Private Equity Fishing for Deals

Raising capital might seem to be a difficult task at this time in the economy but sit tight as the fish are biting.

Now is a great time to invest in private equity, David Rubenstein of Carlyle Private Equity said at Davos, noting that deals with the best returns are historically done during downturns. One problem is that sellers are in denial over their companies’ values, refusing to accept lower valuations. Instead, they’re postponing selling, hoping that prices recover.
“And sellers are probably going to take six to nine months before they realize it's not coming back anytime soon, and so they probably will sell,” Rubenstein says. “But, once we're through that, I think we'll see some extraordinary deals and extraordinary returns generated for investors.”
For the time being, deals are much smaller and have less leverage. Private equity is moving overseas. Rubenstein says, “It's clear that some of the greatest growth opportunities for private equity moving forward are in China and India and other so-called emerging markets.” John Loewen says, “We will see more and more firms begin to invest overseas.”

Innovate Before You Raise Capital

"Before your go for financing," says John Loewen,"make sure you do some innovating."

Want to design the next great service or product? Upgrade your product, but can't decide what to add or change? Add a new feature to your product, but can't decide how to implement it?

Forget focus groups. Forget endless meetings and brainstorming sessions. Throw an ultra-rapid-design party, and do it in a single day. This approach exploits the wisdom-of-crowds through a process of enforced idea diversity and voting, so no consensus, committee, or even agreement is needed. And it's way more fun.

The Innovation Dinner Party takes 9 people, a pile of diverse "inputs", and has each of the 9 people voting on--and pitching--one another person's ideas to continuously reconfigured groups of 3 people, letting the best ideas rise to the top. The process is a little complicated, but it's derived/modified from an existing rapid-prototyping design. The basic idea looks like this, although there are a million ways to modify it:

1) Preparation:
Pick 9 people, ideally from different parts of your company and including some customers. (If you don't have a company yet, pick 9 friends--preferably those who don't know each other well) Buy/borrow/find at least 20 "input materials" including books, magazines, a short film, graphic novels, etc.
Assign (randomly) at least 2 "inputs" to each person. Do NOT let them choose (it's important they not be allowed to gravitate toward things they're already comfortable with)
2) Idea Generation

Give the group 30 minutes to generate 4 ideas (if it's a feature/upgrade party, then 4 different features or feature sets... if it's a feature implementation party, then 4 different ways to implement the already-decided feature, etc.) These 4 ideas don't have to come directly from their input materials, although participants should be highly encouraged to describe at least one new thing they learned that inspired their idea.
3) Round One begins:

Split into 3 groups of 3 people (see chart below). Each person gets no more than 10 minutes to "pitch" four ideas to the other two in their group. There are 12 total ideas for this group, so allow about 30 minutes. Record (anonymously) the selections of each person, which represent a "vote" for the ideas.
At the end of Round One, each person must select their two favorite ideas from each of the other two members of their group. So if Group One had Fred, Mary, and Sue... then Fred must select his two favorite ideas from the four that Mary pitched, and his two favorites that Sue pitched.
4) Round Two begins:

Reconfigure the groups so that each person is now with different people (see chart below). Instead of pitching their own four ideas, each person pitches the four ideas they chose from their previous group members. Again, they have about 10 minutes to pitch the four ideas. Remember, the point is that each person is no longer pitching their own ideas! At the end of Round Two, each person must again select their two favorite ideas from each of the other two members of this new group. Record (anonymously) the selections of each person, which represent a "vote" for the ideas.
5) Round Three begins:

Reconfigure the groups again. Each person in the group now pitches the four ideas (two from each of the two members of their most recent group) they chose in the previous (Round Two) round. At this point, each person has pitched a total of 12 ideas:

• Round One: pitch your own four ideas*
• Round Two: pitch four ideas from your Round One group to your new Round Two group -- two ideas from each of your previous group's other members.*
• Round Three: pitch four ideas from your Round Two group to your new Round Three group, as before.

At the end of Round Three, again each person selects their top two favorite ideas from the ones pitched by the other two members. Record these as a vote. You should now have a total of 108 votes. Choose the top 9 vote-getters (you'll have to be creative about tie-breaking... you could choose more than 9, for example). Give each person a copy of the 9 ideas, and send them back for another round of "inputs." Again, assign each person different materials from the ones they used at the beginning. Give the participants 30 minutes to use their inputs and flesh out a single idea from the nine.

