Private Equity sees the value in Health Care

The tale of rival Indian and Malaysian bidders for a Singapore-based health-care chain might be described as "same hospital bed, different dreams."

A full-on bidding war for Parkway Holdings Ltd., a successful Singaporean provider of swanky, high-end hospital care, broke out last week when India's Fortis Healthcare Ltd. announced an offer for the shares it doesn't already own in Parkway that values the company at 4.32 billion Singaporean dollars (US$3.10 billion). Fortis's bid of S$3.80 a share tops a partial takeover offer of S$3.78 a share from a unit of Malaysia's sovereign-wealth fund aimed at securing majority control without having to buy the whole asset.

The two offers share one thing in common: a belief that rapidly growing demand for quality health services around Asia represents a unique business opportunity. But the offers from each of Parkway's two biggest shareholders envision different players—one government-owned, another a private-sector industry leader—grabbing the consolidator's position.

Malaysia's interest in Parkway is clear. It holds 24.1% of Parkway outright through Khazanah Nasional Bhd., the state-owned investment fund, and owns 60% of a Malaysian Parkway affiliate. Parkway also generates 26% of its revenue in Malaysia, which is expected to be a key driver of its future growth, according to a Citi Investment Research report.

Moreover, Parkway offers tiny Singapore's bigger, less developed neighbor a chance to leapfrog into a leading position in high-end health care, an industry the government has singled out for strategic growth. Malaysia already has used government funds in that effort: state-owned oil company Petroliam National Bhd., or Petronas, owns a luxury, "futuristically designed" (as the website puts it) 300-bed hospital in the country's capital, Kuala Lumpur, built two years ago in part to promote medical tourism.

For Fortis, Parkway offers a chance to expand from its base in India across the region. One of India's largest hospital groups, Fortis is run by billionaire brothers of the Singh family that founded drug maker Ranbaxy Laboratories Ltd. In an email, Fortis Chairman Malvinder Mohan Singh said a combination between Fortis and Parkway would create a "pan-Asian health-care platform" that stretches from the Gulf to Southeast Asia, with both China and India representing big opportunities.

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Bono Values Private Equity

Elevation Partners, the private-equity firm whose founders include Bono and Roger McNamee, added to its stake in Facebook with a $120 million investment, according to a person familiar with the matter. Elevation bought the shares from equity owners in private transactions and has invested a total of $210 million in the company. The social-networking site, with about 500 million users, is valued at $19.9 billion, according to SharesPost Inc.

Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/07/03/BU9B1E8EGF.DTL#ixzz0slHUtFg9

"An Unfair Advantage"? Combining Banking with Private Equity Investing

"Does the combination of banking and private equity investing endow banks with superior information that allows them to identify good prospects and garner superior returns?" asks Lily Fang, Victoria Ivashina, and Josh Lerner from HBR. "Or does the combination bestow banks with an unfair ability to expand their balance sheets, capturing benefits within the bank at the expense of the overall market and ultimately the taxpayers?"
When I first went to meet with all of Canada's Private Equity players, I quickly learned that Canada's banks had tried doing private equity, but have exited this industry. The main reason is that the Bank culture is very different from Private Equity. Banking is about managing risk, while private equity culture requires embracing higher risk than most could stomach.
It reminds me of General Stanley McChrystal's situation who was reported in Rolling Stone to have made insubordinate comments about the USA government. Many of these comments, such as "Bite Me", I have heard a million times from very senior men during my career in finance. 
Many have condemned the General for being light with his criticisms of the top leadership of the USA in front of a reporter. Yet, they would probably mostly agree that McChrystal is very smart and good at his work -cutting edge, in fact. Those criticizing McChrystal would probably even agree that his innovations have reinvented the US military. That is quite an accomplishment for a man who has now been fired for criticizing his boss in the media.
If you did a quick survey, I predict that those who think McChrystal should be fired for his insubordinate (and foolish) remarks are usually working for big companies. They can not fathom making such comments to any media, even a music magazine. I suspect that McChrystal probably thought Rolling Stone would be empathetic to his coolness and repaint the military as a hip place to be, after the Bush years of ridicule. 
Business owners and private equity would be more likely to say McChrystal should have been reined in, but certainly not have lost his job. Private equity and entrepreneurs look past these terse, sarcastic jokes and appreciate if the job is being done very well. Private equity would first ask and look for the answer "yes" to every question:

