Private Equity Not All Bad

“I'm part of the big hollowing out of Canada, I'm afraid," an investment banker told me at the tennis club last week, giving me his sad look. "I've been working on the BCE and Alcan deals, which are such a shame for Canada, but I suppose it has to happen." Then he dashed off for his doubles match with a jaunty jog (probably at the thought of his year-end bonus).

Is this hollowing out cause for alarm? What does it mean exactly for Canadian business entrepreneurs? Is this the end of Canada and should all entrepreneurs head for the exits? Not at all.The issue has been raised due to recent high-profile cases involving large American funds spotting a company that has missed business opportunities. These funds believe they can do more with the business than the current management team. The goal is to gain ownership through control of shares, then smarten up the business, and, finally, sell it for a profit.

Pirates, you say?

Maybe – but it's all perfectly legal.

What's not being said is that some Canadian management teams are missing the ball and not operating at a global standard. For some Canadian companies, a shakeup is exactly what is needed. You don't see RIM (the Canuck company that brought you the blessed Blackberry) having Jolly Roger types lurking around. That's because RIM's management team spends a great deal of energy working at what it takes to be a world leader in the wireless communications market – the key word being world.

For Canadian entrepreneurs, there will be a great deal more hollowing out to come, particularly in the smaller manufacturing industries. Letting go is hard to do, but many thoughtful Canadian business owners have grasped the idea that they can venture outside of Canada to set up plants and offices. These entrepreneurs are discovering that there are partners willing to help, such as the smaller private equity fund management teams. Smaller private equity firms, which are currently unfairly tarred with the same brush as larger firms, bring more than cash; they bring a rolodex of international contacts, global skills, and forward-thinking strategy.

Many private equity players already have shared ownership in a variety of manufacturers willing to change. McGregor Socks is such a case: After nearly closing its doors forever, it now has factories in faraway China, knitting up Canadian-designed creations. McGregor's core competencies shifted from manufacturing to design, managing the long supply chain, and keeping up relationships with stores. Besides, why couldn't it be the supplier, using China as a manufacturing base?

It was a private equity fund that supported this vision and put up the capital. The firm already had experience and contacts in China for McGregor. Although it took a great deal of pain for McGregor to make these tough changes, the company's dark days faded, and another excellent Canadian brand survived – and continues to fill store shelves (look for a pair next time you need socks).

By the way, my tennis playing, Master of the Universe, big swinging dick investment banker friend works for a global finance company. Nearly a decade ago, his Canadian finance company sold ownership to foreigners in order to go under their umbrella, with its attractive global brand. Horror of horrors! This finance fellow was part of the hollowing out of Canada! And what has been the result over these past 10 years? Within Canada, this company has experienced stupendous growth, creating many more Canadian jobs with high end salaries, and, at the same time, importing knowledge and the ability to serve a great deal more clients working between countries.

A recent article in The Economist supports this fact – that private equity is actually about adding value to economies rather than moving jobs off to foreign shores. OK, but what about the hollowing out of Canadian culture?

Well, my investment banker friend was apologizing for doing a good job, so that seems pretty darn Canadian to me. But selling out to foreign "pirates," besides adding lots of points on his platinum British Airways card, also brought him (and his staff) an amazing exposure to diverse management and financial practices, and an open-mindedness to global business – not to mention a few extra bucks in every one of his employee's pockets. Don't you think it's time Canadians embraced those points too? Aargh…bring on the pirates.