Even Sri Lanka attracts Private Equity risk takers

Even a war torn country near to India is attracting private equity investors. Sri Lanka has managed to attract money from the attractively named Leopard Fund.

Following the prolonged civil turmoil in the country, Leopard Fund sees an upturn in the investment cycle for Sri Lanka. Leopard Sri Lanka Fund will provide expansion capital and strategic guidance to mid-market Sri Lankan companies, and also help some expand their businesses into other frontier economies.

The fund will be led by Colombo-based investment professionals Nirosh De Silva and Ramanan Govindasamy. A fundraising target for vehicle has yet to be disclosed.

Leopard's maiden vehicle, Leopard Cambodia Fund, has so far raised more than $28m and most recently invested $2m for a majority stake in Kingdom Breweries.o

Is Private Equity going elsewhere?

Business owners thinking of transferring their company ownership within the next five years, need to know this fact: In five years, you will not be able to get the valuation you could get right now.

Is this alarmist?

Not if you look at the fact that the last market crash has changed the world view of Brand America. With this mental shift, smart money realizes America is a market in decline and if you want to invest your money and see it grow, you look for growth markets. That affects Canada.

I am hearing that you realize that private equity could buy your company. Hell, they’re calling me all the time, begging to partner in my company. Well, enjoy it while it lasts because the allure of North America is fading. While there are p.e. funds with money and an interest in Canada right now, already money is rushing out of the North American market to India and China. The big boys of private equity, like Carlysle, are investing. Already funds are back to 2003 levels of cash available for business owners, and that was when PE only did about 12% of the deals.

Here's a great article on fund raising activities of Private equity in the States by FinAlternatives. Private equity fundraising hit a nearly six-year low in the third quarter, as industry players offered fewer new funds—with dramatically lower fundraising targets—or abandoned fundraising altogether.

Funds holding their final closing in the third quarter raised just $38 billion, a 55% drop from the second quarter and a 68% drop from the third quarter of last year, according to a new report from Prequin. It was the smallest amount raised by the industry since the fourth quarter of 2003.

“Historical data shows that the summer months of Q3 often represent a relatively slow quarter for fundraising in any given year,” Prequin’s Tim Friedman said. “However, for the rate of fundraising to drop by nearly 70% over the course of a year is a dramatic fall, and demonstrates just how challenging it has become to raise new funds in the current climate. Many of the funds that are closing are doing so short of target, and we have seen a number of fund managers putting their fundraising efforts on hold until 2010, or abandoning them altogether for the foreseeable future.”

Just 1,574 funds are actively fundraising this month, down from almost 100 funds from earlier this year. What’s more, those funds that are seeking capital are looking for less, with an aggregate target of $754 billion, down from nearly $900 billion during the first half. And some 90 funds have given up fundraising altogether this year, three times as many as last year and six times as many as in 2007.

Given the weak fundraising environment, it’s also taking long for private equity funds to close. Fundraising now takes an average of more than 18 months, up from 15 months last year and 12 months in 2007. Just five years ago, the average amount of time spent fundraising was just 9.5 months. And it’s no wonder: Just three in five institutional investors polled by Prequin made a commitment to a p.e. fund in the first half, although 54% of them say they intend to make new investments this year, with another quarter planning to invest next year.

Another bright spot was the closing of Hellman & Friedman’s new fund, which Prequin called the largest p.e. fund that began fundraising in earnest after the collapse of Lehman Brothers.

The party is over. The model is broken. Private equity is dead.

A pessimistic story about private equity. The comment is from an insider who seems to be the type who loaded up with debt and flipped his companies. Good riddance to that model of doing business. There will always be sensible business people willing to invest their money and take the risk to grow the business with the management team.

Here's the full story.

'The party is over. The model is broken. Private equity is dead.' Not the ramblings of some rabid trade unionist or overpaid City scribbler but the judgment of one of the industry's consummate deal makers over dinner last week. He may have fronted some of private equity's highest profile deals over the past decade but my acquaintance was blunt about the prospects for the industry (which, by the way, has helped him amass a small fortune). His advice to an ambitious twentysomething hoping to play with other people's money? Look to the public markets. It will be quoted investment vehicles that do the mega deals of the next decade (and make fortunes for their promoters). The future is stock market paper not the double digit leverage that private equity is so addicted to.

The cracks in the private equity model are increasingly evident – witness the recent boardroom bust up at Alchemy – but are the prospects for the industry really as dire as my dinner companion claimed?

Having gorged on cheap credit, private equity is undoubtedly struggling to adapt to life in the post credit crunch era. Lacking the magic ingredient that is leverage, the likes of Permira, Cinven and CVC are struggling to find deals that will deliver the super-returns they have promised their investors. They have commitments from their backers to invest hundreds of millions of pounds but no deals: a state of affairs that leaves investors restless and private equity's star financiers frustrated.