• Is this warrior of top value to building the military of the future?
• Is this person an innovator? 
• Is he bringing more to the bottom line even as he grates? 
• Does this person challenge authority, but is there value in what he is saying? 
• Could we bring him in and coach him more on how to keep the team working together, and encourage a little less of the Clint Eastwood shots from the corner of the room? 

OK then. You have a good person here, but with a badly misguided PR problem. 
General McChrystal is operating in a very different world than most corporate people. His world requires entrepreneurial thinking and attitude to challenge sacred cows. I can guarantee that corporate behaviour is not going to save lives and it is why the US military has been spinning its wheels because they stifle their true warriors. 
McChrystal's brashness  is his value. His riskier behaviour is change agent behaviour. When the leadership takes out their innovators, a bad message goes out to the rest of the military strategists. Think, but do not speak your mind. It is why innovation does not happen in big corporates. the rest of the people will not stand for it. They stamp it out viciously. 
General McChrystal demonstrates private equity behaviour. His boss, General David Petraeus, is steady at the wheel type of fellow, who tows the line, illustrates more bank relevant culture. And that - in a military story - is why banks should not do private equity.

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  Read more at Harvard's excellent article on this: 

INSEAD's Lily Fang and Harvard Business School professors Victoria Ivashina and Josh Lerner examined nearly 8,000 unique private equity transactions between 1978 and 2009, looking in depth at the nature of the private equity investors, the structure of the investments, and the performance of the firms. Collectively, findings suggest that there are risks in combining banking and private equity investing. The results are consistent with many of the worries about these transactions articulated by policymakers. Key concepts include:

• The cyclicality of bank-affiliated transactions, the time-varying pattern of the financing benefit enjoyed by affiliated deals, and the generally worse outcomes of these deals done at market peaks raise questions about the desirability of combining banking with private equity investing.
• These investments seem to exacerbate the amplitude of waves in the private equity market, leading to more transactions at precisely the times when the private and social returns are likely to be the lowest.
• Investments involving both affiliated and nonaffiliated firms appear particularly vulnerable to downturns.
• Some information-related synergies, however, are captured internally by the banks. But banks' involvement poses significant issues as well.
• The share of banks in the private equity market is substantial. Between 1983 and 2009, over one-quarter of all private equity investments involved bank-affiliated private equity groups.

Read more at the National Post 

Canada has a productivity problem

Canada's disturbing productivity performance is getting highlighted out by one of Canada's leading economists, Sherry Cooper. According to Cooper,

" Our banks were the only ones, worldwide, that never took a single dollar of government money." 

Yet our productivity is shamefully low, a fact I learned while doing my MBA outside of Canada, many years ago. Sherry says, "Our rate of return is not as high as in other countries, and the gap has widened to the highest level in history."
Sherry pointed out another fact that disgusted my MBA professor teaching unionism - America had a very low union rate. As Peter Drucker pointed out frequently, Marxism and Unionism was built on the back of the unhappy, poor, overworked Proletarian worker. Well, in the USA, with a high school education, you could earn a huge salary in manufacturing and mining. That's when the unions and Marxism lost its force because well paid workers would rather go home and watch the World Cup soccer with a cold one than fight what exactly.
Canada does have a higher unionization rate, which made my professor happier. I was startled when a visiting productivity expert told my MBA class that the laziest workers he had seen were in Canada and worked for a union.
There are three elements of productivity growth according to the Bank of Montreal report:

1. investment in machinery and equipment, 
2. human capital development and 
3. openness to trade and investment.

All three points are debated constantly by business owners, government and interest groups but I thought that the great success story, Open Text's Tom Jenkins summed up the issue for the politicians. Waterloo region has lost thousands of jobs, yet Tom says there are over 2,000 jobs unfilled in the tech industry.