Their one idea can be a modified version of one of the nine, based on their "research." Their one idea could be a mashup of two or more of the nine ideas. It cannot, however, be something completely new. Participants should be prepared to explain how something they got from their inputs helped in some way (not an absolute requirement).

Go Ahead and Choose
Now it's up to you what to do with the ideas. You might choose just one, or take all 9 "winners" with their pitches back to another person or group.

What is the Future of State Capitalism?

Raising capital today means that private equity companies are bumping into state owned funds, particularly when seeking capital for larger deals. If a fund manager tells a client their capital will come from a state owned fund, often the client’s first question is how ethical is that fund? How did they make that money? Who benefits from the incoming revenues from these investments?
The concern arises as there is the perception that some States do not channel money to their own people’s social welfare.

This is State Capitalism at its worst.

If the answers to customer concerns can be given easily, then that capital will be willingly accepted. The West is able to think beyond xenophobic attitudes that if money is not money made here, we don’t want it. Remember the Nineties when Japan bought up property?

We do need to look at why so many citizens of some countries with these huge funds are choosing to vote with their feet and leave their home land for the West? This has been developing for decades. Why did these people travel far to North America, Europe and Australia? Being an immigrant myself, I have put this question to other immigrants many times over the years. The answer is the same – my government has leaders enriching themselves rather than taking up the role to help everyone in the nation.

Otherwise, I see business leaders – my clients – embracing seeing other nations rising up, experiencing their own industrial revolutions and going global. "There may not be global rules for State Capitalism yet," adds John Loewen, "but these will come because the customers are asking the questions more and more. The market-human beings- is demanding transparency and states need to show where they spend their money and who benefits from it."

No, it’s not perfect in any country so let’s not be grand standing and silly about who is pure and who is not. The point is we have now arrived at a point in history where every human being on this planet now understands that their State is obliged to look after their people first, before enriching themselves and indulging in their vanity projects. Otherwise, the steady outflow of their best and brightest will continue.

Raising Capital for Women

I get asked why women can not raise capital and am frankly, flummoxed. In my experience, female run companies get capitalized. Recently, one of my female clients got $5M and appears on the front covers of business magazines as CEO of one of the fastest growing companies in Canada.
She had a good service and spent the time and money putting together a detailed five year financial model. That preparation when going out to raise capital makes the difference, not your gender.

I guess it is difficult to overcome stereotyping that by simply being female, you are not going to get money or that a female run company is not good for loan or investment repayment. Countries that are having gender roles change, such as Rwanda, are discovering that women are better at business than the men. The Washington Post explains the reasons why empowering women eliminates the cycle of poverty. It’s hard to imagine the lives Rwandan women for example, have lead, hard to relate to a circumstance where you have no rights, no standing, and no physical power to protect yourself. So why now, with just the slightest assistance, are these amazing women beating out their male counterparts in business? Easy - they’re women which seems sexist to say!

Here's an excerpt from the report: Officials at Vision Finance, the microloan arm of World Vision International that launched a program in 2005 in a Rwandian town of 40,000, said that while women make up the majority of borrowers, four out of five defaulters are men.
"They say that women care more about the family, but I do not know if that is true," Mukandayisenga said. "I think it has more to do with the self-control woman show in hard times.”

Curb Your Greed

Indulge in your inner child - or channel Gordon Gehko from the movie Wall Street - and let out the greed. Diane Francis has a new book topping the best sellers' lists and it is about who has got the cash in Canada and who are the new ruling families. 60% are newcomers to Canadian shores but that will not come as a surprise to those in finance who get to see the passing parade of entrepreneurs.


Perhaps, to reflect on national identity, John Loewen says, "the Canadian identity is not wrapped up in business success but more around what do you contribute to the community and that old fashion ideal of leading a decent life." The more American approach to business and drive to succeed is to be found amongst immigrant parents who limit TV time and curtail friends with the emphasise on homework and developing skills for the CV. If you play ping pong, you will do it with a coach and drill away at serves - not just for the fun of it.

Or perhaps the big families have removed their wealth from tax collectors' grasp to the Gurnsey Isles or Bermuda.