Lack of deals is not the only challenge facing the private equity industry. With the financial world in turmoil there has also been a drought of buyers for businesses that have been given the private equity makeover.But, with stock markets rising again, the industry is once more testing investors' appetite for their investments. US private equity groups have floated a number of businesses in recent months and, as my colleagues reveal today, here in the UK retailer New Look may well be one of the first out of the stalls. Many expect AA and Saga owner Acromas to follow shortly after.

But it could be a tough sell. Private equity's quoted cast-offs have, on the whole, done poorly in recent years, underperforming the wider market. Jessops is a case in point. ABN Amro's private equity arm did very nicely, thank you, when it floated it at 155p in 2004, banking a 43pc return. Five years later Jessops is a penny stock trading at 2.2p. The company is in debt- restructuring talks and the board has warned that "it is unlikely that any value will be attributed to shareholders". Hardly the best advert for private equity floats.

Why Jay Leno is like your new CEO

We have a fun Guest Blogger and no, it is not Jay Leno. This article was by Adrian Davis, and I liked it as I am busy hiring two CFO positions for owner managed businesses and this article jogged my mind about issues to watch. The owners both brought up the points made in this article by Adrian, who is an inspiring speaker at conferences but also can ramp up your sales. You can reach Adrian at:

http://whetstoneinc.ca/blog/?p=58.

Tel: 416.410.1456 | Fax: 416.572.2201

Blog: http://adriandavis.ca

Twitter: @SalesScientist

After 17 years, on May 29, 2009, Jay Leno made a clear exit from the tonight show and graciously handed over the reigns to Conan O’Brien.

Three months later, Jay Leno launched his new show on September 14, 2009. Of course, as the master of humour and timing, his debut was not a disappointment - well, not entirely. I have to admit, however, that I was a little bit disappointed. I was expecting something new and I thought new meant different.

The Jay Leno Show was not dissimilar from The Tonight Show. Jay’s loyal sidekick, Kevin Eubanks, also made his debut with The Prime Time Band (different in name only from the Tonight Show Band).

Just Like a CEO

As I processed my disappointment with the apparent lack of creativity, I realized that Jay is the same as CEOs who move from one company to another. After many years, they develop their formula for success. They have a certain way of getting things done that leverages their strengths. They also have a network of close associates that they trust, that understand them and that they can rely on to get things done.

When a CEO moves from one company to another, the strategy he or she will initially employ to make a mark and put some quick successes on the board is entirely predictable. It will be the same strategy that brought them success in their previous role. In order to execute that strategy, the CEO will need to be surrounded by reliable people. Inevitably, they will recruit their trusted network into the new company in an effort to reduce the number of unknowns associated with their new role.

When Does This Approach Fail?

This is a perfectly reasonable approach except in the following circumstances:

1. The new environment differs significantly from the old one and the strategies that worked well in the old environment are ineffective in the new one. This can be as a result of the strategies being ineffective in the new environment or the strategies violating deep-seated cultural norms or tightly held values.

2. The trusted network that is recruited into the new environment does not have the deep relationships and influence that are needed in the new environment in order to get things done.

3. A competitor understands this tendency and employs a counter-strategy that sets the CEO up for failure.

What Does This Mean To You?

First, realize that all of us are creatures of habit and we repeat the strategies that work for us. Consequently, you should work to show up on the radar of your C-level clients as a resource that can be trusted to make them successful. If you do, they will take you with them wherever they go.

Second, if you are taken into a new situation by a new CEO, don’t assume that the strategies that worked in the past, will continue to work. Be sure to assess the environment you are being brought into and determine what variables have changed.

Third, when a new CEO shows up in your environment, take the time to find out where he or she is coming from and what/who made him or her successful in his/her previous role. Look for the strategies and the people that were employed and expect elements of the previous strategy to be immediately repeated. If you are competing against such a CEO, figure out what steps you might take to neutralize these strategies. If you are supporting such a CEO, find out how you can ensure these strategies become more effective in the new environment.

Finally, if you are hiring an executive, realize that people will do what they have done. Hire someone who is doing or has done exactly what you need done. Don’t hire someone hoping they will figure out what needs to be done and they will grow into what you are looking for.

The Success Formula

Jay Leno knows what his success formula is and he knows the people he can rely on to execute his strategy. Your C-level clients know their success formulas. Are you on their radar as someone who they can rely on to execute their strategies?

Will the Queen have to ask again?

Economists are still working to show why they should be in the business of predicting the future trends of business. The Queen may also still be waiting an understandable explanation for why Economists missed last year's big dump in world markets. Now that economies are beginning to recover, Economists are establishing sound causes for the world recession.

