Ontario government will be leveraged many times over by the private sector.”
Potter’s words were prophetic as the private sector followed the government, contributing the bulk of cash and project stamina.Let’s go beyond idealism and get down to action.