Stories of Private Equity

When the announcer yelled out, “The winner of the Media category, Ernst & Young Entrepreneur of the Year—Somerset Entertainment!” Andy Burgess grinned and bounded up to the stage to collect the award.
It all looked so easy to be standing there in a tuxedo waving the trophy, but this moment of appreciation came from painful years of slogging late into the night.
Andy Burgess is one of the owners of Somerset Entertainment, which produces and distributes specialty music to gift stores and other non-traditional retailers using interactive displays where you can push a button and listen to the CDs. They have 28,000 displays in over 18,500 locations that now include mass merchants and specialty stores.
With business and Juno awards filling their shelves, Somerset Entertainment did various acquisitions and moved from $5M in revenues to $11M, until eventually they were achieving $21M in revenues. They bought a distributor and, in 1998, levered up with four flavours of debt: term debt, debt at 17% interest rate, revolving credit, and a vendor take back loan. Then the cracks began to show.
The Buffalo distribution fulfillment center had been shipping comfortably to over 100 different retail points when Andy asked, “Can you do higher volume?” Naturally, they answered, “Yes!” when in fact that was far from the truth. Somerset had been a company with $8M revenues and $2M in EBITDA (earnings before interest, tax, depreciation, and amortization—see glossary) but had grown into the supply chain approach with a distributor turning out to be slow and with the uncanny ability to mess up orders. They would say they had shipped goods—the display case with CDs—and Somerset would then invoice the retailer who, it turnrf out, had not received anything except a bill. It was October—prime pre-holiday selling time with the Christmas season around the corner.
Not good!
American retailers are the toughest sons of guns and were furious at being bamboozled. They told Andy they did not get the goods, but then told him not to bother coming around any more—they were through. Yikes! In one fell swoop, Somerset had gone from being swift deliverers of orders to slow, unreliable duds.
“We hit $36M in sales with $8.5M EBITDA but our debt was at $15M and for the first time, we stressed about breaking covenants. We got a valuation of $15M and, with reluctance, we decided to go with a private equity investment of $21M.”
In hindsight, Andy says getting private equity was good for the owners’ motivation. It took the edge off the worry about money and retirement. “With private equity buying part ownership, we were allowed to take a large chunk out for ourselves straight away but still retain control. I had been working very hard and it was good to get $6M out for the founder and owners.”
The money meant Somerset could pay off their debt straight away and still have $4M to make acquisitions.
Andy says, “With that extra cash, we set up an office in Chicago that has turned out to be the vital springboard into the American market, taking Somerset to the next level. We’ve had a bad year in there, but we did not have to worry about the business blowing up. The peace of mind meant we could focus on battening down the hatches to the storm and finding a new way forward.”
The private equity partners proved to be great sounding boards when Somerset was making acquisitions. The investors were more aggressive in wanting growth but respected Somerset’s decision to step away from some identified targets.
“Also, when we nearly lost a key person,” Andy adds, “The investors did bring him around and get him to stay.”
Andy adds, “When you are an entrepreneur working your butt off, it is great to get that cash pay out as well as have cash to grow the business. With private equity you get the best of both worlds—the cash liquidity without the rigorous scrutiny of the public market.”
“Not every company can go public,” says Andy. “Private equity will transition you.” See if you can go public. Take Andy’s test and put the necessary tick marks next to your chart.
− You are making enough money to pay for public listing and accounting.
− You are profitable.
− You have a strong growth curve for your revenues.
− You have a decent management team.
− You are a good size.
Andy says, “At the time of the private equity deal, we were too small to go public. With private equity investors, we got to retain control and we got liquidity. Private equity took us back from the brink with risky debt and looming covenants. They were the stepping stone to getting big enough until in 2005, Somerset did our initial public offering (IPO). Selling those secondary shares was sweet, too.”
As Andy Burgess stood on the stage and let the applause of the audience sweep over him, it struck him how far Somerset Entertainment had come and what a ride it had been so far.

