Signs of revivals among private equity's giants

From The Economist, we learn that there are signs of revival among private equity's giants:
Along with the rest of the finance industry, the private-equity business has endured a miserable couple of years. Congress continues to plan heavier taxation of its profits, even though they have slumped. As banks, which had been lending buy-out firms spectacular sums of money on extraordinarily generous terms, abruptly turned off their taps, buy-outs became a rarity.
In the first half of 2009, just $24 billion of private-equity deals were completed worldwide and only three loans were extended to fund leveraged acquisitions, the lowest number since 1985, according to Dealogic. That compares with deal volumes of $131 billion last year and $528 billion in 2007.
Meanwhile, the economic crisis has meant that many of the firms snapped up by private equity in the boom years have got into difficulties, so private-equity bosses have had to spend most of their time trying to keep them alive when they would rather have been selling them for a profit and snapping up new bargains.
There have been some notable casualties suffered by some usually reliable performers. Apollo could not save Linens ’n Things, a retailer, from bankruptcy. The purchase of Chrysler by Cerberus made the private-equity firm named after the three-headed dog guarding the gates of hell look like a different sort of dog when the carmaker filed for bankruptcy. But possibly the most ignominious loss in the history of private equity was suffered by the venerable Texas Pacific Group (TPG): it invested $1.35 billion in Washington Mutual in April 2008, only for its entire stake to be wiped out five months later when the mortgage lender went bust and most of its assets were bought by JPMorgan Chase.
Last week TPG’s founder, David Bonderman, was appointed to the board of post-bankruptcy General Motors, suggesting that the WaMu misfortune has not done too much damage to his reputation. That is one of several signs in recent weeks that the wind may be starting to blow in a better direction for private equity. Some private-equity firms have invested on terms that have been described as “Don Corleone financing”
First, a few deals have been announced. They are small compared with the blockbusters of the credit bubble, such as Blackstone’s $40 billion purchase of Equity Office Properties in 2007, but better than nothing. Bankrate, a financial-services website, has agreed to be bought by Apax Partners for $571m. Some private-equity firms have invested in life support for CIT, a troubled lender, on terms that have been described as “risk-free” and “Don Corleone financing”.
There has also been a twitch of life in the market for disposals, with the announcement that Vitamin Shoppe, owned by private equity, intends to hold an initial public offering (IPO), albeit a tiny one that may value the retailer at $150m. Still, given that the IPO market has been dead this year, and trade sales of private-equity-owned firms have also been rare, this is not to be sniffed at. Perhaps the exit market, which in the first half of this year has raised only $21 billion, compared with $115 billion in the first half of 2008 (according to Dealogic), is past its worst.
But the clearest signal that things are looking up for private equity is the news that the granddaddy of the industry, Kohlberg Kravis Roberts (KKR), is to revive its plans to go public—and fast. These plans were postponed after the bankruptcy of Lehman Brothers last September led to a meltdown in the financial markets. By early this year KKR’s partners were considering abandoning the IPO for good. Now, they are in a hurry to get it done. The IPO is due to take place in October, through a reverse merger of the holding company into a European unit that KKR floated in happier times. By this method, KKR gets a listing in Amsterdam at least a year before it could get one in America—though the firm says it will put in place corporate-governance measures designed to meet the high standards of the New York Stock Exchange rather than the less demanding Dutch requirements.
Why the rush? There is no evidence that Henry Kravis and George Roberts, the two founders still active at KKR, are looking to cash out, as was the case with Pete Peterson, a founder of Blackstone, which went public in 2007. It seems that KKR wants public equity as currency for rewarding and retaining other partners and for acquisitions (perhaps of other private-equity firms or financial companies). That means it sees opportunity.
Mention of Blackstone is a reminder that when a private-equity firm goes public, that is not necessarily a buy signal for the industry. Blackstone’s IPO marked the industry’s pre-crunch high point, and Blackstone’s share price has never since come close to its IPO level of $31 a share. Strikingly, however, having fallen to under $4 this March, Blackstone’s share price has since rallied to over $11—another sign that KKR may be getting its timing right. If so, it will be no surprise if IPO plans are soon announced by Carlyle and perhaps other leading firms.
For all its recent difficulties, private equity still has plenty going for it—not least an estimated $400 billion of uninvested capital. True, the credit-fuelled mega-deals of old are unlikely to return soon. Deals will be mostly financed with equity rather than debt, which means that private-equity groups will need to improve the fundamentals of the businesses they buy rather than just profiting from financial engineering. The first area to see an increase in dealmaking is likely to be “roll-ups”, in which firms already backed by private equity will consolidate fragmented industries by buying small competitors from their troubled owners.
However, for the big private-equity firms like KKR, the greatest opportunity may come in diversifying. Already KKR has raised money to invest in distressed securities and infrastructure development. It may also see a chance to snap up stakes in other private-equity firms through the fast-growing secondary market for limited partnerships. It also has an advisory business, and is said to see an opportunity in helping firms raise capital. With the investment-banking industry a shadow of its former self, could it be that the future of the newly public KKR, along with Blackstone and maybe others, will be to become increasingly like, and competitive with, Goldman Sachs?

