What is the truth about private equity?

The one overarching truth about private equity: The entire investment hinges on improving the business and increasing its value. If the private equity firm fails to do that, it loses its own money, its investors lose their money, and its ability to raise future funds is undermined.

The essence of private equity is the alignment of the interests and incentives of management with that of the owners.

In a public company, the owners — shareholders — are largely separate from the management of a company. Private equity eliminates this disconnect. The owners often include the management (PE firms usually requirement management to invest their own money into the company so they have a vested interest in its success).

This provides a sharper focus on how capital is allocated across the business. Everyone has a single objective: Grow the company’s value. Thus, they can make business decisions solely focused on that goal, rather than satisfying external constituencies, such as analysts, traders, stock brokers, and the media.

Why are only 6% of tech start ups by women?

Ilse Treunich, CEO of the MaRS Discovery District, points out that only 6 per cent of tech start-ups accessing the Toronto innovation centre’s advisory services have a woman as founder or senior executive. “Young high-growth firms create the majority of new jobs. Women remain significantly underrepresented in this cohort, relative to their participation in the work force.”
The big question on the minds of policy makers, bankers and female entrepreneurs is: why is this the case, and what can be done about it? Ruth Bastedo has a long history of helping women and particularly business owners. She writes an article about the latest program she developed with Rotman and how it impacts these female business owners. 
Read more at Globe and Mail

There are a number of similarities between for-profits and non-profits which make people with for-profit experience particularly helpful as board members. Marc J. Epstein of Rice University and F. Warren McFarlan of Harvard Business School have a new book on board work. They discuss the similarities of working on nonprofit and for-profit boards.

6 Key Similarities

1. Both organizations can grow, transform, merge, or die. Success is not guaranteed for either type of organization, but requires sustained work.
2. In both cases, cash is king. This for-profit focus is critical for a nonprofit board.
3. In both settings, good management and leadership really matter. Delivery of service, motivating and inspiring staff, and conceiving of new directions for growth are all vitally important.
4. Planning, budgeting, and measurement systems in are vital in both settings.
5. Both types of organizations face the challenges of integrating subject matter specialists into a generalist framework.
6. Both organizations add value to society. They just do it in different ways.

In short, there is much overlap between the skills needed and perspectives provided by leaders in the two types of organizations. This is a key reason why social enterprise courses have taken root in business schools and why, appropriately socialized, those with for-profit backgrounds can contribute so much to the nonprofit world.

How nonprofit and for-profit board work is different

For those who sit on nonprofit and for-profit boards, the differences between the two organizations couldn't be clearer. Nonprofit boards meetings tend to be longer, less tightly organized, and more sporadically attended by the board members themselves. 

The focus is far less on making money, but this can be a fatal flaw. Both nonprofit ad for-profit need to focus on revenues.

I attended a womens’ Board Director’s dinner held by the prestigious Heidrich and Struggles firm, who have done invaluable research on women and boards. 

Diane Francis was the guest speaker and she had recently been invited to sit on the board of a mining firm with a profit motive. Diane commented that it was a completely different experience and far more demanding. Immediately, this was dismissed by one of the women, a formidable lawyer. Her rebuttal was that women are told to go on nonprofit boards to build their resumes and there are talented people on these boards, working just as hard as on a for-profit board. 

I agreed with Diane Francis though, because the for-profit is under far more pressure with paying shareholders money at risk. For women, I believe it is an important message that putting time into a nonprofit board might not make as much sense as we are lead to believe. There are many companies with revenues of $10M and up who need board members and would give a great experience of how to add value to a company from that position.

My chief regret from the evening was not speaking up to encourage more debate between Diane and the woman who snapped the topic closed. 

Now, here is a book from Harvard that opens up that topic and the authors  support Diane Francis and her view on for-profit boards. Another reason I wish I had spoken up - think of the opportunity for these top women to get out a few more points we could all have discussed. 

Next time.