This is an excerpt from Money Magnet: Attracting Investors to your Business. Read more:

Women need to break through in banking

A new study finds no progress breaching top ranks despite industry's employment growth, says Dana Flavelle, Business Reporter for The Globe & Mail.
I must add here that I just finished a meeting with a South African finance expert who commented that although Canada is so open in business culture to people from anywhere, Bay Street is a tight knit group of Canadians. So, although this banking study focusses on women's difficulties in getting to the top, there are very similar issues for males not from the inner circle of Canadians. The South African went on to comment on how Wall Street is far more open to outsiders.
My question is does that make Canada's finance industry more secure and less likely to suffer Ponzi schemes and Enron debacles? Today, financial business is being done more and more with people you know. Perhaps the Bay Street inner circle does seem to work at keeping stability? I think we need to keep a great deal more in mind when reviewing these damning reports which make great press but are far more complicated with long term consequences we may not understand.
Here's Dana's article:
Stunned silence, groans of recognition and occasional laughter greeted the disappointing data and frank talk yesterday about women and the glass ceiling on Bay Street.
While Canada's banks have made progress promoting women in their other lines of business, in the rough-and-tumble world of stock and bond trading and private wealth management, they have made "virtually no gains," a study shows.
Part of the problem is the industry's lingering image as dominated by a "cigar-chomping group of men" where everyone works 15-hour days, Lynn Kennedy, managing director of foreign exchange for BMO Capital Markets, told a blue-chip luncheon at the King Edward Hotel, where the report was released yesterday.
The idea women need to network after office hours to get ahead is probably overrated, Kennedy added. "In those networks, I think we think a lot more goes on than actually does," she said to a burst of laughter. "I like to think I'm recognized for what I do during the day."
Still, stunned silence greeted the revelation that the latest study by Catalyst Canada found women have made no progress even as employment in capital markets at the management level grew 12 per cent to 16,300 during an eight-year period ending in April 2008.
Despite the stated support of senior bank executives, women remained stuck at 17 per cent of all senior managers, those with jobs that lead to a shot at the corner office, the study found. They made up 21 per cent of all middle managers. Even when support staff are taken into account, women make up just 40 per cent of employees.
"To say we are reporting progress would be overstating the data and before you blame the recession, the data was collected before it began," said Catalyst Canada vice-president Deborah Gillis.
"The truth is women have made virtually no gains," she added, sparking audible groans from an audience of 250 men and women who work in the capital markets industry. "There is still no one holding the title of chairman, president or chief executive officer."
Indeed, women may have lost ground since the credit crunch that began in the United States sparked a global financial meltdown and sweeping layoffs in the investment industry, the study's main client said in an earlier interview.
"We don't even know the impact of the enormous financial crisis. It's a huge concern for me," said Martha Fell, chief executive officer of Women in Capital Markets.
There is debate in some circles that more women at the top would have prevented the kind of testosterone-fuelled risk-taking that caused the financial crisis, Fell added. "I'm not saying I agree with that, but it makes you stop and think."
Catalyst Canada has long argued that presenting the data would lead to change and Fell said she is personally convinced that's the case.
However, she acknowledged in an interview the fact that four highly publicized studies of women in capital markets in eight years have produced little change raises disturbing questions.
"How the heck is this possible? Everything we're doing suggests we should have moved the dial by now," said Fell, whose non-profit advocacy group works with women to help them get ahead.
At least one bank, TD Financial Group, defended its record, saying women had made good progress in its other lines of business.

Finance Club For Women

For women meeting with private equity investors, you will be judged within the first five minutes. Will you convey confidence that you deserve to manage a whole lot of capital entrusted to you or will your body language say that you are not strong enough?

You may give off the wrong message without even opening your mouth.
Here's Forbes Woman's best advice for transforming your self-presentation into one that commands respect. Read more:
Raquel Laneri tells us, "Jeannine Fallon, executive director of corporate communications at Edmunds.com, learned this at a training course called "Women Unlimited," which she attended when she worked at Volvo 10 years ago."
"I distinctly remember one insight," she says of the session. "At a boardroom table, women tend to pile all their materials neatly and sit tucked into the table, while men tend to sprawl out, push away from the table, cross his ankle over a knee and lock arms behind his head. It was impressed upon us that the concept of taking up space correlates to the concept of dominance." The result? "I've never sat tucked into a table since."

Carey O'Donnell Public Relations Group, based in West Palm Beach, Fla., "many of us have no idea that our non-verbal cues are making an impact. There are thousands of micro-expressions, and people are reading these, even if they are only subconsciously translating these cues."
Some of the visual ticks common to women:
--Tilting your head--a sign of listening that can be misinterpreted as one of submission or even flirting.
--Folding your hands on your lap--hiding your hands under a conference table or desk, for example, signals untrustworthiness; a cue from ancient times, when men would reveal their palms to show they were unarmed.
--Crossing your legs--a sign of resistance.
--Excessive smiling--an indication that you lack gravitas and seriousness.
--Folding your arms in front of you--translates to insecurity or defensiveness.
--Playing with or tugging at your hair, jewelry or clothes--can signal distress or, again, be misinterpreted as flirting.