Not all private equity deals are good deals

The big private equity stories get covered by the newspaper media because they are known by a national readership. In Chrysler's case, an international readership knows the compnay, maybe not the PE firm, but a huge number of people are paying attention. Here is a cautionary tale told by LOUISE STORY in the New York Times about the downfall of Chrysler and how on its way down, it pulled off the golden crown of one of private equity's kings. (Read it on NYT)

FOR Steve Feinberg, the onetime owner of Chrysler, the past year has been a crawl toward defeat. He lost billions of dollars. He lost prestige. He lost his privacy. And he ended up a ward and supplicant of the federal government.
"Cerberus did not have a clue about the automotive industry," said Don Johnson, a former Chrysler employee in Ohio. "I don't think anything could have been worse." Steve Feinberg on Capitol Hill in December, as lawmakers worked on a bailout for automakers. "From the day we bought it," he recently said of Chrysler, "we worked hard to improve it."
But, even now, Mr. Feinberg, a man who can play a decent game of chess while blindfolded, is hard-pressed to pinpoint many mistakes. Sitting in his office on Park Avenue, far away from the detritus that surrounds Detroit, he grows pensive when asked what he has learned from his audacious — and failed — effort to privatize and resurrect the legendary and deeply troubled auto giant. “I don’t know what we could have done differently,” he says, crossing his arms on his chest. “From the day we bought it, we worked hard to improve it.”
He pauses, pondering, as the clock ticks away. Then he shakes his head. “We were too optimistic on timing,” he says. “Maybe what we should have done was not bought it.” Mr. Feinberg took over Chrysler almost exactly two years ago, promising to revive the company. Chrysler filed for bankruptcy protection at the end of April. So how he and his private equity firm, Cerberus Capital Management, choose to describe their journey with Chrysler is a delicate matter.
If he says he should have shelled out more money to help Chrysler, he could face the ire of investors who have already suffered heavy losses on his gambit. If he says he should have simply dumped Chrysler’s auto arm, while clinging to its more promising finance unit, he could be accused of caring more about his wallet than he did about Chrysler’s workers and the automaker’s role in the economy.
Mr. Feinberg’s education at the hands of Chrysler, the government and economic reality is emblematic of the limits private equity players have encountered as they’ve sought to reap outsize returns while also contending that they had the smarts and managerial prowess to repair companies of any size. Not too long ago, some pundits and analysts wondered whether private equity firms — backed with a rising tide of easy bank loans — could gain enough traction to make runs at seemingly untouchable behemoths like General Electric.
When Cerberus began poking around Detroit, some at the firm said they thought that the American automobile industry was going to be the biggest turnaround story in history. In sessions with potential investors in the last few years, the Cerberus team came across as passionate, skilled and incredibly confident that they could succeed where others had failed. “I thought, wow, this really signals a real change in the landscape here,” recalls a person who attended a Cerberus session who asked to remain anonymous because of agreements he signed. “I guess it gave me hope. The auto companies needed an enormous amount of capital, and where else was it going to come from?”
John W. Snow, a former Treasury secretary in the Bush administration and Cerberus’s chairman, also heralded Cerberus as Chrysler’s savior, likening the firm’s investment to the government rescue of Chrysler in 1979. “Over 25 years ago, when Chrysler faced bankruptcy, it turned to the United States government for assistance,” Mr. Snow said at a National Press Club meeting in 2007. “Today, Chrysler again faces new financial challenges. But it is private investment stepping in to inject much-needed support.”
Cerberus and its co-investors ultimately invested $7.4 billion in Chrysler, a sum now worth an estimated $1.4 billion. Ideally, Cerberus hoped to wed Chrysler’s finance arm to another finance company it controlled, GMAC. To that end, the risks in Chrysler’s auto business were something that the Cerberus team thought it could manage and that wouldn’t stand in the way of making billions of dollars for investors. “This will go down as one of the investments made at the very top of the credit bubble,” Josh Lerner, a professor who studies private equity at the Harvard Business School. “They don’t look good. This will be a black eye on their record.” Indeed, GMAC and Chrysler became so weak that they needed $22.6 billion in government aid in the last year to stay afloat. For Chrysler and its workers, investors, business partners and customers, was all of that worth it?
Mr. Feinberg defends his actions, saying he did everything possible to help the company. Known for avoiding publicity, he says that he was naïve not to anticipate the public attention that would surround him once he bought Chrysler and that he would have avoided the investment had he known. “I always view the press as something for guys who were trying to do big things,” he says, perhaps overlooking that Chrysler was, indeed, a very big thing.
DON JOHNSON, a former Chrysler employee, says he worked on initial production of the Jeep Liberty at a plant in Toledo, Ohio, in summer 2007, when Cerberus won the right to buy Chrysler from Daimler of Germany. To the surprise of some, Mr. Feinberg managed to woo the support of the United Automobile Workers for the deal. But Mr. Johnson says he was always skeptical about the carmaker’s new owners. “Cerberus did not have a clue about the automotive industry,” he says. “I don’t think anything could have been worse.”
Still, if you peel back Mr. Johnson’s argument, you quickly find a story of an automaker that was already in peril by the time Cerberus came on the scene. For example, he says the body shop at his plant couldn’t produce Jeep frames fast enough to keep up with the paint and assembly lines. Instead of fixing the problem, he says, the factory paid the body shop workers overtime to come in Sundays to keep up. Cerberus took the helm about a week after Mr. Johnson’s team ran into problems with the Jeep. When Mr. Feinberg addressed workers at a town hall meeting at Chrysler’s headquarters in Auburn Hills, Mich., shortly after the deal, he spoke of his long love of American manufacturing, according to workers who attended the speech. In particular, he said he was proud to repatriate Chrysler’s ownership from Germany.
“Steve saw this as a huge patriotic opportunity, in addition to a great investment,” says Robert L. Nardelli, the former Home Depot chief executive whom Cerberus installed at Chrysler’s helm. Although some investors doubt that anything other than profits drove Mr. Feinberg’s investment, many say they believe that he was authentically excited by the prospect of reviving an American corporate icon — a theme that Mr. Feinberg is happy to support.
Surrounded by rifles, a motorcycle and model cars in his office, Mr. Feinberg mentions family members who have served in Iraq and a brother-in-law who worked at G.M. He apologizes for rambling and explains his motivation for investing in Chrysler: “I love this country,” he says. “I feel it’s been great to me. I had a great chance.” Still, Mr. Feinberg, 49, has spent years as a dealmaker. The son of a steel salesman, he graduated from Princeton in 1982, where he studied politics. He went into finance so he could pay off his student loans. He worked at Drexel Burnham, the investment bank made famous by Michael R. Milken before it collapsed, and then, after a brief stop at a smaller firm, he was a co-founder of Cerberus in 1992.
For years, Cerberus was largely a trading shop specializing in distressed debt. But by the mid- 1990s, Mr. Feinberg expanded into buying and selling distressed companies and hired dozens of seasoned corporate executives to run them. Chrysler was the biggest prize he had ever bagged, and many co-investors say they always believed Cerberus’s stake in Chrysler’s auto operation was never the main reason the firm was interested in the company.
According to five people who heard Cerberus’s Chrysler pitch, all of whom requested anonymity because of confidentiality agreements, Mr. Feinberg’s deputies valued the financing unit more than the auto operation. In fact, the deputies believed, the finance unit’s value covered the cost of buying Chrysler, making the car company something of a bonus — if that part of the investment worked out, great; if not, Cerberus could still profit on the finance unit.
