Does privacy pay off for private equity?

One of the criticisms of private equity is its secrecy or as the fund managers may prefer to say, "Their below the radar approach." Privacy is why some owners choose to raise capital from private investors rather than expose themselves to the scrutiny and criticism of the public market. This approach certainly works for Maple Leaf Sports & Entertainment Ltd. (MLSE).

Maple Leaf Sports (MLSE) is the owner and operator of the Toronto Maple Leafs National Hockey League team, Toronto Raptors National Basketball Association team, Toronto FC Major League Soccer team, and Toronto Marlies American Hockey League team—all based in Toronto, Ontario, Canada. In addition to owning these franchises as well as Leafs TV and Raptors NBA TV (the official television stations of the Maple Leafs and Raptors respectively), MLSE is also involved in property management, including ownership of the Air Canada Centre, the home arena of the Maple Leafs and Raptors.

Quite a private company.

The owners are top private equity companies and others:

- 58% – Ontario Teachers' Pension Plan
- 20.5% – Kilmer Sports Inc. owned by Larry Tanenbaum. (Their boardroom boasts the biggest collection of basketball sneakers in the biggest sizes I have ever seen.)

- 14% – TD Bank Financial Group, through TD Capital Group

- 7.5% - CTVglobemedia

As I listened to Richard Peddie, the CEO, speak recently, I admired his pluck at addressing a crowd of Toronto sports fans who wanted to know how MLSE can keep selling seats to losing teams.

Who is buying those seats priced at $200 plus? How much does MLSE make per year, despite losing teams? Could they pay more for players?

Richard Peddie is under no obligation to reveal anything but he did let slip that MLSE is very profitable this year. Private equity gives the business financial support but keeps the cards close to the chest and by the glowing speech by Mr. Peddie, this secrecy strategy is working very well. The fans keep buying and the money keeps flowing.

Tax spending will create more jobs

CARPE DIEM: Cartoon of the Day

Multiple Mayhem

Valuation multiples have fallen.  Everyone knows it.  The industries hit the hardest are healthcare and IT according to data collected from Standard & Poors (see below).  

Last year, multiples sky rocketed, a response to so much credit floating in the market, which allowed many fund managers to aggressively pursue deals.  This led to very high bussiness valuations as so much money was chasing each deal.  In 2008, the flurry of activity led to the most private equity deals done in one year and the greatest amount of capital invested in private companies.  Not news.  But what is interesting these days, is that the $1 Trillion of uninvested capital in the private equity market is poised to gush into the market soon enough.   

However, maybe not soon enough for some.  To get a better sense of the loss in value, the chart below shows the average market valuation multiple.  Obviously, we're wading through an aberration, but for business owners looking to raise equity capital, seeing the value their business cut by half, in some cases, simply because of seemingly external forces, is a difficult pill to swallow.

There are, however, financial structuring alternatives that can preserve the value that has been painstakingly established over time.  The reason for this is the flexibility offered in the private market.  In public deals there are regulatory issues, such as the 10% insider rule (requiring shareholder approvals) or warrant prices which must be fixed, which confine the possibilities of how to preserve and realize shareholder value.  In private deals, there is far more flexibility, which can likely overcome the majority of losses seen in the markets today.

Oh, Canada

At school, American friends made a hobby of slagging Canada.  Pretty standard.  "Canadians are too polite", "Canadians are boring".  Luckily, "The Man Everyone Loved to Hate" was President of the U.S. at the time and the conversations were short.  We've all heard the swipes, some in Canada would agree with them, very politely and boring-ly, though despite our unflappable humility, we do love to have our skirts fanned from time to time.  

Fareed Zakaria, editor of Newsweek International is apparently taking a serious run at a Governor General's Award this year, despite the fact he's American.  Last week he published a column in Newsweek applauding Canada's virtues.  Mr. Zakaria writes in his article "Worthwhile Canadian Initiative", Canadians should be proud of the "common sense" and the capitalization rates of our banking system, which is getting recognition the world over.  Not exactly riveting stuff, but Switzerland must be hating us.

Canada is the only country in the industrialized world that has not faced a bank failure or calls for bailouts and government intervention.  The reason for this is our conservative, staid, risk-averse attitudes, the fodder of a-many jabs.  Our banks have been regulated to have far higher capitalization rates than the rest of the world.  Typically, our banks are leveraged 18 to 1 ($18 of debt for every $1 in the savings account), whereas the Americans are generally 26 to 1 and the European banks are a staggering 61 to 1.  Ooh la la.  Needless to say, this functions as a lot of profit in boom times, and, when the boom turns to bust the bank goes bursting and a Frenchman has one less half-caf, triple, Grande, three pumps sugar-free-vanilla, soy, no foam, 180 degree cappucino. 

Apparently, TD is brimming with pride these days.  They have gone from the backbenches of North American corporate obscurity, having been the 15th largest bank in N.A., to a major player, becoming North Americas 5th largest bank.

Mr. Zakari goes on to sing the praises of our 'responsible' natures when it comes to our fiscal policy.  We have been very good beavers and have stored up a lot of nuts through fiscal surpluses over the past decade to deal with the current financial crisis with a stable and sober approach. The Harvard PhD also likes our immigration program, our accountable mortgage policies, and our healthy life-expectancies.  Stop it, I'm blushing.

After having read this, I looked again at the the first line of the article.  It reads, "The legendary editor of The New Republic, Michael Kinsley, once held a "Boring Headline Contest" and decided that the winner was "Worthwhile Canadian Initiative".  This, for me, encapsulated much of the torn pride I felt throughout the article.  Though disguised as complements, we Canadians, can never escape the love affair foreigners have with taking a few jabs at our responsible, risk averse, common sensical, conservative selves.  Characteristics of good bankers it seems.

Business owners like the long view

"One of the reasons business owners are preferring private equity," says Jacoline Loewen, author of Money Magnet, "Is they appreciate that the investors go in for five years. It sure feels better than the short term view of shareholders in the public market who bale as soon as they see anything slightly off."
Long term trends are difficult to remember for investors in public markets.
This is an interesting chart as you can see we are still 5% above the trend line. Yet the public market ignored job loss information that came out last week, and ended up higher by Friday probably due to wishful thinking.
Private equity is in stark contrast to this short term thinking demonstrated in the public markets. Five years with a company before taking back the money is the shared goal. Think how this long term approach by shareholders helps business owners during these times.
One of the top fund managers at my secret handshake club said that these are historic times and our children will read about them. Now that is long term thinking.