We will be giving Diane Francis's new book to the presenters at the Canadian Innovators Forum which will be discussing raising capital with private equity. The CEOs attending will be able to read the pages of those who have managed to make their fortunes here in Canada without a membership to that inner club. By the way, where is that inner club? I have asked Diane Francis to write the foreword to Money Magnet and will let you know how that goes.

Raising Capital Event

With billions of dollars in uncommitted capital, many private equity experts are saying: “Now is the time to invest…”

Join the CEO Roundtable
Thursday, May 15th, 2008:
10:30 am – 3:00 pm
at The National Club, Toronto.

Private Equity Investors are Ready to Spend
“The question is will market volatility quell the interest of private equity investors?”
says Peter Plows of Cobalt Capital. “Absolutely not! Private equity firms are now looking for quality deals more actively than ever.”

Cobalt Capital is a private equity firm made up of former business owners and operators seeking to help private companies grow and innovate by investing their own capital and contributing operating expertise. Cobalt Capital partners have significant business and entrepreneurial experience in a wide range of disciplines, sectors and geographies and work closely with their portfolio companies to help them achieve their growth objectives.

My Journey to Private EquityPatrick Bermingham, Bermingham Construction Ltd.
Patrick Bermingham, owner of a Hamilton based construction enterprise, discusses what his private equity partners have done for his company. As a fourth generation business owner, Patrick had a difficult decision to make; and the journey was not without its challenges. Learn about the key issues that needed to be resolved and the lessons learned. Find out what made the partnership with private equity triumph.

Iain Scott, Executive Coach & Roundtable Facilitator.
“CEO Roundtable events are organized to give business owners the opportunity to exchange ideas and gain insight into key issues that growing firms face.” This highly interactive session is designed to explore topics that are important to company growth strategy.
Please note that space is limited to maximize the value to attending CEOs by ensuring a highly interactive environment.


Map Location & Parking
Cost
CIF Members: $90.00 + GST

Non-members: $148.00 + GST
To Register (Please note, business owners and CEOs only):
Please email:
events@strategyinternational.com or call 416 961 0740 and ask for Anastassia

Private Equity Gets Respect

"Private equity is trying to improve its image in the public eye," says John Loewen, but they may not have to worry. According to a recent poll, politicians are the least respected and private equity did not even get a mention.
Why do teachers get paid less than lawyers for example, or politicians, or even TTC ticket collectors? If people were paid according to how much they were respected, then politicians may have a problem. Here's the quote:

"In the online survey of a representative national sample, a large majority of Canadians say they have a great deal or a fair amount of respect for doctors (94%), police officers (83%) and teachers (83%). At the bottom end are politicians (25%), lawyers (44%) and journalists (49%).
The results of the current survey are especially noteworthy when compared to those of an identical poll carried out by the Angus Reid Group in 1994. Interestingly, over the past 14 years, respect for every single profession—with the exception of doctors—has diminished across the country.
The professionals who endured the most noticeable slump are journalists. In 2008, less than half of all respondents say they have a great deal or a fair amount of respect for journalists (49%), compared to 73 per cent in 1994."

So you want to stay in your pond?

There’s an old Scottish tale of a frog living in a damp well. One day, another frog from a large pond hopped past the well. Interested in all things, this adventurous frog looked down into the dark depths and leapt inside.

Intimidated by the interloper, the first frog asked, “Who are you and where did you come from?”

The pond frog said, with a nod at the top of the well, “A large pond filled with water many times the size of this well.”

“How big is this water?” The well frog pointed to a boulder at the edge of the well. “Oh, many times the size of that boulder.”

“As big as that?” the well frog gestured at the shadow of a weeping willow tree.

“Much bigger.”

The well frog was momentarily struck, “How much bigger, then?"

“It’s many times the size of your well and it’s quite close. We could travel together to see it.”

“Why would I do that?” He regarded the pond frog suspiciously.

“You would have more water.”

The frog in the well gave a sideways look as if to say, “Oh, a wise guy, eh?” and swelling up with enough irritation to pop, said decisively, “Get out! Get out! I want nothing to do with frogs like you.”

“Why, because I can show you a bigger view, more flies to catch?” The pond frog realized that this frog was afraid to go beyond the bricked walls he had known for so long.

“Nonsense. You are trying to trick me out of my well.”