Mr. Feinberg says he believed the automobile operation had great potential value, perhaps even more than the finance arm if Cerberus could put the automaker on the right track. But that meant he and Mr. Nardelli (who had never overseen a car company) had to effectively manage the auto operation — no small feat.
By October, only three months into Cerberus’s tenure, Mr. Johnson says it was becoming obvious to him and other workers that trouble was ahead. “We went from three shifts to two shifts to one shift within a year,” Mr. Johnson recalls. “Then there was just down week after down week.” To reduce expenses, Mr. Nardelli cut excess factory capacity and billions of dollars in fixed costs. He improved the interiors of several models, which bolstered some of its approval ratings.
But there still wasn’t a strong demand for Chrysler’s product line, which was packed with large vehicles like minivans and S.U.V.’s at a time when skyrocketing gas prices were making consumers interested in more fuel-efficient cars. The company was aware that its lineup was far too limited. And Cerberus sent Chrysler executives around the world to seek partnerships with foreign automakers like Nissan. The hope was that those companies would help provide a broader product line for dealers.
But there was not time for any of the efforts to bear fruit. Chrysler was burning through cash. “Once the car market stalled, the cash in the auto market evaporated,” says Maryann Keller, a longtime auto analyst and consultant, of Chrysler’s predicament. “The cash was leaving their balance sheet, and they weren’t selling cars to make money they could invest.”
That situation was made worse by hefty interest payments on more than $10 billion in debt that Cerberus arranged for Chrysler as part of the takeover, which left the automaker carrying piles of debt just as auto sales were about to plummet. While many private equity deals involved saddling companies with debt to pay off investors, Chrysler needed to take on more debt because it had so little cash on hand to finance its operations, some analysts say. The company paid back some of the debt in November 2007.
Ms. Keller says that the company that Mr. Feinberg took over was already suffering from myriad problems: a bad cost structure, a limited product line and no pipeline of more diverse offerings. In short, she says, Cerberus had simply bought “a basket case.” At the beginning of 2008, Mr. Feinberg sized up his investment in a private letter to his investors. “We do not need to be heroes to earn a good return on the investment in Chrysler,” he wrote. “We do not need to transition the car industry or even to return Chrysler to a much stronger relative position in the U.S. car market in order to be successful.”
His letter sent a chill around New York, where dozens of hedge funds had joined in his Chrysler bet. Although these firms had agreed to let Cerberus control decisions involving their investments, there was fear about how his harsh words might affect the industry’s image. After all, such a steely, hard-headed look at Chrysler didn’t mesh with the patriotic tone of Cerberus’s other statements about the company. Nor did it comport with the private equity industry’s broader arguments that its investments were good not only for its firms, but also for America. Cerberus, meanwhile, was unable to stop Chrysler’s downward spiral. Last fall, Chrysler and General Motors tried to merge their operations, a scenario Mr. Feinberg supported, but a deal could not be struck. And in November, Chrysler announced a huge employee buyout. Mr. Johnson, the worker at the Toledo plant, joined thousands of others who signed up.
“There was absolutely no hope” among employees accepting the buyouts, he says. Mr. Feinberg says that he sympathizes with Mr. Johnson, but that he also believes business restructurings are, unfortunately, often brutal affairs. “It’s demoralizing when things go down,” he says. “But that’s a turnaround, you know. Some guys make it; some guys don’t want to deal with it. This was the most difficult environment. You couldn’t think of a worse storm for an employee to have to live through.”
It was also, as it turns out, a bad storm for Chrysler’s owners. MR. FEINBERG, a longtime free-market enthusiast and a Republican who never envisioned himself needing the government for help, suddenly found himself running a company that needed federal support to stay alive. By early last December, with Chrysler bleeding cash, he had become a vocal presence in Washington, circulating around Congressional offices to get his story out. He even offered to put tens of millions of his own money into Chrysler, a move that would have been largely symbolic.
“He said his dad was a blue-collar manufacturing type,” says Senator Bob Corker, Republican of Tennessee, who often spoke with Mr. Feinberg. “You sit there and you talk to Steve, and you can tell he’s from a background that greatly understands what the American worker is all about.” But Mr. Feinberg soon found himself negotiating with government officials who understood what Wall Street was all about.
When Congress did not pass a rescue bill for the automakers, the Treasury Department stepped in, using financial authority it had already assumed from its bailout of the banking system. Cerberus’s fate moved into the hands of Steven Shafran, a Goldman Sachs alumnus who represented the government and was regarded inside Treasury as a tough negotiator.
Mr. Shafran forced Cerberus to accept a painfully low valuation of its GMAC stake. He also quashed arguments by Cerberus that Chrysler’s financial arm shouldn’t be responsible for paying back bailout funds provided to Chrysler’s auto operation. At some point in December, Mr. Feinberg began to realize that Cerberus’s investment in Chrysler’s auto operations was largely unsalvageable. In a phone call with Mr. Shafran about 2 a.m. on Dec. 19, he offered to simply give the car company to the government, according to five people briefed on the call.
Mr. Feinberg says he was offering Cerberus’s stake in the auto company to the government as a bargaining chit for negotiating with bankers, the union and others. But some Treasury officials were worried that he was simply trying to avoid leaving the finance unit on the hook for $2 billion of the $4 billion the auto operation received in federal aid.
Treasury officials declined Mr. Feinberg’s offer and also were so wary of his motives that they put in a rule requiring that federal bailout money provided to Chrysler’s financial arm could be used only to help Chrysler’s auto unit. Despite all of that back and forth, Mr. Shafran says he believes that Cerberus behaved professionally. “They were prepared to work closely with us to ensure a smooth landing for the car company,” he says.
When the Obama administration took over this year, Mr. Feinberg got a second chance to negotiate. He faced yet another Wall Street refugee trying to save the auto industry, Steven Rattner, as well as Ron Bloom, a former banker who worked more recently for the United Steelworkers union. Mr. Feinberg was particularly focused on decreasing the $2 billion guarantee the previous administration had wrung out of Chrysler’s financial arm. He eventually knocked that amount down by hundreds of millions of dollars after agreeing to give up some other things the government wanted — something Mr. Feinberg regards as a fair outcome.
“Basically,” Mr. Bloom says, “they realized they made a poor investment and wanted to end it in a decent way.” Chrysler filed for bankruptcy protection on April 30 to help clear the way for a merger with the Italian automaker Fiat. Cerberus now values its Chrysler stake at 19 cents on the dollar. It is a humbling and embarrassing figure for Mr. Feinberg. But it’s better than zero cents on the dollar, which is what his stake might have been worth had the government not bailed him out.
Mr. Feinberg and his colleagues at Cerberus maintain to this day that their time at Chrysler was, in part, a reflection of their patriotism — a view that some analysts find hard to swallow. “It’s hard to believe that any of these firms — including Cerberus — will be viewed as patriots in 10 years,” said John Rogers, a private equity analyst at Moody’s Investors Service, “because I don’t think their impact on any of these companies will be seen as so positive for the overall economy.”
Mr. Feinberg still begs to differ, saying his experience at Chrysler has left him feeling like a good citizen. “There were times we could have been tougher and pushed harder and gotten more,” he says, “but it wasn’t the right thing for the country.”

