May 11, 2009
May 5, 2009
5 Questions Board Directors Can Learn From Private Equity
If Private Equity gets involved with a company, as either a minority partner or over 50% ownership, there are usually five major thrusts of reform.
These translate into five key questions that directors should pose to senior management and expect a thoughtful analysis in response. If you are a Board Member, take note and try asking them at your next Board meeting:
1. Have we left too much cash on our balance sheet instead of raising our cash dividends or buying back our own shares?
2. Do we have the optimal capital structure with the lowest weighted after-tax cost of total capital, including debt and equity?
3. Do we have an operating plan that will significantly increase shareholder value, with specific metrics to monitor performance?
4. Are the compensation rewards for our top executives tied closely enough to increases in shareholder value, with real penalties for nonperformance?
5. Have our board members dedicated enough time and do they have sufficient industry expertise and financial incentive to maximize shareholder value?
Jacoline Loewen is a partner with Loewen & Partners and has been a Board Member for Bilingo China, Innovation Exchange, The Women's Post, Strategic Leadership Forum and more.
These translate into five key questions that directors should pose to senior management and expect a thoughtful analysis in response. If you are a Board Member, take note and try asking them at your next Board meeting:
1. Have we left too much cash on our balance sheet instead of raising our cash dividends or buying back our own shares?
2. Do we have the optimal capital structure with the lowest weighted after-tax cost of total capital, including debt and equity?
3. Do we have an operating plan that will significantly increase shareholder value, with specific metrics to monitor performance?
4. Are the compensation rewards for our top executives tied closely enough to increases in shareholder value, with real penalties for nonperformance?
5. Have our board members dedicated enough time and do they have sufficient industry expertise and financial incentive to maximize shareholder value?
Jacoline Loewen is a partner with Loewen & Partners and has been a Board Member for Bilingo China, Innovation Exchange, The Women's Post, Strategic Leadership Forum and more.
May 4, 2009
US Debt May Crowd Out Private Investment
Deficits are a way for governments to use tax payer money and public spending to stimulate the economy when private demand is weak. This works as long as a country closes its deficit and pays back its borrowings after its economy starts to recover.
The trouble is that government borrowing risks crowding out private investment, driving up interest rates and potentially slowing a recovery still trying to take hold. That is why the American Federal Reserve announced an extraordinary policy this year to buy back existing long-term debt — $300 billion over six months — to drive down yields. The strategy worked for a while, but now the impact of that decision appears to be wearing off as long-term interest rates tick up again.
Then there is the concern that the interest the government must pay on its debt obligations may hurt future generations. The Congressional Budget Office expects interest payments to more than quadruple in the next decade as Washington borrows and spends, to $806 billion by 2019 from $172 billion next year.
GRAHAM BOWLEY and JACK HEALY report in the Wall Street Journal, May 3, 2009: “You’re just paying more and more interest and having to borrow more and more money to pay the interest,” said Charles S. Konigsberg, chief budget counsel for the Concord Coalition, which advocates lower deficits. “It diverts a tremendous amount of resources, of taxpayer dollars.”
Of course, no one is suggesting the United States will have problems paying the interest on its debt. On Wednesday, even as it announced its huge financing needs for the latest quarter, the Treasury said financial markets could accommodate the flood of new bonds. “We feel confident that we can address these large borrowing needs,” said Karthik Ramanathan, the Treasury’s acting assistant secretary for financial markets.
One worry, however, is that there are fewer eager lenders to buy all that American debt. Most of the world is in recession, and other nations have rising borrowing needs as well. As other nations’ surpluses turn to deficits, America will face competition in global financial markets for its borrowing needs. For the moment, the United States is actually benefiting from a flight to quality into Treasuries brought on by the global financial crisis, which helped reduce rates to record lows this winter. But the influx will not continue forever.
China has lent immense sums to the United States — about two-thirds of its central bank’s $1.95 trillion in foreign reserves is believed to be in United States securities — but it has begun to voice concerns about America’s financial health.