With that, the pond frog shook his head and hopped back into the sunshine.

In the book, Money Magnet, the author, Jacoline Loewen, explores this theme of not wanting to explore past your every day groove is opened up for discussion. What are you missing by not even learning more about private equity and venture capital?

What is Venture Capital?

Your business is attracting customers but now to fill those orders but your bank is being difficult. It is time to look at the very exciting alternative which will change the way you do business for the better.

Venture Capital (VC), is risk capital invested in privately held companies by VC firms, through the underwriting of newly issued stock and/or convertible bonds.

If you plan to launch a new business venture or expand a young business which has not reached profitability, venture capital is almost always the only source of capital. For banks, it is too high a risk and why should they put their own customers' money at risk on your venture? Banks get given a knock for being cautious but they are being paid to look after their depositors' cash.

Do look for an expert in private equity to match you to the right fund and get your business "investor ready".

Venture capital funding is provided by Venture Capital funds. If you are interested in finding out more, you can read about it in Money Magnet: Attracting Investors to Your Business.

Raising Capital Rule #1: Swim in the right pond

It was a sunny spring day when I had lunch with a Profit Top 100 Fastest Growing business leaders and most of the conversation revolved around his search for capital.

You would think that his many listings as Ernst & Young Entrepreneur of the Year or Profit’s Top 50 Entrepreneurs or Rising Hot Stars to Watch would make it easy. He thought it would be but forgot the first rule of finding capital: Swim in the Right Pond.

What the heck does fishing have to do with raising money? People with cash have what is fondly referred to as their preferred “bite size” which is the amount of money they will invest in a company. This bite size could range from $200,000 right up to $50M and private equity investors cluster according to this investment size. My friend, the cover story of Profit magazine, could not understand why funds were passing on his company but when I asked who he was seeing, it became very clear. He was swimming in the pond for much larger bite size than required for his stage of business. He was wearing out the leather in his shoes walking around Bay Street and visiting what he termed the “best” investors. One of the people he saw was Brent Belzberg of Torquest who is one of Canada’s leading private equity investors. Torquest raised capital for their private equity fund from a range of high calibre sources such as CIBC and these sources will be expecting a high level of return. Torquest is under pressure to achieve their client expectations and have delivered so far due to their focus on size of investment or deal they will do. They are familiar with investing $20M and know how to work with this size. Anything lower would require a different type of involvement with the management team and a different financial structure. Quite rightly, Torquest politely declined and explained the company was not their "bite size".

My CEO friend could not understand how the size of money put into a business could be so different until I asked him if he fished: he glowed as he described catching bass up at Georgian Bay. I asked him if he gone salmon fishing in BC or deep sea fishing for marlin – yes, to the former, no to the latter - but what about catching a whale? It became instantly clear how each of these fish sizes would require different bait, hook, equipment and boat. Above all, the attitude of the investor becomes evident. Is this a weekend jaunt with beer in the cooler or is it for a living where if the fisherman does not bring home the big tuna, it means not being able to make a living? Torquest fishes where there are the big tuna and takes their risks out in the big sea. My Profit Hot Shot CEO needed to fish with the private equity funds who put in their own money, with a far smaller bite size.

But here’s the real hair raiser: the CEO went to a Whale sized private equity shop where one of the financiers advised against private equity but then said, “I’ll invest as I have just made a bonus and have $2M sitting on top of my dresser.” The irony is that $2M investment is private equity! This rich individual was putting in money - which is labeled as Angel investing - but he did not have passion for the business, it was just opportunistic. It is private equity at its worst!
By now though, the CEO was exhausted from swimming in all the wrong places which is the worst time to make a financial decision. He thought the big name of the rich investor would be good for his business and he went ahead and accepted the valuation thumb suck without even checking with a third party agent. This CEO believed the investor knew what he was doing. Absolutely correct – this private equity investor knew he was dealing with a great upcoming company with a vulnerable CEO/owner and jumped to put in his own money. He knew if the company grew, he would get a great payout and if it did not, well, he had the cash to burn. The situation was the equivalent of a Whaler captain deciding to fish with you but with a cooler of beer and no big deal if you don't catch much. Would you want that type of investor in your boat with you?
If this CEO had taken the time to even skim the book Money Magnet: Attract Investors to Your Business he would have known how to swim in the right pond.