Government infrastructure spending has arrived

Aecon talks about the infrastructure industry in the second half of this year - looking good. http://tiny.cc/s6vma
The CEO, Scott Balfour, admits he is not sure if the rush of work is due to the government spending on infrastructure but that there is more work than they usually see. When I last heard Scott speak, it was to The Ticker Club, Toronto, and I was impressed with his positive energy and global perspective.

Here's part of the article:
By David Paddon (CP)
TORONTO — Canadian construction heavyweight Aecon Group Inc. (TSX:ARE) is finding new bidding opportunities are coming forward at an unprecedented pace that's likely the result of government economic stimulus packages, top executives say.
For the last six or eight weeks there have been significant new project opportunities every week that are "clearly being pushed as part of the stimulus package that we've been hearing so much about," Aecon president Scott Balfour said Wednesday on a conference call for analysts.
One analyst noted that some of the projects on Aecon's to-do list have been there for some time before the economic downturn and asked how much credit to give to the government stimulus spending.
"Truthfully, I don't know that it's possible for us to differentiate," Balfour replied. "Would all those projects still have been going but for the stimulus package? I just don't know."
But he added that the pace and number of projects coming forward at once has never been seen before "and so I can't help but believe that a lot of that is as a result of the incremental funding from the stimulus programs."
John Beck, Aecon's chairman and chief executive officer, said the Toronto-headquartered company is seeing an urgency to spend the money prior to March 31, 2011, the announced date for end of the federal stimulus program.
"And so there's a scramble. We're seeing that on some of the projects that may have been planned before," Beck said.

