Private equity also doing debt for the Dividends cash flow

There used to be a time, during what some called the Great Recession, that American Capital, one of the oldest American based “business development companies” BDC, was struggling amid a stock market slump and a liquidity crunch. It wasn’t pretty.

Fast forward to today, American Capital’s woes from the past didn’t seem to deter any latecomer to the business development company game. More than 20 companies have filed to launch new American BDCs over the past 12 months, compared with a trickle of such filings in 2008 and 2009.

Investors are hungry for yield, and BDCs provide that thanks to their quarterly dividends.

“There are few alternatives to high-yield products, and BDCs provide an attractive option,” said Steven Boehm, a senior partner of law firm Sutherland Asbill & Brennan LLP that specializes in structuring and advising BDCs. “It’s a sexy product.”

Equally seductive is the prospect of having a permanent source of capital, a dream of private equity firms that dread the distraction and cost of raising private funds.

But the commonality of the new BDC hopefuls and their older brethren stops here. The younger crop looks a lot different. For one, it promises to use less leverage in their investment – a lesson well learned from American Capital’s problems. (American Capital itself has learned, too –  Wilkus said recently that “it became evident during the recession that we were overleveraged, considering our asset mix,” and “we intend never to repeat that.”)

In another difference, many of the new BDCs plan to buy debt as opposed to equity in midmarket companies, which certainly would help their dividend-paying ability.

4 reasons to think twice before "doing what you love."

A Rotman lecture by Danial Pink, author of Drive, is available on iTunes "BigIdeas" podcasts, and as I listened to him late at night this week, I mulled over his push for people to work in jobs that they love. 

Pink went to law school and dropped out of the whole, restrictive, boring law career. He says, "Law school was the worst thing I did." 

Yet, I listened to him because I know he went to law school, is able to express himself logically and is not a delusional, "just say what you want and it will happen" expert type. I can understand why people love his point about doing what you love, but life is tough and gets in the way. My business just signed up with a superb business owner to help him transition his business. We spent 18 months working with him and his wife to show how our company will help his family business achieve the wealth he needs to retire. 

Was I doing what I love? Not totally. I hate negotiating the engagement. I hate discussing the amount of debt and family shares owed. I hate picking up the check for our work fee - I find that awkward. But I do it. I have to ask for the job, go through the value and why our fee is fair, explain the engagement letter, pass it back and forth with a hundred changes, get his signature and ask for the check to start work. I hate that but as a small business owner, I had better be very good at this detail and arm wrestling because it is what sets us apart. Besides the work I love to do, if I want to be successful as a business owner, I had better be good at those skills my MBA taught to me and believe me, that was not painless either.

Once I am through that sales close, now, it is exciting. Persuading a family business owner to do what is in his best interest is far from what I love to do, but I know how happy this man will be within a few months once we improve his wealth situation. I know how it will improve his family relations with his sister and father. 

So here are 4 reasons not to do what you love:

1. You love it — but you're not fantastic at it. There is the 10,000 hour rule of how much you need to invest to become very good. If you do not have the body type, you will never be a ballerina. Same with intellect. The women who started up Zipcar over day care were not just thumb sucking an idea. They were both experts in transportation and engineering. How good? MIT and Harvard PhD good. Lots of women come to me with ideas for start-ups and they are passionate about green and pollution by cars, but do not have the intellectual backing to add depth. Without competence, passionate people would not get the start up funding Zipcar attracted.  It is hard to judge yourself accurately, so ask your friends and employer what your talents and weaknesses are, and then play to your strengths, even if they don't lead you to what you would currently describe as your "perfect" job.
2. You're skilled at your passion — but hate the work that surrounds it. Many businesspeople are masters at their craft but drop the ball when it comes to everything else. One of my clients is a brilliant Day Care operator who set up in-house child care for big companies. But — although she loved working closely with clients and helping them create employee benefit programs with her Day Care — she was simply unable to manage her pricing and cash flow. She had boxes of unpaid checks in her basement. It's possible to learn these skills, but, for many, the process sucks the joy out of their chosen field and small business. (Michael Gerber writes about this extensively in The E-Myth).
3. You're too emotionally attached. You've already heard about Marion Stoddart. I recently heard Charlaine Harris, author of the wildly popular vampire series that spawned the TV show True Blood, talk about this issue too. The best writers, Harris said, don't fall in love with their characters, or their words. They don't mind being edited; in fact, they're open to any suggestion that makes them better. Writers who get too close to their work and take criticism too personally never improve. As an author, I learnt that a long time ago. Your work improves with others commenting. Business people also need to look carefully at whether passion for their work is clouding their judgment. When you care deeply about a pet project, for example, it's hard to make a rational decision about whether it should live or die.
4. No one will pay for it. You can turn a hobby into a job — but only if someone's willing to pony up. Sometimes the market's just too small (luxury vacation planning for couples honeymooning in Cape Town). Sometimes the margins are too thin - decorating business targeted at Divorced Dads. And sometimes your company simply has other priorities (no matter how many times you offer to move the business into web video, your boss wants you to get your actual job done, and today please).

Another Private Equity Fund for China

Alibaba, the Chinese e-commerce company, had a nasty investigation in February. The former CEO of Alibaba, David Wei, has left and is now raising a $200 million investment fund for his new firm, Vision Knight Capital Partners, focusing on China’s red-hot e-commerce, retail and consumer goods sectors. 

And he’s teaming up with his former boss and one of China’s richest men, Jack Ma, the founder and chairman of Alibaba, which is partly owned by Yahoo Inc. Ma is providing some of the money as a limited partner. Wei says his fund will look to back deals from other investors’ portfolios in an effort to turn them around using the operating experience he gained from years spent working in China’s consumer goods industry.

What happened to having a clean track record and not being able to raise capital if there is an ongoing investigation? That is proof of the fast, expanding market that is called Asia. There is so much to gain since you are not taking market share from other companies - just filling a void.

Read More...

My book choice for your business

Business owners will suspect John Warrillow has followed them around with a video camera as he describes
how the typical service business operates and what needs to change to improve the dollar value of the business. This entertaining, but very important book should be at the top of the reading list for any business owner of a service company. The suggested steps and easy tweaks to current practices will add a substantial increase in valuation for a service company. Entrepreneurs will be surprised at how much Built to Sell will add to building a stronger business and appreciate the knowledge gained when it does come to time to sell.

For John Warrillow

Office 1-416-628-0780
Mobile: (33) 06 40 36 61 42

Twitter: @JohnWarrillow

Good private equity funds still attract large investments

Some private equity firms may be having problems fund-raising but don't tell that to Berkshire Partners.

The eighth fund of the Boston-based firm is clocking in at $4 billion, three sources said. Berkshire Partners, which only began fund-raising in late January, is expected to announce a first close in the next week, a source said.

A final close for Berkshire Fund VIII LP is seen coming 60 days after. "There was massive interest," a second source said. "This is one of the must-have funds of 2011."

The firm's prior fund, Berkshire Fund VII LP, closed at $3.1 billion in 2006. The one before that collected $1.7 billion in 2002. Fund VII had generated a net IRR of 6.9 percent as of September 30 for backer California Public Employees' Retirement System, while the sixth fund had produced a net IRR of 23.2 percent.

Berkshire Partners, which pursues leveraged buyouts, growth capital deals, take-privates and related transactions, typically invests between $50 million to $500 million equity per deal. Sectors of interest include consumer products, retailing, business services, transportation, energy as well as manufacturing and communications.

Last week, Berkshire Partners recapped Engineering Solutions & Products, a government services provider. In January the firm teamed up with Rhone to make a minority investment in Coty, the beauty company.

While private equity fund-raising is rebounding this year, firms have been taking longer to close their funds. The Gores Group took about 18 months to collect its third fund, which came in at $2 billion. EnCap Investments spent an estimated nine to 10 months raising $3.5 billion for its eighth upstream energy fund.