Mad rush to China for Private Equity

In a rush to tap China's booming private equity market, Morgan Stanley will be partnering with the eastern city of Hangzhou to launch yuan-denominated funds.

Morgan Stanley has signed a partnership agreement with the local government and has decided to establish its China headquarters for private equity investment in the city, the Hangzhou government said on its website.

Morgan Stanley and its partner aim to raise 1.5 billion yuan ($225 million) in the initial phase, a source with direct knowledge of the plan told Reuters. It will invest in non-public companies.

Earlier this week, Chinese media reported that U.S. private equity giants Warburg Pincus WP.UL and Kohlberg Kravis Roberts & Co (KKR.N) planned to set up units in Shanghai to launch yuan funds, following in the footsteps of rivals Blackstone, Carlyle and Bain Capital.

China is encouraging the development of the private equity industry, hoping to channel more liquidity into the private sector to aid economic growth. Beijing also expects to use foreign expertise to improve corporate governance.

"We hope that the partnership with Morgan Stanley would help boost private sector investment, accelerate economic restructuring and boost the local private equity industry," the Hangzhou city government said in a statement.

Groupon - Who Knew?

"I don’t know the third act of the transformation of media," says Michael Eisner of Disney fame. "I don’t even think we know the second act. We’re probably still in the first act or the prologue."
With the surprising offer for Groupon at $6B (yes, BILLION) from Google, there are reasons that it is hard to see where the next venture capital hit will emerge.
As Michael Eisner puts it: 
"I’ve gone to conferences where some people are getting carried around on top of shoulders like they just won the Super Bowl, and two years later it’s “whatever happened to that guy?” I sat at the Allen & Co. conference a couple of years ago and this guy Mark Pincus [CEO of Zynga, the company behind Farmville] was sitting at the table. Who knew that two years later he would have the best room at the lodge?"
Well done to pushing through the hard times, Groupon and Zynga. Let's keep at it.
Footnote: 
Here is BNN show, The Pitch, from a week ago, where business owners talk about their companies and are seeking investment capital. The private equity people have not heard of Groupon. I am sure they know the name now. 

http://watch.bnn.ca/#clip379746

India making Private Equity exits difficult

A regulatory backlash against Indian microlenders is complicating the exit strategies of private equity and venture capital investors.The practice of focusing on loans in poor areas largely shut out from traditional banking services gained prominence globally when Muhammad Yunus won the Nobel Peace Prize in 2006 for his role in founding Bangladesh's Grameen Bank. 

Microlending in India has expanded at an average annual rate of 62 percent over the past five years in terms of number of customers and 88 percent in loan volume, according to Micro-Credit Ratings International, a rating firm in Gurgaon, India.

The tougher regulations in Andhra Pradesh, a southern state that accounts for 30 percent of India's microlending market, arose from concerns about overlending to low-income borrowers, interest rates as high as 50 percent, and coercive debt-collection techniques that the state government claims have led to impoverishment and suicides by borrowers. There were 9.6 loan accounts for every poor household in the state, according to a report released on Nov. 15 by the nonprofit group Access Development Services. The upshot? "I don't think private equity investors will recover their money at the rates they thought they would," says Sanjay Sinha, managing director of Micro-Credit Ratings International.

Here's a seasonal surprise

Junk food choir takes the world by storm. This is sheer delight. Turn up loud and set to full screen.
And it's Canadian.

Buy Ontario shuts down innovation in health and medical businesses

Job growth and the big economic development resulting from these new work roles is now proven to come from the successful incubation of "small, entrepreneurial employees--not a few big companies." Even adjusting for variables such as tax or industry, Glaeser and Kerr, in a recent Harvard Business Review article, observe, "the relationship between small firms and job growth rate stands." 

In other words, industries with smaller firms and more start-ups had faster job growth than an industry without a cluster of start-ups.

Our government has introduced a program called “Ontario Buys” for all institutions it supports, such as schools and hospitals. Ontario Buys is encouraging institutions to buy in bulk as a means to save money. Quite simply put, purchasing from fewer suppliers is the Walmart model of “buy in bulk and save”.  

At first sweep, it does seem sensible to buy from fewer suppliers  and save money by simplifying processes and consolidating costs of doing business.

 Unfortunately, this well-meaning government program is killing long term, future innovation since large numbers of smaller Canadian companies are being shut out simply by not having the size or product breadth for this bulk game. As Glaeser and Kerr’s research show, small companies lead to big companies.  

It is alarming that the Government buys from big suppliers as it is already crushing small companies. Then, where will be future innovation or competition. Maybe another question to get more of a response would be the shrinkage in government jobs for those experts trying o help business owners.

As an example of how the Ontario Buys program works, a medical device manufacturer who is under $40M in revenues is refused even an appointment with the several buying groups tasked with following this new initiative for the health care industry because of their small size. The bulk of orders go to large corporations. 

You may think: Wonderful, these large corporations produce Canadian jobs through their Canadian offices, but they are actually American multi-national corporations with subsidiaries that have been set up in Canada. They do create jobs, but profits are more than likely invoiced back to the American Parent as management fees to avoid our higher Canadian Tax Rates. The goods are imported into Canada from American manufacturing parent corporations, avoiding any manufacturing in Canada. We therefore do not get the benefit of manufacturing or higher paying jobs.  If you ask health care industry people about the Buy Ontario program, they approve because, generally, they are working for these large companies.

This same medical device supplier is peppered with calls from government experts offering all manner of programs to help the business, from R&D tax breaks or government experts to build better online catalogues, and so on. But if there is no buyer, these government initiatives will be of limited use.

Ironically, the US has implemented a minority owned mandate under the Federal Initiative “Minority Owned Contract Opportunities” which forces buying groups to ensure that a percentage of the products purchased are purchased from Minority Corporations, inclusive of SME companies.  

Canadian politicians should take into account the research by Glaeser and Kerr showing that a gnat like cloud of small companies buzzing around larger companies will be a far better boost to job growth than incentives for large companies. Our politicians need to be doing a lot more to protect our future by mandating that a small percentage of purchases be from SME Canadian businesses in conjunction with the Ontario Buys initiative. The percentage could be small but it would ensure a fair and open process at the table for all Canadian Manufacturers.

I will end here but I do get frustrated hearing about R&D grants or financing being given. That is not the problem - it is the buying end. Why give all our support to US owned companies who have a branch office or corporation in Canada, but shut out our SME’s who truly are our Canadian future.

Jacoline

416 961 0862