Unions lambast private equity

Here is an article in the New York Times ripping away at Private Equity by ANDY STERN, president of the Service Employees International Union. Read at WSJ:

May I add that this article is a great illustration at the disconnect between private equity and unions. Private equity's process is a black box for union leaders and an anathema, particularly to those who do not want to give up their 18 days paid sick day leave. As one commenter put it: "When Andy Stern and the SEIU subject their pension funds to the same oversight that he is suggesting should happen for private investors (as is the law), perhaps I'll take more seriously his analysis of how best to regulate capital markets."
Here's Andy:

While we’re still digging ourselves out of the greatest economic crisis since the Great Depression, private-equity firms are shoveling dirt back in the hole. Firm leaders still argue that the over leveraged, privatized and market-worshipping financial model they perfected—uninhibited by regulation and enforcement—is key to rescuing our nation’s banks.
Last month, the Federal Deposit Insurance Corporation (FDIC) released draft guidelines limiting the ability of private-equity firms to invest in failed banks. These new guidelines will ensure that the banks are well capitalized, that the details of their investments and loans, like those of any commercial banks, are made available to the FDIC, and that the FDIC and other agencies can prevent a rerun of the Savings & Loan crisis of the 1980s and ’90s.
Meanwhile, private-equity stalwarts have been arguing against those guidelines. If we are to believe these guys, any attempt to rein in private equity’s ability to invest in bank deals would stifle investment and hinder economic recovery.
They promise they’ll play by the rules this time, that we can trust them, that they’re looking out for taxpayers. But we’ve played that game before. And we learned ordinary Americans pay the price when financial markets are unregulated and over leveraged deals—which initially thrived—eventually go bust.
We lose our jobs as our employers cut back or are forced to close their doors altogether. We lose our retirements as the value of the stock market plummets, along with our investments and our pension funds. We lose our homes because we can no longer afford our mortgages after getting laid off or having our hours cut. We lose our recovery when banks cut off the credit our small businesses need to survive.
But hard-working people lose in more ways than this. As homes foreclose and businesses go bankrupt, states and cities lose tax revenue—resulting in cuts to services we depend on. That tax revenue could be used to provide health care for all, develop a new green economy, or foster a world-class education system. But instead of investing in our future, we end up bailing out a reckless financial industry.
Most Americans, like myself, believe in a pretty simple philosophy—that if you work hard and play by the rules, you should be able to get by and raise a family, send your kid to college, and retire with dignity.
That’s been the promise of America for decades—until a handful of people on Wall Street and in Washington figured out how to rig the system against us.
Nobody is trying to stop private-equity firms from making profitable investments. But we need to ensure that the decisions made by a few never again threaten our ability to provide for our families and win a better life for our children. The FDIC’s guidelines are, for two reasons, an important step toward protecting the economy from future financial recklessness.
First, banking is still a relatively new industry for private-equity investors. It’s therefore not unusual for the government to provide them with increased oversight, ensuring their new investments prove sustainable. Private equity’s recent track record suggests that it needs regulation on this front.
For example, the Texas Pacific Group’s (TPG) disastrous investment in Washington Mutual last year prevented the financial giant from raising additional capital until it was too late, resulting in its forced fire-sale to J.P. Morgan Chase. This wiped out TPG’s entire investment.
Then in May, four private-equity investors teamed up to buy BankUnited—a bank with $12.7 billion in assets and $8.3 billion in deposits—for only $900 million. The FDIC committed to share in 84% of the bank’s losses. Though taxpayers subsidized the purchase and took on most of its risk, private-equity firms stood to gain most of the profits.
Second, private equity’s entire business model is based on reworking the connection between risk and reward. In this case, they get all the rewards while the government and taxpayers take on all the risk. This is not the way to stabilize our banking system. The FDIC’s guidelines ensure that more risk is spread out among investors with less saddled onto the taxpayers.
These are the kinds of guidelines that the Service Employees International Union (SEIU) called for long before this economic crisis. SEIU wanted to ensure that private-equity firms wouldn’t continue to reap all the rewards of their investments while using workers and taxpayers as a backstop against potential losses and failures.
The FDIC’s new guidelines are a good first step, but full economic recovery will take more. We must continue to act more boldly and more broadly if we are truly serious about building a new financial model that rewards long-term sustainability over quick profits and fad investments.
As I said at the top of this article, Mr. Stern is the president of the Service Employees International Union.

Big brand private equity to get the upper hand

The Securities and Exchange Commission Monday released the full, 114-page documentation supporting proposals to ending pay-to-play problems at public pension funds that it made last month.
As sister blog Private Equity Beat points out, reports Scott Austin, the documentation affirms what many placement agents had feared after reading the short initial proposal from the SEC, which was somewhat vague: under the new rules, private equity firms would be banned from using placement agents to solicit business from government pension fund clients.
With regards to venture capital firms, which generally don’t use placement agents as much as buyout firms, this is especially troublesome to the smaller firms that rely on them to raise capital. If this ban does go through - the proposal will be open for comment for 60 days, it may give the so-called brand name firms even more of the upper hand. For reactions, read more in VentureWire….

An Act of God?