To calm nerves and fill the deficit hole, the government is getting creative. The Treasury is ramping up its auction calendar, holding more frequent sales of government debt and selling the debt in expanded amounts. It is now holding sales of its 30-year bond each month, up from four times annually.It is also resuscitating previously discontinued bonds, such as the seven-year note and the three-year note, to try to mop up any available money all along the yield curve. There is even talk of issuing billions of dollars of a new 50-year bond, though the idea has not won official approval
The trouble is that government borrowing risks crowding out private investment, driving up interest rates and potentially slowing a recovery still trying to take hold. That is why the American Federal Reserve announced an extraordinary policy this year to buy back existing long-term debt — $300 billion over six months — to drive down yields. The strategy worked for a while, but now the impact of that decision appears to be wearing off as long-term interest rates tick up again.
Then there is the concern that the interest the government must pay on its debt obligations may hurt future generations. The Congressional Budget Office expects interest payments to more than quadruple in the next decade as Washington borrows and spends, to $806 billion by 2019 from $172 billion next year.
GRAHAM BOWLEY and JACK HEALY report in the Wall Street Journal, May 3, 2009: “You’re just paying more and more interest and having to borrow more and more money to pay the interest,” said Charles S. Konigsberg, chief budget counsel for the Concord Coalition, which advocates lower deficits. “It diverts a tremendous amount of resources, of taxpayer dollars.”
Of course, no one is suggesting the United States will have problems paying the interest on its debt. On Wednesday, even as it announced its huge financing needs for the latest quarter, the Treasury said financial markets could accommodate the flood of new bonds. “We feel confident that we can address these large borrowing needs,” said Karthik Ramanathan, the Treasury’s acting assistant secretary for financial markets.
One worry, however, is that there are fewer eager lenders to buy all that American debt. Most of the world is in recession, and other nations have rising borrowing needs as well. As other nations’ surpluses turn to deficits, America will face competition in global financial markets for its borrowing needs. For the moment, the United States is actually benefiting from a flight to quality into Treasuries brought on by the global financial crisis, which helped reduce rates to record lows this winter. But the influx will not continue forever.
China has lent immense sums to the United States — about two-thirds of its central bank’s $1.95 trillion in foreign reserves is believed to be in United States securities — but it has begun to voice concerns about America’s financial health.
To calm nerves and fill the deficit hole, the government is getting creative. The Treasury is ramping up its auction calendar, holding more frequent sales of government debt and selling the debt in expanded amounts. It is now holding sales of its 30-year bond each month, up from four times annually.It is also resuscitating previously discontinued bonds, such as the seven-year note and the three-year note, to try to mop up any available money all along the yield curve. There is even talk of issuing billions of dollars of a new 50-year bond, though the idea has not won official approval
April 30, 2009
Even Facebook likes private equity
Facebook is looking to raise money from 'God's gift to finance'....Private Equity.
"Facebook meets private equity firms to raise capital," reports the Dow Jones Newswires, 30 Apr 2009. Facebook has held a series of exploratory meetings with private equity firms on raising additional capital but the two sides are about $3bn (€2.2bn) apart on what the social networking website is worth, The New York Post reported, citing sources close to the situation.
"Facebook meets private equity firms to raise capital," reports the Dow Jones Newswires, 30 Apr 2009. Facebook has held a series of exploratory meetings with private equity firms on raising additional capital but the two sides are about $3bn (€2.2bn) apart on what the social networking website is worth, The New York Post reported, citing sources close to the situation.
April 27, 2009
Pitching to Raise Capital
“Do you know how many business owners stand in this room and fifteen minutes into the meeting, I still don’t know who the customer would be or what the product would do for them?” says Michael Della Fortuna, an investor in private companies.
“What don’t you like?”
“It’s the lack of a big, driving goal. Imagine if General Montgomery spent all his time discussing how war ships and planes were built - and their fire power - instead of getting on with the big picture for D-Day. It’s the same for entrepreneurs. They must show the vision of D-Day, the milestones to get Normandy done and what the results should be. Cost – reward. They must show they can use the left side of their brain to steer their earnings before interest, taxes, depreciation, and amortization (EBITDA).”
