CVCA's PD session on Deal and Valuation trends

I received a summary of the latest CVCA event from Shailen Chande. It's worth a peak:
Market overview:
- 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

Is anyone getting any money?

I see Jeff Frost is asking on the Venture Capital forum on Linkedin if there is any money being loaned or invested. Here in Canada, our banks have moved onto the list of top largest banks in the world which really is quite remarkable. When you fly across the country, most of it seems unoccupied! Also, we only have six cities with a population over a million while China has 100 cities with 1 million plus people.
So to get back to the question -is anyone putting money into companies?
Yes.
First up the government is handing out sugar plums to early stage companies. But since our banks are very conservative - as they should be we have come to appreciate - it has made room for a very healthy private equity fund industry.
If you have a business generating over $10M in revenues, you are of interest to a private equity fund in your field of expertise. Old style manufacturers, do not despair, as you are of interest too.
Last night, Loewen & Partners had a board meeting with one of our clients who is doing very well with global clients. Two years ago, when we first met, it was not a pretty picture. What happened? We matched the owner with a private equity fund who bought a 35% stake in the business. They also pushed him to do the strategic changes he had always meant to do. We raised capital - over $15M for the company and they had revenues of $35M and a downward trend. So you can see that there are possibilities where your Canadian banker may not wish to go.
The smiles around the table make private equity a great business.

Is private equity taking away bank business?

Now we can fast forward to 2009 and a completely different picture emerges.

China now holds the top 3 spots and America’s largest bank, JP Morgan Chase is merely in 5th place. You can do a whole range of further comparisons but the overwhelming conclusion must be that the financial world today is far different from a decade ago. And the power players have clearly shifted. If power were to be measured by the strength of financial institutions, 2009 must be considered a much more egalitarian world. No longer could the fate of things to come be dictated by one superpower only. An interesting thought considering the upcoming G20 meeting.

"Also to be factored in is the amount of money being given out to companies by private equity," cautions Jacoline Loewen, author of Money Magnet. "A lot of the business done by banks is shifting to private equity which does not show up on these charts."

Private equity and the bank share of market

In the book Money Magnet, Jacoline Loewen talks about how the unthinkable does happen. Like the music industry, technology is transforming the traditional banking and public markets.

"One of my themes is that private equity is slowly talking the higher risk bank lending and redoing this relationship," says Loewen. "Instead of being only a lender, the private equity people actually get a board seat and buy inot the business. Effectively, they are now a part manager too. It can seem high stress to an owner used to a nice lifestyle business but if you are going to earn a great deal more money, perhaps you can think about it."

Here is a chart to show the beginning of the big shifts in the world economy.

Rewind to 1999 to get a glimpse of the top 20 global financial institutions (based on market capitalization). The U.S. had 11 banks listed in the top 20. UK had 4 top 20 banks. Another interesting fact, the top 20 were dispersed among only 5 countries. US banks looked pretty good.

Green Technology is a Money Magnet

A survey, published by Environmental Entrepreneurs and CleanTech Ventures, shows that $2.9bn was invested in clean technology firms in 2006, up almost 80 per cent on the year before.
I predict Green is the new "bubble", with the growth set to continue, by 2010 investment in the sector could climb as high as $19bn. Here is a stimulus package!
There are already the market behemoths - like Google - just five firms attracted $600m of the total investment.
The reports says shifting public opinion and growing policy support for green technologies were two of the main raising agents that helped the sector attract more cash than even medical devices, telecoms, and semiconductor sectors. Biotech and software are still more attractive overall ($4.92bn and $5.25bn receptively), but have seen nothing like the same growth.
Green Technology is a Money Magnet and if you want to read more, check out the book.