CVCA Portfolio Management

Critical to proactively manage portfolio company performance through a downturn - increased focus on dashboard reporting and managing expectations
- Cash flow "Quick Hits": Dial back growth; Focus on streamlining direct costs as opposed to SG&A; Aggressively manage working capital
- Very rarely are cuts too deep - need to react to current environment quickly and prepare for the worst - revisit downside case
Clearly, we are operating in very difficult and uncertain times. That being said, there was a general consensus that good deals will get done in 2009.

CVCA Valuation & Structuring

Valuation of Canadian PE deals never reached the heights of their US counterparts - many Canadian sponsors sat on the bench and leverage levels were relatively prudent
- For the most part, there is not widespread acceptance of the "new world" amongst sellers - deals getting done are when sellers are distressed
- Lack of transaction comps post Fall 2007, significantly deteriorating current trading and lack of visibility through 2009 make valuation incredibly difficult - greater emphasis on diligence
- To mitigate valuation concerns, recent transactions have seen a greater emphasis on earn outs and vendor take backs - trend will likely continue
- Most interesting opportunities have a restructuring angle - need to structure for the downside case.

CVCA Market Update

Fresh from the CVCA conference last week:
Market Update
PE deal activity has been crippled by significant expectation gaps between buyers and sellers and a lack of financing
- Current baseline LBO structure for a "middle of the fairway" business - EV: 5.0-6.0x EBITDA; Total debt: 2.0-2.5x EBITDA
- Shift towards smaller deals - Larger US sponsors are looking at equity tickets in the region of US$200m
- 2009 has seen positive inflows into leveraged loan and high yield funds marking a potential return to mainstream lending
- Increasing number of GP's are returning LP commitments and/or reworking terms - fundraising market is limited, although there is demand for distressed/turnaround funds
- Increasing number of mid market US sponsors looking North to Canadian carve outs and/or distressed situations
- 2007/2008 funds will make for some of the best vintages given unprecedented buying opportunities

The ongoing global, banking, financial and credit crisis

"What happens to our financial services industry is important to our city, to the Province of Ontario and to Canada," says Jacoline Loewen, author or Money Magnet.
At their latest fiscal year-end, our five major banks had total assets of $2.5 trillion of which almost one trillion was outside of Canada.
In terms of market capitalization the five Canadian banks headquartered in Toronto all rank within the top 35 in the world.
So Toronto is an important banking centre and, if we play our cards right, it’s going to become more so. While Canadian banks have received some shocks from this crisis, on a relative basis they have done well.
Last year total write-offs by financial institutions around the world were in excess of $1 trillion and Canadian banks accounted for less than 1.4% of this total. Canadian banks are in a stronger position than what we see south of the border or in Europe.

Blackstone cashed out at the right time

FT.com says that

the listing of the private equity group could be the turning point in
financial history; one that will shape the world that emerges
from the current crisis: the moment when China really began to question its deep
financial entanglement with the US.

An interesting dilemma for both China and the U.S.: read here.
Jacoline Loewen, author of Money Magnet, says, "Blackstone cashed out at just the right time."
This article gives a glimpse of the dilemma facing both US and China with regard to their currencies and the management of growing debt on the US side versus the growing surplus on the Chinese side. The essence of this growing dilemma is highlighted in the following quote:
"US Treasuries are the safe haven; it is the only option," said Mr Luo. "Once you start issuing $1-$2 trillion . . . we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do."
Chinese investors are now the biggest foreign holders of US Treasuries with nearly $700bn. In total, foreign investors own about $3,000bn or more than half of all US Treasuries publicly available. The fact that the US is still somewhat considered the only true safe haven would explain why the US Dollar still remains relatively strong against all other major currencies. However, it also shows the precarious situation the US may face in the very near future. In order to continue to be able to find buyers for the growing US debt mountain, something has got to give. If the US$ were to depreciate, foreign investors would need to be incentivized with significantly higher yields on US treasuries.
Inflation will be a debtor's best friend and a creditor's worst nightmare.