How did Private Equity get to this position? What happened?
In 1980, approximately $4 billion was invested in private
equity in the USA. Today, that number is estimated to be over $600 billion.
Canada has followed a similar, but smaller, trajectory.
Many of our great companies and iconic brands were founded with
private equity investment and partnering including: RIM, Opentext, IMAX,
Skidoo, Four Seasons, Mastermind, Flickr, Apple, Sleep Country, Harveys, Rogers, Cirque duSoleil and Lululemon. Many private equity individuals and firms have generated
very large and highly publicized returns on their
investments. They have made it the Billionaire's Lists.
The visible, monetary success of private equity was met with some general
concern, skepticism and, perhaps, envy from the business community and seeded
the pervasive negativity of today. These attitudes were then heightened by the
sometimes-questionable and widely publicized practices of mostly American well-known
private equity professionals like Michael Milken of Drexel Burnham Lambert, who
drove tremendous merger and acquisition activity with junk bonds, T. Boone
Pickens generating fortunes with greenmail, and Carl Icahn’s ruthless corporate
slashing.
In Canada, Vengrowth’s Labour Fund rise and fall was not
helped by the perception that management had taken a huge fee for themselves,
and lived the high life in mansions, while not giving the promised returns. I heard a top journalist lumping all of labour funds and private equity with Vengrowth.
It is very unfortunate that the journalist put the term “private equity” into a negative business view which flows through to the public’s dialogue. It is hardly surprising then that the bad apples of PE spoil the reputation for private equity that has done very well. Bermingham Construction, Hamilton, was only able to get private equity, not bank finance, and then able to grow to a significant size. This growth would have not happened with bank debt..
The public’s concern about private equity was cemented during what Carlyle’s
founder, David Rubenstein, called the golden age of private equity, from 2003
to 2007. These years saw unprecedented levels of investment activity, investor
commitments, debt deployment and the formation and growth of thousands of
private firms and companies that support their investing. During that period,
13 of the 15 largest buyouts in history occurred, and three of the largest
private equity firms went public, creating tremendous wealth for their general
partners.
During the golden age, many owners of small- and middle-market companies,
and much of the public, started considering private equity investors to be
greedy abusers of debt, willing to do whatever is necessary to generate a quick
return, even to a company’s detriment. Unfortunately, that perception was not
unfounded. Fortunately, there are many great private equity firms that do not
operate that way.
Private equity is like many industries (and political parties) where a
highly visible portion sets the public’s perception of the whole. There are, in
fact, many private equity firms that don’t fit the stereotype, and they can be
great partners to business owners and management teams.
Reputable private equity firms focus on creating returns though growth and
improvement of the companies they invest in. They develop transaction
structures that align their needs with those of the selling parties, as well as
the company and its employees. They use appropriate leverage. They develop well
thought out incentive plans for company leadership and employees. They support
management in developing and executing a strategic plan that will satisfy
stakeholder expectations and realize the company’s full potential. They bring
resources to bear that the ownership and management wouldn’t otherwise have
access to. Finally, they are valuable sounding boards and guides.
They add value.
Don’t assume all private equity firms — or corporate finance advisers for
that matter — are the same. If you are considering a transaction, talk to an
exempt market dealer, like Loewen and Partners to point you towards those private equity partners with
the track record and who make great partners. They definitely exist.