Michael takes a breath and continues. “It’s never the technology alone that gets money out of the customer’s wallet. Ask Beta, Eight Track tapes, Lotus Notes, and all those companies with the way-cool technology that overshot the customer’s need. If you spend your twenty minutes telling me about your technology, I can’t stand it! It means you’re just not CEO material.”
“You hate seeing pitches?”
“Nope, I just get bored out of my skull by people who have not taken the time to expand their skill set. Owners bogged down in their product are like finger nails down a blackboard.”
Crikey! No wonder business owners get intimidated by pitching to investors. It is why I tell company owners who are about to raise capital that pitching to the fund managers is fifteen minutes under a hot, hot spotlight. When you get before the investors with the big bucks, you may have been invited for an hour, but in reality you have just fifteen minutes to break through and get them wanting to know more. For those silver-tongued owners who can communicate their business situation effortlessly, they will attract the finance partners to take their company to the next level. For those lesser mortals (most business owners) they could learn a lot from Andy Warhol’s phrase “fifteen minutes of fame” when prepping for pitching.
Make no mistake, the initial pitch is a short time to explain your value and, quite frankly, this process annoys the heck out of owners who know their companies are solid performers with a good financial record. They bristle, “Can’t these guys just read the business plan and we can email the PowerPoint?”
Eeeer, no. Private equity investors put their money (and it is often their own cash) into management and the pitch is their first opportunity to assess the team. Put yourself in the place of these investors. Imagine that you must make an investment decision. How would you make your decision? Would you choose the owner who froths at the mouth about their fabulous technology that U of Waterloo admires? Then there’s the owner who is obviously a great manager but the product is iffy. Lastly, you meet the owner who talks in broad brush strokes about the technology, how it will translate into cash, but also how much your investment could earn you over the next five years. The entrepreneur who can communicate and is thinking about my investment gets my vote – n’est pas?
For many owners, it can come as a surprise the extent that quality of management influences the investors. Most fund managers will tell you they would rather put their money into the great management team with a B product, rather than the less than stellar team with the A product because leadership is what gets results.
One of my clients, Angella Hughes of Xogen, swept me up in her enthusiasm because of her ability to get across her business value. Angella said, “Water is a scarce resource, not here in Canada but across the world, and it is dwindling every year. We have a cheap way of purifying water.” Ok, got that and I know fund managers in the green sector would agree. She pitched a brief investment thesis in a few words that people can grasp. She understands that there is time to get to her technology and complex business model in the second half of the meeting, once the value has been established. If she spoke about her water purification technology too early, her science would only serve to numb the interest of her investor audience.
The best case scenario is to get plugged into advisors and investors who really know and love their industry before you decide to take on private equity. “Even if they aren’t looking for capital at that time,” says Robyn Lawrie Rutledge, an investor with TSG Consumer Partners. She advises, “When the time is right for both parties, there will be a relationship in place which will lead to a more streamlined process and a stronger partnership out of the gate.” You might not have to burn under that fifteen minute spotlight by then.
I don’t want to suggest that pitching is like taking in a Staples “Easy Button” and the fund mangers will punch it, writing you a fat check. Simple is never easy. Deep preparation is needed and those who do it, get the funding. The investment community is globally small and, by golly, if you treat the visit to any investor with the same forethought as a chat with a friend in the school parking lot – well, put it this way, you don’t deserve the money. If you are one of the many business owners not comfortable with the communication required to finesse a capital raise, for heaven’s sake hire a professional corporate finance expert. Or find yourself a partner who can communicate.
Jacoline B. Loewen is the author of Money Magnet and managing director at Loewen & Partners, a private equity and venture capital firm based in Toronto. Jacoline works with the owners of companies to access capital. Jacoline can be reached at www.moneymagnetbook.ca.
“What don’t you like?”