Those who know me personally will conclude (I hope!) that I am not the type prone to throwing shoes at the television, at least not as early as seven in the morning. So I must confess that, on more than one occasion in recent weeks, I have come perilously close to doing so. The object of my un-desire? The normally level-headed crew that run the Squawk Box morning show on CNBC Europe. Mea culpa; a day hardly passes when I have not been tempted to bung a brogue at the US CNBC crew who – with a few honourable exceptions such as Bob Pisani – are so smug, they cannot see an empty space let alone an empty glass without imagining an overflowing swimming pool. And, for the record, I only watch Bloomberg when I cannot get CNBC; Bloomberg’s Stars and Stripes cheerleading makes CNBC look sober, even sombre!
What is it that so gets my ire up? It is the idea, so widely peddled in the Western media and even sadly in the venerable Financial Times, that we are experiencing a GLOBAL financial crisis. NO! NO! NO! What is happening is first and foremost a WESTERN WORLD financial crisis, a world where Japan is arguably not merely a but the founding member. More people live in countries that will see their nation’s GDP grow this year than live in those that will see it contract. As John Stopford so eloquently put it: “It is the Developed World that is experiencing an Emerging Market crisis.” Yes, of course there have been repercussions for most of the rest of the world, not least in (why am I not surprised?!) that “wagon-still-hitched-to-the-wrong-ox”, South Africa. But in Asia – where the world’s newest economic locomotives are stationed – and Latin America, Russia, the Middle East and much of the rest of Africa – home to the world’s main ‘coal trucks’ – these repercussions are much more akin to the buffetings one might feel when a hurricane passes five hundred miles away: the effects wear off quite quickly.
For completeness however, note that some emerging markets – the passenger cars of Eastern Europe, the Baltic States and Mexico – are marooned in a siding by virtue of being hitched to the ‘out-of-steam’ Puffing Billys of Europe and the US respectively. Unable to be lower cost than Asia, no longer able to sell their migrant workforce into their bigger, richer next-door-neighbours, these emerging markets have found their place in the world’s value adding hierarchy undermined from all sides. In Eastern Europe and the Baltic States in particular, chronically high cross-border, cross-currency debt burdens owed to Western European banking houses mostly in the form of house mortgages are threatening to precipitate maxi-devaluations and sovereign defaults. If Latvia goes, which Eastern European and Baltic houses of cards might tumble down in its wake?
Most other emerging markets however are still moving forward precisely because their houses – be they financial or residential – have not come tumbling down. Of course, as is now well known, in the West, the houses of Lehman’s, AIG, Northern Rock, Fannie Mae and Freddie Mac have been razed to the ground whilst the houses built by the likes of Pulte, Lennar, Horton, Beazer and Taylor Woodrow have crumbled in value. Given the interconnectedness between the financial health of the typical Western banking house with the typical Western residential house, and the fact that the failure of the one has hastened the fall of the other and vice versa, was it any wonder we witnessed a plague on both these Western houses? By contrast, the banks of emerging market locomotives and coal trucks may well be boring but at least in their world, one can still say they are as safe as are their houses (though I fear this simile may have outlived its usefulness! As safe as the Bank of China, perhaps?!)
So why do so many blinkered financial commentators in the West make the mistake of assuming that their current financial crisis is everyone’s financial crisis, that it is truly global?
The first answer is that many hardly recognise that there is a bigger world out there beyond the end of their own national noses – to borrow the title of a Michael Jackson song, they seem to assume “We are the World”! Wrong; they are not, never were and never will be. Indeed, as much as it may gall those who sit in their home-biased business Western TV studios to admit it, there is a whole New World out there beyond the West, a world wherein arguably the greenest pastures open to mobile global capital now lie.
Secondly, these commentators assume that because they are the centre of global finance (which for now they are but, given recent events, this status is now living on borrowed money and so on borrowed time), they jump to the conclusion that what is rotten in the core must by definition be rotten everywhere. Wrong again; yes, the periphery has inevitably been bruised but it is by no means bowed; indeed, much of it is already showing signs of restoring its much higher growth trajectory when compared to the now “Turning Japanese” West. Perhaps their misconception is wrapped up in a naïve and indeed even patronising belief that what afflicts the risk-free (except that it is no longer risk-free!) rate at the centre could not but hurt the higher beta periphery even more. (As a friend in London harrumphed, admittedly in a good-natured jest: “Good God, man, are you trying to tell me that our former colonies are now doing better than we are? What is the world coming to?” What, indeed.).
Thirdly – and Western politicians use this ‘logic’ even more than do its financial commentators – there is a “get-out-of-jail-free” card that suggests if the Browns, Sarkozys and even the late-lamented Bushes can cast their domestic crisis as truly global, they can claim that its causes are largely “beyond us” so, they hope, absolving them of any blame. Like a real tsunami, they must have hoped that if the financial tsunami could be cast as “an act of God”, Western voters would not take out their anger on their Governments. So far, Anglo-Saxon voters are having none of it: “Chuck the incumbents out” has become their rallying call.
As US Republicans have learned and the UK Labour Party has already experienced in local polls and is sure to experience in national polls next year, democracy hath no fury like a house-owner scorned.
But of course, this crisis was not an act of God; it was wholly an act of man and Western politicians of all political persuasions as much as those who elected them in the first place were and are still deeply implicated in this tsunami’s formation.