Indeed, the process of looking at the data may help a great deal in understanding how to anticipate and avoid and future bubbles.

We avoided a Depression because governments knew to keep putting in spending and not stop too soon, according to Don Drummond, Economist for the TD Bank. Drummond said the one key factor which extended the deepness of The Depression was the too quick withdrawal of government stimulus spending. For the next two years, we will be experiencing government spending on infrastructure and other projects. It is after that the Queen may be showing up at the LSE again, asking for another explanation from her Royal Economists.

Read more.

Ontario's Teachers Pension Plan buys Simmons Mattress

There was a time, not long ago, that mattress business was terrific. There were big margins and if you were supplying hotels at Vegas, for example, you had it made. In fact, Profit magazine’s top fastest growing companies featured one of Canada’s family businesses, Price Mattress, that manufactured mattresses but managed to sell into the USA back in the good old days.

Gerry Price took a smarter approach. He figured out how to add incremental improvements to the mattresses made at his plant in Toronto, yet charge less than Sealy, Serta and Simmons. He then wooed key retailers with exclusive deals on a mix of attractively priced private-label brands and models licensed by Oklahoma City-based Lady Americana Associates Inc. His resulting revenue growth has been anything but sleepy, from $1.3 million in 2000 to $21.6 million in 2005. This 1,588% increase placed Price Mattress 38th on the 2006 PROFIT 100 ranking of Canada's Fastest-Growing Companies.

Gerry Price was a fighter but did not manage to save his company this recession. So it is no surprise that the Simmons Company, maker of Beautyrest mattresses, said on Friday that it planned to be sold to private investors in a $760 million transaction. The New York Times reported that it would include a bankruptcy filing.

The company said it had support from more than the two-thirds of its noteholders and lenders needed for a prepackaged restructuring planthat would reduce its debt to about $450 million, from $1 billion.

The buyers are Ares Management, a private equity firm, and a unit of the Ontario Teachers’ Pension Plan. The mattress sector has been hurt across the board by the downturn in the economy. The Simmons filing would be on the back of those from Foamex International, a maker of polyurethane foam used in mattresses; Consolidated Bedding, which makes the Spring Air mattress brand; and retailers including 1-800-Mattress and the Mattress Discounters Corporation. The company will put the plan out to a vote soon and expects to file for bankruptcy in 30 to 60 days, a Simmons spokesman said. The bankruptcy could then take two more months, he said.

Simmons has been in negotiations with lenders after it failed in late 2008 to meet loan requirements related to debt associated with the 2003 purchase of the company by the private equity firm Thomas H. Lee Partners from Fenway Partners, another private equity firm, the spokesman said. Simmons said the purchase price included equity injections from the buyers as well as debt commitments from some lenders. Simmons also said it had lined up $35 million of debtor-in-possession financing from existing lenders to keep operating while in bankruptcy. The company said its Canadian and Puerto Rican units were not expected to file for bankruptcy but were among the assets being acquired

Baby steps

Open wide, Mummy wants you to eat well and grow up nice and strong. So does the Carlyle Group. want to grow. In fact, David Rubenstein said in a speech earlier this year that most of Carlyle’s growth will be in China and India.

With that strategy in mind, Carlyle bought a 17%-ish stake in one of China’s biggest baby-formula companies, Yashili Group Co. These guys were the people who thought it is OK to put some melamine in its baby formula. Apparently, Melamine passes food tests and adds minerals, but has an unfortunate side effect when eaten by humans. Carlyle is the latest in a line of PE firms who see the potential for profits here, including Kohlberg Kravis Roberts & Co., CDH Investments and Hopu Investment Management Co. I just hope they can bring in some ethical thinking, not just growth of profits. Carlyle has a strong management team with a solid ethical core and I think this will impact on Yashili Group's guiding principles.

Jacoline Loewen, (jbloewen at loewenpartners.com) is a partner in a private equity firm, Loewen & Partners, dedicated to raising capital for family business owners and developing their growth strategies.

99 Bottles of Beer

Lots of beer getting consumed over the past year according to North American Breweries. It is true that in a recession, ice-cream, candy and beer do very well, helping people’s waistlines grow as their stocks shrink.

I guess that’s what happened with the bottom line for KPS Capital Partners, which has just conducted a dividend recapitalization of North American Breweries. This is pretty soon after creating it (in part from another InBev asset). The company did confirm they had done very well proving that there are business that do well when others are crashing.

Jacoline Loewen, (jbloewen at loewenpartners.com) is a partner in a private equity firm, Loewen & Partners, dedicated to raising capital for family business owners and developing their growth strategies.