“It’s the lack of a big, driving goal. Imagine if General Montgomery spent all his time discussing how war ships and planes were built - and their fire power - instead of getting on with the big picture for D-Day. It’s the same for entrepreneurs. They must show the vision of D-Day, the milestones to get Normandy done and what the results should be. Cost – reward. They must show they can use the left side of their brain to steer their earnings before interest, taxes, depreciation, and amortization (EBITDA).”
Michael takes a breath and continues. “It’s never the technology alone that gets money out of the customer’s wallet. Ask Beta, Eight Track tapes, Lotus Notes, and all those companies with the way-cool technology that overshot the customer’s need. If you spend your twenty minutes telling me about your technology, I can’t stand it! It means you’re just not CEO material.”
“You hate seeing pitches?”
“Nope, I just get bored out of my skull by people who have not taken the time to expand their skill set. Owners bogged down in their product are like finger nails down a blackboard.”
Crikey! No wonder business owners get intimidated by pitching to investors. It is why I tell company owners who are about to raise capital that pitching to the fund managers is fifteen minutes under a hot, hot spotlight. When you get before the investors with the big bucks, you may have been invited for an hour, but in reality you have just fifteen minutes to break through and get them wanting to know more. For those silver-tongued owners who can communicate their business situation effortlessly, they will attract the finance partners to take their company to the next level. For those lesser mortals (most business owners) they could learn a lot from Andy Warhol’s phrase “fifteen minutes of fame” when prepping for pitching.
Make no mistake, the initial pitch is a short time to explain your value and, quite frankly, this process annoys the heck out of owners who know their companies are solid performers with a good financial record. They bristle, “Can’t these guys just read the business plan and we can email the PowerPoint?”
Eeeer, no. Private equity investors put their money (and it is often their own cash) into management and the pitch is their first opportunity to assess the team. Put yourself in the place of these investors. Imagine that you must make an investment decision. How would you make your decision? Would you choose the owner who froths at the mouth about their fabulous technology that U of Waterloo admires? Then there’s the owner who is obviously a great manager but the product is iffy. Lastly, you meet the owner who talks in broad brush strokes about the technology, how it will translate into cash, but also how much your investment could earn you over the next five years. The entrepreneur who can communicate and is thinking about my investment gets my vote – n’est pas?
For many owners, it can come as a surprise the extent that quality of management influences the investors. Most fund managers will tell you they would rather put their money into the great management team with a B product, rather than the less than stellar team with the A product because leadership is what gets results.
One of my clients, Angella Hughes of Xogen, swept me up in her enthusiasm because of her ability to get across her business value. Angella said, “Water is a scarce resource, not here in Canada but across the world, and it is dwindling every year. We have a cheap way of purifying water.” Ok, got that and I know fund managers in the green sector would agree. She pitched a brief investment thesis in a few words that people can grasp. She understands that there is time to get to her technology and complex business model in the second half of the meeting, once the value has been established. If she spoke about her water purification technology too early, her science would only serve to numb the interest of her investor audience.
The best case scenario is to get plugged into advisors and investors who really know and love their industry before you decide to take on private equity. “Even if they aren’t looking for capital at that time,” says Robyn Lawrie Rutledge, an investor with TSG Consumer Partners. She advises, “When the time is right for both parties, there will be a relationship in place which will lead to a more streamlined process and a stronger partnership out of the gate.” You might not have to burn under that fifteen minute spotlight by then.
I don’t want to suggest that pitching is like taking in a Staples “Easy Button” and the fund mangers will punch it, writing you a fat check. Simple is never easy. Deep preparation is needed and those who do it, get the funding. The investment community is globally small and, by golly, if you treat the visit to any investor with the same forethought as a chat with a friend in the school parking lot – well, put it this way, you don’t deserve the money. If you are one of the many business owners not comfortable with the communication required to finesse a capital raise, for heaven’s sake hire a professional corporate finance expert. Or find yourself a partner who can communicate.
Jacoline B. Loewen is the author of Money Magnet and managing director at Loewen & Partners, a private equity and venture capital firm based in Toronto. Jacoline works with the owners of companies to access capital. Jacoline can be reached at www.moneymagnetbook.ca.
Subscribe to:
Posts (Atom)