The Renaissance of the Platinum Age

Though he does point out that it may not be for another year, David Rubenstein co-founder of The Carlyle Group, mentioned last week that "the greatest period [for private equity] is probably ahead of us as you will see the industry coming back into the Platinum Age".  This is not surprising. As noted in previous weeks in this blog, private equity firms are currently raising incredible sums of money right now; when these funds will be discharged is anyone's guess, but informed opinions, such as Mr. Rubenstein's, point to a renaissance in about a year.  

This is not to say that the industry has fallen flat on itself this year, it has simply come to more reasonable levels of activity, compared to years prior.  We saw the prices paid for firms in buyout deals rise significantly last year.  Josh Lerner of the Harvard Business School noted that EBITDA multiples were, on average, 8.3 times earnings before interest, taxes, and depreciation/amortization, however, this was in an environment where returns generated by firms were 25% on average and as much as 40% in the upper stratospheres.  Over the next year, returns are expected to come down from their 25% average to around 14%; still respectable outperformance, but not at the leverage-induced performance of last year.  However, the private equity industry is not experiencing the same hang-over as some of the banks that are forced to write-down significant portions of their balance sheets, but the effect of the tightened credit market is sobering, causing many to point to happier times when billion-dollar buyouts will once again spread the elixer of good fortune.

Finding Private Equity Investors

The number one issue for every entrepreneur is money - getting money, raising money, or convincing investors to give you money - that according to Jacoline Loewen who is one of the Nation’s best known advisors to entrepreneurs who seek capital, venture captial and private equity.business pod cast. Loewen & Partners raises capital for companies with revenues over $10 million.
Listen to Robert Gold to talk about Jacoline's latest book, Money Magnet, which explains how to find private equity investors. This lively interview will appear in a future episode of the BusinessCast podcast.

The UK's Telegraph is reporting that TPG Capital has raised a $20 billion fund, one of the largest ever raised; Blackstone raised the world's largest ($21.7 billion) in August, and Goldman Sachs raised another $20 billion last April.  So what is going on?  Aren't private equity funds suppose to be dwindling without access to the credit they so desperately need from the banks? Apparently not.  

The credit crisis has created enough uncertainty in the public markets that investors are looking to private equity funds for the stability they crave.  Of course, it may be a while until we see the blockbuster, highly leveraged, billion dollar buy-out deals that we saw in 2007's "summer of love" (some say another year), but this does not mean that private equity funds are not active, quite the contrary.  

These funds continue to buy the collateralized debt obligations (CDO) that the banks so desperately look to offload.  Last month Lone Star was the latest private equity fund to buy CDOs from a distressed vendor, Merrill Lynch.  The financial firm sold $7 billion worth of CDOs at 22% of their face value to Lone-Star.  These deals make a very small splash in the pages of newspapers today; part of the credit is due to PE professionals' growing media-savvy in their efforts to keep their faces from front covers, and partly due to the complexity of these deals that really do not make for engaging reading in 500 words or less.

Entrepreneurs have set skills for a set size of business

Terry Matthews is quoted in Report on Business magazine, "I'm increasingly convinced that being an entrepreneur-the first time-is circumstantial. But being a serial entrepreneur is something that I truly believe is deep-rooted in the individual." Terry goes on to explain that the start up stage involves a whoel different set of skills to once the company has matured and is running with set systems.
My book, Money Magnet, spends a whole chapter taking business owners though the concept that their skills which got them to where they are may not be the skills they need to take the company to the next stage of growth - hence, invite in private equity partners. Visit my book's website for a free download of this chapter. http//www.moneymagnetbook.ca
Terry is with Celtic House, one of the top funds for IT companies who are also featured in Money Magnet.

Walking Away from a $3 Billion Deal

Interesting article in the Harvard Business Review online about ABRY, a media-focused private equity firm started in 1989 whose partners managed to raise way more money for their latest fund than initially planned.
What would you do?
John Loewen says, "As you know, partners receive fees for the cash managed and that brings a huge issue of taking this money while knowing you perhaps may not be able to place the money."
This article and case study takes you through the moral points and how they were navigated by this fund - which was ethically prudent.
Now how about the media headlining this story of private equity walking away from a money-for-jam situation?
Nope, not that interesting beacuse no heads rolling or blood letting.