Crosbie comments on research on private equity

Barry Critchley spotlights Private Equity deals over the past 5 years and the report on Private Equity by Crosbie in The Financial Post, Canada.
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All market participants have views on certain matters but until those views are researched they remain opinions without facts.

Toronto-based Crosbie & Co. Inc., which defines itself as a specialty investment banking firm, has now filled a potential void on the importance of private equity to the mid-market. The firm, which has been around for more than 25 years, recently published an analysis of 1742 North American transactions which have been completed over the past five years. The underlying data was compiled by GF Data Resources, a U.S. based firm that offers “a searchable proprietary database that provides private equity buyers, intermediaries, capital sources and valuation professionals with accurate and detailed information on business transactions ranging in size from $10-million to $250-million.”

Recently Crosbie published the results of that analysis.

“The document is powerful because it covers so many transactions over such a long period of time. One can draw some clear inferences for the broader M&A market from this unique data set, specifically for larger middle market transactions which attract higher calculation multiples,” said Colin Walker, managing director at Crosbie & Co.

Colin Walker: LinkedIn

Canada’s culture of risk aversion

The National Post has such an important story on Canada and its risk aversion.

Q  During your presentation, you mentioned Canada’s culture of risk aversion. Do you believe this can be changed?

BC  When you get to post-secondary education, our educational systems are built on a 150-year-old model that’s not set up for today. We reward tenure, not innovation. Our faculties are strong political silos, and what we need are students graduating who have diverse backgrounds. Business people who have a fine arts background are more innovative and creative and take more risk. The challenge is it takes a generation. So, first you have to get change in our university system, which is challenging. Second, you have to give it time to catch. You can’t change culture overnight.

JR  To me it’s the embracing of failure that is a big difference I see, particularly in Silicon Valley where entrepreneurs use failure as a badge of honour, and in Canada we don’t really do that. We view that as something you do not disclose or something that you’re ashamed of. I would have a far higher propensity to invest in an individual after three failures as opposed to seeing zero failures, because I now know that when that individual is going to be working on their next opportunity they’ll know where to pivot around. They move much faster and are able to get to the same point they were at the previous opportunity within a fraction of the time. So, when the company starts to scale; when the problems become far more complex, somebody who has dealt with failure, I believe, is able to navigate and pivot around those and not completely panic at a situation.

What is top public-policy to spur productivity?

Great summary of what Canada needs to get done to grow as a strong economy. The National Post makes it monthly subscription fee worthwhile with this one comment.

Q  We’re going to have a new premier for Ontario by the spring. From your perspective, what is the most important public-policy change that could be made to spur productivity in Ontario?

JR  A year ago on the Liberal platform, they introduced angel tax credits and a corporate venture capital tax credit that was extremely well received. It leverages pure market forces. The government doesn’t select. It really becomes an incentive. It was a very innovative idea. Ultimately, it got passed on largely due to the deficit situation. But those are two examples of something innovative that hopefully the next premier can resurrect.

Will the federal government $400-million venture capital fund help?

How is Canada doing? How will it do over the next year? National Post has a great summary of a presentation:

In a presentation to the Canadian Club of Toronto last week, Bill Currie,Deloitte Canada’s vice-chair and Americas managing director; and John Ruffolo, CEO of OMERS Ventures, highlighted the key obstacles to Canada’s improved productivity, including: a culture of complacency, a lack of Canadian investment capital, a disconnect between entrepreneurs and global markets, and more. They subsequently spoke with the Financial Post’s Dan Ovsey about some of the opportunities for Canada to improve its productivity in 2013. Following is an edited transcript of their conversation.

Q  In its 2012 budget, the federal government created a $400-million venture capital fund. What do you believe is the most productive way to use this money and do you believe the government should be in the business of managing a VC fund?

BC  The opportunity with the $400-million is to lever it up and create joint partnerships where private money will come in on top of it and you protect some of that private money. While that may seem challenging, it’s actually good policy because it drives extra benefit because we create those gazelles (growth businesses) we’ve talked about. Unless you do that, money will stay on the sidelines. Money will not come into this space unless they can get a return. But we haven’t seen the government’s response. You kind of worry that that’s taking so long.

JR  The fundamental question is the sustainability of limited partner investors over the long haul. This is really pension funds, corporates, financial institutions, coming back into the ecosystem and the real question is: can this stimulus be used to help resurrect it; to create a long-term track record of success. If it’s unable to do that, it really is just a one-time shot in the arm, and then you kind of go right back down again. That’s the anxiety that I have. But, I think the federal government’s response is extremely welcome and they’re taking it very seriously.

When you are approached by a sales person, do their questions actually irritate you? Do questions move the needle towards you buying their product or service? Emotions are a bad word in business probably because men are not comfortable in letting down their guard. Getting men in business to imagine their business with your products or services can be achieved by using stories. Consulting firms call their stories "case studies".Here is a great article on using stories.

During years, I have been taught that art of selling had a lot to do with the ability to ask intelligent questions, and then to present one's offer in the context of the answers provided by your counterpart.

However, with hindsight, when I look back at my most significant sales - or at least those I am the most proud of - 3 spring to my mind. And I have to recognize that what they have in common has little to do with my ability to ask "intelligent questions". These transactions shares a common characteristic, though: they were all generated via a story loaded with emotion.

• More than 20 years ago, as I was working as a sales executive with a computer manufacturer, one of my customers was a large insurance company. One day, as a bold move, I decided to call the CEO of the company and I provided him with some evidence that, without a fast move from his company in terms of increasing their IT processing power, they might find themselves confronted with difficulties during their beginning-of-the-year premium collection process. 3 weeks later, I was signing a $6m transaction with this insurance company.