TIE was a friendly place to be

I attended TIE last night as a guest of Victor D’Souza, a terrific finance consultant. TIE is for Indian entrepreneurs but not limited to your race – I tend to not like events specific to gender or geographic locations, but this one worked very well because everyone was made to feel welcome. There were some smart lawyers, accountants and of course private equity in the room too.

The warm and erudite Sunny Kumar was there, representing MaRS and Ontario Centres of Excellence. He was commenting on the restrictions in size for government loans to start up companies. The maximum is $500,000 which sounds like a lot if you were given that personally, but burns up quickly once you are trying to build a product and get clients.

Sunny is an expert in medical and pharma businesses but is also helping with other start ups at MaRS. You can reach him at sunny.kumar at oce-ontario.org

What we can all learn from Sam Walton

In these times, business owners need more than a coffee to get going. I find a bit of inspiration when I listen to Sam Walton's wise words. Even though he has been gone a long time, his legacy of Walmarts lives on. Take a look at his ideas, so many are now industry best practices:

Rule 1: Commit to your business. Believe in it more than anybody else. I think I overcame every single one of my personal shortcomings by the sheer passion I brought to my work. I don't know if you're born with this kind of passion, or if you can learn it. But I do know you need it. If you love your work, you'll be out there every day trying to do it the best you possibly can, and pretty soon everybody around will catch the passion from you — like a fever.

Rule 2: Share your profits with all your associates, and treat them as partners. In turn, they will treat you as a partner, and together you will all perform beyond your wildest expectations. Remain a corporation and retain control if you like, but behave as a servant leader in your partnership. Encourage your associates to hold a stake in the company. Offer discounted stock and grant them stock for their retirement. It's the single best thing we ever did.

Rule 3: Motivate your partners. Money and ownership alone aren't enough. Constantly, day by day, think of new and more interesting ways to motivate and challenge your partners. Set high goals, encourage competition, and then keep score. Make bets with outrageous payoffs. If things get stale, cross-pollinate; have managers switch jobs with one another to stay challenged. Keep everybody guessing as to what your next trick is going to be. Don't become too predictable.

Rule 4: Communicate everything you possibly can to your partners. The more they know, the more they'll understand. The more they understand, the more they'll care. Once they care, there's no stopping them. If you don't trust your associates to know what's going on, they'll know you really don't consider them partners. Information is power, and the gain you get from empowering your associates more than offsets the risk of informing your competitors.

Rule 5: Appreciate everything your associates do for the business. A paycheck and a stock will buy one kind of loyalty. But all of us like to be told how much somebody appreciates what we do for them. We like to hear it often, and especially when we have done something we're really proud of. Nothing else can quite substitute for a few well-chosen, well-timed, sincere words of praise. They're absolutely free — and worth a fortune.

Rule 6: Celebrate your success. Find some humor in your failures. Don't take yourself so seriously. Loosen up, and everybody around you will loosen up. Have fun. Show enthusiasm — always. When all else fails, put on a costume and sing a silly song. Then make everybody else sing with you. Don't do a hula on Wall Street. It's been done. Think up your own stunt. All of this is more important, and more fun, than you think, and it really fools competition. "Why should we take those cornballs at Wal-Mart seriously?"

Rule 7: Listen to everyone in your company and figure out ways to get them talking. The folks on the front lines — the ones who actually talk to the customer — are the only ones who really know what's going on out there. You'd better find out what they know. This really is what total quality is all about. To push responsibility down in your organization, and to force good ideas to bubble up within it, you must listen to what your associates are trying to tell you.

Rule 8: Exceed your customer's expectations. If you do, they'll come back over and over. Give them what they want — and a little more. Let them know you appreciate them. Make good on all your mistakes, and don't make excuses — apologize. Stand behind everything you do. The two most important words I ever wrote were on that first Wal-Mart sign: "Satisfaction Guaranteed." They're still up there, and they have made all the difference.

Rule 9: Control your expenses better than your competition. This is where you can always find the competitive advantage. For twenty-five years running — long before Wal-Mart was known as the nation's largest retailer — we've ranked No. 1 in our industry for the lowest ratio of expenses to sales. You can make a lot of different mistakes and still recover if you run an efficient operation. Or you can be brilliant and still go out of business if you're too inefficient.

Rule 10: Swim upstream. Go the other way. Ignore the conventional wisdom. If everybody else is doing it one way, there's a good chance you can find your niche by going in exactly the opposite direction. But be prepared for a lot of folks to wave you down and tell you you're headed the wrong way. I guess in all my years, what I heard more often than anything was: a town of less than 50,000 population cannot support a discount store for very long.

Jacoline Loewen, (jbloewen at loewenpartners.com) is a partner in a private equity firm, Loewen & Partners, dedicated to raising capital for family business owners and developing their growth strategies.