"We're a tale of two cities, in some ways. Parts have the highest unemployment rates in the country, and yet in other parts, we can't find enough people to fill the jobs."

Here is where Sherry Cooper does lay out the ugly truth to Canadians and I have to agree with this unpopular view: In the future, Canadians will have to look to new markets. One of the things that make us lazy is that we live next to the largest market in the world, but its not a growth area. We are limited by our ambition and drive."
I agree with the lid on ambition. It has something that has taken me a long time to understand but I can see the reasoning. Canada has a high percentage of family owned businesses which are quite distinct from professional corporations. The thinking of a family business owner goes along the lines of, "I have a nice lifestyle. In a family business, I can work with my kids. How great is that? Why change?" Well, unfortunately, change is usually forced upon us and I have seen too many businesses decide too late that now would be the time to take on a private equity partner.
Besides, it would be good for your son or daughter to be exposed to the best in the world and have the family business protected. Sherry Cooper would probably agree.

Integrity is the safest way to make money, it’s terribly important

When I worked for the fastest growing bank in Africa, the CEO would often go on about how much he hated derivatives that were just beginning to emerge into the market place. He said if he could not understand it, he did not want it in his bank - it was making money like a casino not through good, rigourous banking. Michael Graham picks up this theme:

Berkshire is especially pumped about their $26 billion cash and stock purchase of the 78% of the Burlington, Northern Santa Fe Corporation (BNSF) they didn’t own. An extensively rebuilt and wisely regulated American railroad system is ushering in a whole new (green) era of national and international importance for the railroads. BNSF was described as their all-in wager on the economic future of America. It’s Berkshire’s biggest purchase ever.

Attendees and questioners from all over the U.S. also bore witness to the wealth their investments in Berkshire Hathaway has brought them. One elderly gentleman we met from Wichita Falls, Texas had come all the way to Omaha just to say thank you.

Munger’s comment that “Integrity is the safest way to make money, it’s terribly important” drew loud applause. So did his thoughts that there’s nothing wrong in “celebrating wealth when it’s fairly won and wisely used”.

There was laughter of a different kind when much of the blame for today’s turmoil was laid at the doorstep of Washington where “those who take the high road are seldom bothered by heavy traffic”.

Trust! Buffett has been criticized for his view that Goldman did nothing illegal in helping craft a between-professionals subprime mortgage deal which the seller wanted to decline, whereas the European institutional buyers of “Abacus” calculatingly took the opposite view. Munger agreed with Buffett, though musing about the ethics of such transactions. In his view derivatives play a useful role in genuine commodity and trade transactions, but when they are nothing but synthetic, casino-like bets (often also dreamed-up by academics) they should be “got rid of from the face of the earth” (loud applause).

 Trust, the plain-vanilla (“Dairy Queen”) way, couldn’t have come through more loudly or clearly. It’s a cornerstone of investing and of the Berkshire approach.

How much longer – the question of succession comes up with an increasing frequency at these annual gatherings? We were reassured that a short list of successors has been chosen, that the board knows who they are, and that the Berkshire and Buffett-Munger culture will live on.

At the same time the Qwest Center has been booked for 2011 and 2012!

By then there could also well be clearer answers to Buffet and Munger’s biggest worry; namely, how much longer Berkshire can keep building wealth for its shareholders at a rate superior to the growth in its benchmark S&P 500 index, as it has done for 38 of the past 45 years. We were told how a compound annual gain in its per share book value of 20.3% is going to be next to impossible to sustain. What should be done when Berkshire can no longer beat the S&P because of its sheer size? The question was posed rhetorically. A dividend perhaps? Knowing them, you can bet that whatever is done will be different?

There can be no question that these one-of-a-kind annual meetings and Berkshire itself will be different when its two great champions are gone. In the meanwhile, is Berkshire Hathaway a jumble of diverse parts, or an undervalued work of art like no other? I’m in the latter camp, also believing it deserving of a place in most, if not all, investment portfolios.