Private equity management style is all about the deal

“If you want to build a ship, don’t drum up the men to gather wood, divide the work and give orders. Instead, teach them to yearn for the vast and endless sea.”

Private equity is about the deal and the numbers, so interest in human side of managing is not as visible. I enjoy the people side of growing a business. So the management style that I have is first, share your passion. Explain to people why it’s an exciting idea and how they can be involved in it. In an entrepreneurial business, the most important thing, the thing that creates the most excitement and value and interest in the business is the big picture — where are we going. You can destroy little bits of it by all these little errors that you make. But if you fix all of them and you don’t have the big picture, then you’re never going to get there. Really engaging people in that big picture is way more important, I think, to success.

So I’ve learned to do the big-picture stuff, and I can be really great at the analytics — sitting down and running the numbers. What I’ve had to learn over time is the middle part about, O.K., how do you build a team? How do you assign a team to do something? How do you give them enough rope to be successful, and when do you take it back? The middle part has been trial and error for me.

5 Leadership commitments to make today

This list reminds me of Deming, the father of TQM, and his 14 point plan for top quality companies. The 5 Practices of Leadership come from a highly recommended book written by Kouzes and Posner. They identify what they call "five leadership practices common to successful leaders".
Kouzes and Posner go on to suggest ten practical "behavioral commitments" among those leaders studied. I liked the reminder and I know this will inspire you once you see that you are probably trying to do them already.
Here they are:

1 Practice: Challenge the process 
Commitments: 
(1) Search for opportunities and 
(2) Experiment and take risks

Practice: Inspire a shared vision
Commitments: 
(3) Envision the future and 
(4) Enlist others

Practice: Enable others to act
Commitments: 
(5) Foster collaboration and 
(6) Strengthen others

Practice: Model the way to the desired objectives
Commitments: 
(7) Set the example and 
(8) Plan small wins

Practice: Encourage the heart of everyone involved
Commitments: 
(9) Recognize individual contribution and 
(10) Celebrate accomplishments 

Where did the 40% rise in M&A happen?

The number of Canadian M& A transactions remained relatively unchanged from the previous quarter at 268 transactions.  Cross-border activity, mega-deals and financial sponsors all played a significant role in driving up the value of Canadian M&A as each category saw significant improvements over the second quarter. 

Overall, it is exciting to see that Canadian M&A activity demonstrated a strong recovery in Q3 with a 40% increase in deal value to approximately $48 billion.  

Four interesting points for the Q3 results:

1. Canadian buyers continued to be acquisitive abroad, outnumbering foreign acquisitions of Canadian businesses by a ratio of 2.2-to-1
2. Bucking the trend, the value of Canadian-led acquisitions abroad exceeded that of foreign-led takeovers by a ratio of 4.1-to-1
3. Activity in the mega-deal segment of the market (deals valued in excess of $1 billion) rebounded to ten transactions valued at $32.2 billion
4. The Real Estate, Oil & Gas and Industrial Products sectors were the key drivers of M&A activity in Q3 representing 53% of announced transaction volume 

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

Medical industry interesting for Private Equity

Dental implants is a highly cyclical business. It’s an underlying high-growth sector, especially in the U.S. and other markets where the population is aging, but is correlated to consumers’ ability to pay out of their disposable income.

During the crunch, as one would expect, many potential patients put off treatment, opting instead for cheaper alternatives such as crowns and bridges, or indeed doing nothing at all. As a result, revenues fell, profitability was trimmed and stocks in the space got hammered.

The very short-term outlook doesn’t look bright either. But a private equity (PE) powerhouse such as Kohlberg Kravis Roberts and Co. or a consortium comprising say Bridgepoint Capital, Permira and Cinven could bet on a cycle upswing, with growth accelerating and valuations returning to mid-cycle levels of around 20x Ebitda by 2013–not to mention the expected efficiencies that PE ownership would bring, which in turn would boost the PE exit. That is if the cycle does happen as the current bears say.

Why do we chase stars?

Three themes appear to characterize many of the responses to this Harvard Business School's column which posed the question - Why do we Chase Stars?

Three themes came up: 

1. leadership talent is portable, 
2. the reasons that we chase stars are traceable to human nature, and 
3. women have qualities that explain why they have greater success in porting their talent from one organization to another.

Several discussants maintained that portability is high for certain leadership talents. C. J. Cullinane stated, "The manager who is experienced in cost-cutting and turn-arounds can use this talent in many different situations and be successful." Philippe Gouamba said that "Management performance is 75% portable … (but) today's tough environment has forced upper management to adopt a 'welcome to the team, good luck, here is the deep end of the pool, hope you survive'" approach. Guy Higgins added, "Management is highly portable if people will take the time to learn their new company's management processes." Stephen Basikoti put it this way: "The fact that some transplanted leaders do not succeed does not negate the fact that management performance is portable; it simply points to the uniqueness of the learning curve for each change."

Transferability was thought to be particularly difficult in a move from a large, successful organization to a smaller, struggling one. In Gerald Nanninga's words, "If you put a super-operator in a place where the position is poor and resources are weak, they have nothing to leverage. Their skill-set is wrong."

We chase stars for a number of reasons: "… corporations and the media encourage stardom and discourage team work" (Nauman Lodhi); "It is the expectation that some 'miracle worker' or 'hot shot' can come in and fix issues without the board facing the pain and agony of doing the hard work themselves." (Phil Clark); "It's about selling the dream that the star will add to the bottom line fast with new clients, etc." (Jacoline Loewen); "Rather than create succession plans to hone existing talents, it's so much easier to scavenge for those floating around in the industry." (Vanitha Rangganathan); and "We chase stars because we are fallible …Glamor always is enticing." (Vadeed Lobo)

Women are particularly successful in porting their skills because "… women are more associated with transformational leadership," according to Fidel Arcenas. As Ratnaja Gogula put it, "…traits (that) make women better contenders for talent portability (include) … women's ability to better cope with stress, better communicate and multi-task …" Tom Dolembo asks "are women really different, or have they simply evolved in management by gender bias with skills and talents so alien to their male counterparts that they are uniquely powerful in an information world?"