Marc J. Epstein of Rice University and F. Warren McFarlan of Harvard Business School have a book to crack open this debate with solid facts about the key differences. These key differences are said by industry leaders and are well worth re-visiting. Here are Epstein and McFarlan:

 Failure to understand these differences can cause the new board member to stumble badly and perhaps irretrievably damage her credibility and effectiveness in a nonprofit organization.

Differences

At its core the nonprofit is fundamentally different than the for-profit. At the center of the nonprofit is its social mission. Understanding the mission, helping the organization to fulfill it, and adapting it to a changing world is the very core of nonprofit governance and management. It is for this reason this book starts with a detailed discussion of mission and how it grows. Right behind this are the two major intertwined strategic themes that the nonprofit trustee must deal with. 

The first theme is fulfilling the mission and whether we are doing it in a fiscally responsible fashion. There is the complex multifaceted issue of mission definition and evaluation of its appropriateness. There needs to be a deep understanding about how organizations can go about measuring their performance against mission. For the new trustee, understanding these issues is the place to begin her trusteeship. 

The second theme is financial solvency. There is the board's fiduciary responsibility and financial sustainability. Our life experience drives us to put this behind "performance measurement against mission." Repeatedly we have seen new trustees and ineffective boards try to wag the mission dog with the financial tail. It just doesn't work that way. Without mission and its accountability we have nothing.

Achieving financial sustainability is very different for the nonprofit than the for-profit in that the nonprofit cannot easily access the public equity markets but instead has philanthropy as a potential additional source of funds. Non-profit boards must deal with the role of philanthropy and the trustee's role in it. This may be summarized by giving often and generously and when not giving helping others to give (hence the phrase, "give, get, or get off.")

Finally, the execution of the work of the board is deeply different from that of boards in the for-profit world because of the tasks of mission performance measurement and different capital markets. Nonprofit boards are often larger, have more committees, and have a very different trustee life cycle. Further, the heart of the governance process is a volunteer nonexecutive chairman and volunteer board, leading a staff of paid professionals. The dynamics of this are complex and profoundly different than the process in the for-profit world.

Business expansion top reason for private equity success - Cassels Brock

The finance industry is changing as private equity funds are setting up that are smaller, deals are smaller and are looking across a wider range of businesses. To do a better job of explaining how private equity helps business owners, Loewen Partners held an event with the law firm, Cassels Brock and invited speakers from some of our favourite private equity funds to talk about why private equity does so well with business owners. Particularly business owners of companies in the $30M revenue range have been surprised by their growth once taking on private equity partners.

I thought I try and get down a few of the critical points made:

Michael Castellarin, Clairvest, spoke about why family businesses should look to Private Equity over a final sale as the fund can smooth the family issues. Yet, I never hear a word about private equity's value at business succession events. This has got to change for Canada's economy to grow. We have 200,000 small businesses needing to get much bigger.

Jeff Brown of Edgestone focussed on the "value add" of private equity for even the best business owners. According to a 2007 study by Ernst and Young, two-thirds of the earnings growth (before taxes, interest and capital expense) at PE-owned portfolio companies came from business expansion, with organic revenue growth being the most significant element. Cost reductions accounted for only 23 percent of pre-tax earnings growth in U.S. companies. In other words, PE investors add to the company’s strength by implementing significant operational improvements to the business.

Another study done for the European Parliament supports this view. The study found that PE-acquired companies outperformed comparable publicly- traded companies in terms of sales (14 percent), earnings before taxes, interest and capital expense (5 percent), and profitability (five percent) growth.

Carlo von Schroeder of Westview Capital had inspiring words of advice for companies falling below the $24M revenue target range. Carlo suggested that if they needed to get to the level of revenues to attract private equity, owners need to do what they can to grow. Merge, acquire, add product lines and get a good advisor, like Loewen Partners and a law firm like Cassels Brock.
Thank you for everyone who attended and a big thank you to our host: Stuart English at Cassels Brock, senglish@casselsbrock.com Telephone: 416 860 5223


Jacoline Loewen at Loewen and Partners, 416 961 0862