Our guest blogger is Dr. Michael Power. Dr. Power may be reached at:
email address: Michael.Power (at) investecmail.com

Trading Places

Speaking to the recent International Economic Forum of the Americas held in Montreal, World Bank President Robert Zoellick commented on how lots of countries around the world would like to trade places with Canada, even though we did not escape the effects of the global economic downturn (our higher resource–driven “beta”.) He added: “Canada has had a fiscal policy managed in its budget pretty soundly over the years”.
The continuing test of this fiscal soundness lies ahead. In the meanwhile, Goldman Sachs singles out Canada as among the first of the advanced economies to emerge from recession. Respected David Rosenberg, now returned home to be the chief economist and strategist at Gluskin Sheff & Associates, sees us not having the structural fiscal deficit problems of the U.S. and being well positioned as the economic power shifts towards Asia and China. Reflecting its confidence, the Fidelity mutual fund group has set up an on-site research Team Canada. Expressions of confidence like these keep on growing.
Inflation and its possibly devastating consequences may seem a distant problem at a time of still-serious recession and economic slack. Federal Reserve Chairman Ben Bernanke and Bank of Canada Governor Mark Carney do not seem unduly worried shorter-term. At latest count the annual Canadian inflation rate had dropped to a 14-year low of just 0.4%, and four of the provinces, among them even Alberta, had sunk into deflationary territory. Nevertheless, while it may not be an immediate problem, no serious investor should ignore the elephantine inflation risk. Even if months or years early, it seems none to soon to begin taking precautionary action, adjusting investment strategies and re-examining asset mixes in this probability.
On the fixed income side, the renowned Bill Gross of PIMCO, the world’s largest bond fund, strongly recommends a shortening of term to maturity. For my part, I now prefer not going much beyond bonds (and bond ladders) of a five-year maturity – and always A-rated. For taxable Canadian investors in need of income there are now attractive resettable (5 year) preferred shares issued mostly by the banks, but also by others. And most definitely not to forget the inflation defence offered by companies that pay and continuously increase their annual dividend payouts.
Our guest blogger is Michael Graham. You can reach him at:
Michael Graham Investment Services Inc.
Tel: 416 360-7530 Fax: 416 360-5566
E: Michael@grahamis.ca
Website at www.grahamis.ca

You can't grow your economy if you can't grow the revenues

Here is a great summary from Lynn Lewis at Scotia McLeod. You can reach Lynn at: [lynn_lewis "at" scotiamcleod.com]

North American markets have continued to trade in a very tight range this week as we have heard good news and bad news stories. Following some proclamations last week that the recessions for Canada and the U.S. are supposedly over, markets rocketed higher on the expectation that economic growth is going to be strong and sustainable for the rest of 2009.

The TSX Index is getting closer to its recent high from June 10, while U.S. indices have broken through their recent highs since the market downturn last fall. The calls for the end of the recession are based on the technical definition of a recession in that some economists are predicting marginal if not breakeven growth for Canada and the U.S. in Q3; but those economists are also adding the caveat that while growth may return, the recovery will be difficult as unemployment is expected to rise further, home prices may continue to struggle in the U.S. and you'll still have a financial system that is on government assisted life support for some time.

Lynn says, "I add these caveats as they are a warning to us as investors not to get too carried away with how high we take the markets since this is not just an economic downturn we've witnessed, but a financially structural problem that is going to take years to fix."

This does not mean that markets can't appreciate over the next year or so, but it does mean that we should not see the magnitude of appreciation we've witnessed in previous recoveries when the economy expanded but the financial system was in much better condition.

We also saw the U.S. Case-Shiller Home Price Index report for May where a year over year decline of 17.06% was registered. This was better than the 17.9% decline that economists were forecasting, but let me be clear while this number is improving, it is still awful. All in all we are still cautiously optimistic.
General Commentary from Gareth Watson, CFA
An almost US$4.00 per barrel decline in the price of crude oil on Wednesday sent the TSX lower by 115 points or about 1%. The weakness was not contained just to energy but to other commodity prices as rumours continue to come out of China indicating that the Chinese government may be changing loan policy in an attempt to slow the pace of economic growth in an attempt to avoid any type of asset pricing bubbles in the near term.

Since China has basically been the place where everyone is pointing to for growth, any indication of lending restrictions or signs of reduced lending is definitely going to make investors think twice about piling into economically sensitive areas of the market such as oil, gas and base metals. The Energy subsector was easily the weakest on Wednesday followed by Materials and then Financials (even though some Canadian banks finished higher).

In fact only three sectors managed to post gains including Industrials, Consumer Discretionary and Consumer Staples. Wednesday was the second day of triple digit losses for the TSX as investors are realizing that valuations may be too optimistic at this stage of the economic cycle. Today is an exceptionally busy day for corporate earnings in both Canada and the U.S. We've had some companies already report in the U.S. this morning and we continue to see the recent trend of beating on the earnings line but missing on the revenue line which means we can't be too excited about these results as it would appear as though the earnings are being driven more by cost cutting than by revenue growth.

There definitely have been some companies that have beaten expectations on both lines, but there are others do exist where cost cutting appears to have been the theme for the quarter. You can't grow your economy if you can't grow the revenues.

Selling your business

If gaining access to funding is the biggest initial stumbling block for small businesses, managing growth is certainly the most significant second-stage challenge.
Countless businesses, in spite of showing early promise have failed for one of many growth-related reasons, from lack of cash flow and skills to poor management expertise or insufficient infrastructure. But perhaps the biggest culprit is an unwillingness or inability on the part of the business owner to relinquish the iron-fist control that they grew used to exercising (and which was essential) when the business was growing.
Unable to spread themselves across all areas of the business but unwilling to delegate tasks to others, such entrepreneurs doom their businesses to failure. Either that, or they end up selling to someone who can run a growing operation.