• About fifteen years ago, I experienced a situation with a business intelligence (BI)project manager with a mobile phone operator who wanted to equip his sales people with customer intelligence capabilities on their laptops. After a few words, it appeared clear to me that this project manager had a competitive technology in mind and that the only thing he wanted from me was just a low price, which he could leverage to make his preferred vendor drop his own price. In a state of desperation, I decided to tell the project manager the horror story of another mobile telephone operator who had launched a similar initiative, and who had experienced a resounding failure. Why? Simply because the sales executives had not made the effort to use the new capabilities. Too far from their good old habits. Too much disruption. After telling this story, and presenting some elements that he might consider to avoid falling in the same trap, my counterpart revisited the specs of his project, and eventually made the decision to buy... from me.

Are you misinterpreting the CFO?

It is unlikely that companies would deliberately be reluctant to consider new ideas that would save millions of dollars. However, what might be misinterpreted as reluctance, is that some organisations may find it more challenging than others to take ideas from the drawing table and translate them into reality.

Being organisationally effective at considering, adopting and implementing new ideas requires people to have the skills to change their behaviours to an appropriate extent and at an appropriate speed to be able to work with new ideas.

Some organisations are good at equipping people with such skill sets enabling them comfortably experiment with new ideas, and find ways to integrate them into the activities that drive the bottom line. However, it’s not just about equipping people with these skill sets but also about providing an environment where people are given a certain percentage of their working week as ‘time out,’ to reflect, experiment, and look for applications for new ideas.

Jacoline Loewen   See Jacoline on BNN, The Pitch  Author of Money Magnet Director, Crosbie Co.

Crosbie & Co.

150 King Street West

Toronto, ON

M5H 1J9

416 362 7726

Is Health and Wellness a cost?

Is Health and Wellness a benefit or a cost? Why would a CFO in a larger, employee heavy firm, not take a look at implementing a Health and Wellness program?

It is easier to get fired for doing something that went wrong or that someone found objectionable than it is to get fired for maintaining the status quo.

For example, in the corporate health and wellness industry, there is decades of evidence that positive ROI can be created with a solid wellness program. (And of course a poorly run wellness program can cost hundreds of thousands.) 

With health insurance costs skyrocketing it often amazes me when I see not fund a proper wellness program and go with "free" health fairs that are designed and run by medical doctors who simply use the corporate event to fill their out-of-network medical practice with patients.

It is management's responsibility to maximize the value of the organization but, despite all of the evidence that corporate wellness programs work, the average CFO still refuses to fund a professional program.  Their Human Resources or Benefits department struggle.

Jacoline Loewen   See Jacoline on BNN, The Pitch  Author of Money Magnet Director, Crosbie Co.

Crosbie & Co.

150 King Street West

Toronto, ON

M5H 1J9

416 362 7726

Why do cost saving ideas not get done?

The degree to which companies are having to cut spending and budget expectation is directly proportionate to the degree of cost saving ideas that have been implemented. 
Gary Hamel startled me in his book, Leading the Revolution, many years ago when he pointed out the top line of ROI and the bottom line.
CFOs are risk adverse by the nature of their characters. Ideas push up their blood pressure. Why take a risk?
Let's keep cutting costs because I can cope with revenue payments but not with a new project face plant.

Of course, wisdom indicates that no one will save themselves to prosperity. But is does turn an umbrella into a shelter.

Are CFOs using "Cost" as a reason not to start new projects?

I believe that cost is a major factor why companies are reluctant to consider new ideas right now.
Implementing new ideas can have significant upfront costs, while the savings and returns are usually only realized in the long term.
Companies are cutting costs and budgets due to the current economic climate, and this has a direct impact on what money is available for innovation and new projects.
Are costs holding back business growth this next quarter?

Jacoline Loewen See Jacoline on BNN, The Pitch Author of Money Magnet
Director, Crosbie Co.
Crosbie Co.
150 King Street West
Toronto, ON
M5H 1J9
416 362 7726

http://www.crosbieco.com/

How terrified are managers to do personal annual reviews?

You can never look bad to the board when you tell them you have some new ideas that will increase revenue that ties into the strategic plan. It shows that you are forward thinking. It is my opinion from being in these type of situations that the answer is this. 

Most of the executives I have worked with (70%) lack managerial courage. When you talk about saving millions dollars that means "beaucoup" changes in the organization that probably will effect people's jobs, layoffs, your power and control and the size of our office. This means having to talk to people who work for you that may not be good news for their self interest. 

Just look at how terrified managers are to do personal annual reviews. It takes courage to tell an employee they just aren't cutting it. A majority of men don't have the talent to resolve conflict and avoid it. They avoid conflict just like at home with their wife. Women run the house. (I learned this in Pyschology and talking to my coach) I was with a company who as a perk gave the three C-Level staff their own coach. 

We all know in our organizations staff who are negative and cause so much unproductivity but are given 5 stars at every review because their boss is afraid of conflict. I had a senior manager have a melt down one time because he was going to a different office without his mountain view. He tried to get me to back down on the change with intimidation. Conflict avoiders are everywhere. 

Many seasoned executives are afraid of new ideas because they don't want the pain of making the changes. Change agents don't last long in an organization. The executives that I have talked to who have been with the company the longest had one pervading quality. "They never took sides on anything and never initiated any change" 

I admire how quickly how quickly Microsoft could make organizational changes versus IBM whose ego really got in the way.

Jacoline Loewen, author of Money Magnet and on BNN The Pitch

Jacoline Loewen   See Jacoline on BNN, The Pitch  Author of Money Magnet Director, Crosbie Co.
Crosbie & Co.
150 King Street West
Toronto, ON
M5H 1J9
416 362 7726