Well, now we know. I love to play with my jewelry so I had better cut that out! Check out the grumpy comments from men who came to the Forbes site to read the article. One fellow pouts,"If I had known this was body language for women, I would not have checked out this site." Poor man...

5 Items to have ready for an investor

You are going to have to do a lot more than pray for money when seeking investors. You are going to have to get "investor ready" as once they look at you, like what they see, then they will want a whole truck full of information...NOW.
I get asked all the time, "Where do I find investors?"
That part is easy, actually.
The question everyone should ask is, "what will get the investor to put cash into my business?"
This is the part which separates the men from the boys (and the women from the girls.)
Before you begin looking for people, get yourself ready. As sure as the sun rises in the East, there are items that us investors will require from you. First up, let's look at the 5 items about finances that we will need to tell us more about your business or idea:
1. The income statement is paramount.
If nothing else, if, at the very least, we can look at the income statement from one year of history we can judge how big the company is and how large of a financing it can generate. We would simply look at the earnings, calculate the EBITDA and get a rough idea of the general size of the company
Multiplying this by 6 times would give a very rough idea of the valuation of the company (enterprise value) and how much financing it can withstand. Some people are saying multiple it by 3 times but I think that is a little cruel.
2. The balance sheet is also very important.
From this we can determine the capital structure of the company.
3. Then there's the structure.
Looking at the capital structure allows us to determine what the structure of the financing might look like. It also allows us to determine a more accurate valuation (equity value) and determine the amount of dilution to management.
4. Cash is king, as the saying goes.
Cash flow statements can be derived from having both of these statements, but it is helpful in determining things like how much money management must invest each year to maintain the operations of the company.
5. We are history buffs for a reason.
History: we like to get three years. This is because at least three years allows an analyst to see any financial trends in the company. Having more than three years is even better, but three years is the minimum for noticing trends.


If you are wanting to learn more and get a simple explaination on this in far more details, check out Money Magnet: Attract Investors to Your Business.
It's written by J. Loewen and is simple and, surprisingly, readable because it is written for business owners.

What's a Great Job Now?

One of the hottest jobs for B-School graduates is Private Equity and this article in the WSJ is a good reflection of the trend. (If we count the resumes flooding our office, I would agree.)
I suspect many of these recently minted MBAs think that the private equity asset class is where the big salaries lurk and may be disappointed. Private equity is about far more than the money, the best PE people are fighters for the businesses they bring into their portfolios. They have to know the full range of business - in particular, cash flow. You can not get that from an MBA. Anyway, here's the WSJ article in brief:
"The percentage of graduates from the world's top business schools taking private-equity jobs has more than doubled in the past six years, according to the business schools' numbers.
"Financial News analyzed figures from five of the most popular M.B.A. schools:
- Harvard Business School,
- Stanford Graduate School of Business and
- the Wharton School at the University of Pennsylvania in the U.S.;
- the U.K.'s London Business School; and
- Insead, based in France and Singapore.
The percentage of Harvard M.B.A. graduates moving into private equity and venture capital has more than doubled, from 8% in 2003 to 21% among last year's graduates. In that time, the proportion moving into investment banking rose far less, from 7% in 2003 to 9% last year.
Data from Stanford showed a similar trend, with 9% of graduates choosing private equity in 2003 rising to 19% last year, compared with 4% and 5% for investment banking. Harvard supplied the highest number of M.B.A. graduates moving to private equity last year, with 191. Stanford was second with 72, ahead of Wharton's 45, Insead's 25 and London's 22.
Private equity's rise in popularity reflects the perception that graduates could make more money working in the asset class than in investment banking, but also follows substantial growth in the size of the private-equity market. However, an M.B.A. isn't a prerequisite for joining many private-equity firms. A sample of 10 large European and U.S. firms showed that 52% of the executives at partner level or above had obtained M.B.A.s.
Firms' Web sites showed French group PAI Partners had the lowest proportion, with 21%, or four of its 19 partner-level executives.The private-equity units of U.S. firms Kohlberg Kravis Roberts and Blackstone Group also had high proportions of MBAs among their senior staff, 61% and 63%, respectively.
Patrick Dunne, group communications director at 3i Group PLC, where 48% of partner-level staff had M.B.A.s, said: "For some people, [an M.B.A.] can be fantastically helpful -- for those without a finance background, for example, it can be a useful way of picking up necessary skills and knowledge."