Bay Street Broads Club

I admire the CEO of 85 Broads, Janet Hanson and was delighted when one of my brilliant team members, Winnie Chou, sent me this article on Janet.
Her comments on putting family and relationships at the same level as their career would have been chum to the sharks backin the Ninties. I am so glad to see someone being honest about how family and love are important. As Janet puts it, "She did not want to be someone's rich aunt." It shows that the choices for women can be managed because Janet is her daughter's rich mum! Shows that it can be OK to seek happiness.
Janet's a Columbia MBA, the first woman in Goldman Sachs' history promoted to sales management, founder of a $3B asset management fund, a published author, philanthropist, mother and more.
You can also read Janet's Q&A in full on The Doostang Blog.
Here's a quick summary:

Tell us about 85 Broads and why you started it. I set out to solve a problem.
When I left Goldman Sachs in 1993, I was leaving the world I had known and loved for 14 years to stay at home with my two young children. I wanted to know what the markets were doing, I wanted to be “in the game” but instead I was at home wishing I wasn’t. I founded 85 Broads (which is a humorous play on Goldman’s street address in Manhattan) to re-establish a connection between women who were “alumnae” of the firm with women who were still in the building. You have had a very successful career in finance.

Can you elaborate on your decision to go into that field, and give us perspective on that choice?
I won the career lottery after I graduated from Columbia Business School at the age of 24 – I became an associate in the Fixed Income Division at Goldman Sachs. It was just an amazing time to be at the firm. Being in Fixed Income Sales played to my competitive strengths – I thrived because I was challenged every single day to push myself. It was incredibly hard work but it was also incredibly rewarding. The 2-year investment banking stint as we know it isn't a pervasive option for top grads today. What advice do you have for members who are facing this tumultuous job market early in their careers? My best advice: be willing to really push yourself – whether you’re doing a 2-year stint with Teach For America or 2 years as a banking analyst, this is how young people can truly differentiate themselves. If you can figure out how to live and breathe the company’s “mission,” you will earn the respect of the people who hired you and invested in you. And lastly, when you’re young, if you do nothing else, figure out how to leverage your college alumni network. That is the single best resource you have and it’s free. Like you, many of our members have elected to further their education with an MBA.

Women have made strides in business thanks to trailblazers like you. What advice would you give to the high-achieving women on Doostang who hold career success as a core value?
We have a favorite expression: “read the ending first.” Being driven in your career is great as long as you have your eye on what else will be critical to your happiness 5 or 10 years down the road. I left Goldman Sachs when I was 35 because I had no social life whatsoever. I was on track to be made a partner within a year or two. I left the firm just as my career was going into high gear so that I could concentrate on how to be in a successful relationship as well as have a successful career. Five months after I left, I came back to Goldman in a part-time job in Personnel. My friends thought I was absolutely insane. But less than a year later, I married Jeff Hanson, who I worked with in Personnel. Even though he wasn’t a “big hitter” by Goldman standards, he was brilliant and fun and we built an amazing life together. I left Goldman Sachs because I didn’t want to just be someone’s rich aunt,! I wanted to have a family AND a successful career. My approach was a bit unconventional but it worked – Meredith and Chris Hanson are the loves of my life. They are the reason I’m still happily “in the game.” Bottom line, I had the guts to know that to be happy I needed a successful career AND a great family. That is not work/life balance. That is work/life optimization.

What are some common mistakes you've observed in interacting with top grads just starting out, as well as the hiring managers who recruit them?
It is critical to figure out how to relate to young people – the smartest thing a hiring manager can do is solicit candid feedback from the young people they hire. These kids are absolutely whip smart. They are the best educated, best traveled generation ever. And they learn fast so it’s imperative for managers to keep them intellectually engaged and motivated. That is their single biggest challenge.

In a recent interview for the Huffington Post, you talk about "reading the ending first" in job search. What does this mean for our members who are actively looking for new opportunities?
It means acquire real skills which will make you eminently more qualified. If I was a young person today I would want to have killer computer skills so that I could analyze data and information better and faster. That doesn’t mean you have to be a programmer. It means knowing how to use technology to your greatest advantage. Anyone over 40 years old is probably not that familiar with how to use SEO or the newest social media tools which could give their companies or organizations a real competitive advantage. Young people, if they’re smart, will use this “edge” to make themselves invaluable in any career path. Older people are at a severe disadvantage which young people can exploit (in a nice way). That is a co-mentoring opportunity if there ever was one.

What does career management mean to you?
I will always be grateful to Nancy Reagan. When she was First Lady, she was asked by the press how she would tell young people to steer clear of drugs. Her answer: “just say no.” She was derided in the press for that rather simplistic response but guess what – saying “no” is actually one of the most important skills you need to master in order to have any semblance of happiness – particularly as you get older and are likely juggling career and family responsibilities. Jeff and I launched Milestone Capital so we could spend more time with our kids and have complete control of our own destiny. We worked like absolute dogs but we never looked back. In 2004, I left Milestone and went to work for Lehman Brothers to hedge our downside risk if our business started to falter. But as everyone knows, stuff happens. That and there are no guarantees in life. If I had to do it all over again, I would have banked! a lot more of my income from Goldman which would have given me many more options down the road.

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