Canadian Venture Capital Conference Coming Up

Read the details about the great conference coming up in Toronto, October 12th, held by the Canadian Venture Capital Association -CVCA.
The topic is about going global and Canadian companies are discovering that they can take their strong products to other countries and do very well. It's not just Four Seasons who can go for the top.
Many of the Canadian private equity funds know how to help company owners grow their companies and find success outside of Canada. While working at Loewen & Partners, I have been surprised by how many Canadian companies are already deeply engaged in other countries with more than 80% of their sales from outside of Canukland. We are gaining confidence and it is great to be part of building the Canadian economy.
The cost of the conference is under $300 and it is worthwhile having the chance to be inspired by other entrepreneurs and bump into many of the fund managers themselves.

What Does the Crisis Mean for Private Equity?

Private Equity has passed through a Golden Age, but will now spend a year or so in "purgatory" before entering an even greater period of expansion, or "Platinum Age," according to David Rubenstein, co-founder and managing director of The Carlyle Group, the Washington, D.C.-based private equity firm with more than $70 billion in assets.
In a keynote address at the 14th annual Wharton Private Equity and Venture Capital Conference titled, "Harnessing the Winds of Change," Rubenstein said the credit crisis triggered by subprime lending has brought the growth of private equity investment to an abrupt halt.
When credit markets dried up, large banks had already committed to $300 billion in private equity deals, Rubenstein noted. About a third of that value stayed on bank balance sheets, although much of it has already been written down, he said. Another third was renegotiated with tougher terms for private equity sponsors. For the final third, the deals were never completed and are now the subject of litigation or break-up fees. "For the next year or so, we will be in purgatory. We will have to atone for our sins a little bit," says Rubenstein. As head of Carlyle, one of the biggest private equity players in America and the world, he also believes that the next wave of private equity will be stronger than ever and will start in early 2009.
In Money Magnet, this theme of the breakdown of the big, public markets and the build up of private equity partnerships as an alternative to the Wall Street and Bay Street is discussed in depth.
"It is becoming more pressing, says Jacoline Loewen, "that private equity managers do a better job of explaining how they can improve companies and deliver strong returns that lead to increased employment and economic expansion overall.

Money Magnet Lifts the Veil of Secrecy from Private Equity

"I owe a great deal to the financial investors who gave me their time to tell their stories," said Jacoline Loewen at the launch of Money Magnet. "They lifted the curtain of secrecy that the media love to discuss."
Jacoline says she learnt three things:

First of all – the finance people are generally wonderful. They are dolphins rather than sharks and they love business. The partnerships created by private equity deals I have watched unroll, really do create jobs, pay taxes and build Canadian companies out to the global market.

Secondly: the people most likely to benefit from private equity – business owners – tend to be the people who know the least about this type of financial partnership. Private equity partners get a company focussed on transformational growth and allows all sorts of ways for owners to get money out of their business to pay for retirement, family trusts. Anyone relying on traditional bank debt – it’s just like smoking – you are stunting your growth.

Thirdly: private equity is the way for Canadian companies to survive this global market.
When Ace Bakeries recently sold to an American private equity firm, I called Linda Haynes and asked her if she had looked at any other options – such as Canadian private equity. She said no. As with most entrepreneurs, her passion was bread not the money of the business.

I wrote Money Magnet to try and get Canadian business owners like Linda Haynes to see that Canadian money is here and that instead of selling out to the Americans, we can build iconic Canadian brands that go out to the world – like IMAX, Lululemon, Cirque du Soleil, skidoo, Four Seasons. All of those began their journey of growth when the business owner decided to put their ego on check and say “I can move over and share the steering wheel. I can bring in private equity.” And by the way, the biggest PE deal in the world’s media this year was Canadian, not the KKRs of America!

The hardest part of writing this book was getting a shared definition of what the heck is private equity. I asked Angels, VCs and professional fund managers. All had different answers. But the best was “Private Equity is the energy brought to the company”. That energy is what is priceless and very hard for outsiders to understand. Today in this market, as we see the East pick up the baton from the West’s economy, it is scary times. But remember, the last big smack down in 2000 was when Lululemon, Google, Paypal and countless others were working with their private equity partners. There’s lots of money out there for you.

Takeover Fever in Small-Cap World

A modern day investment banker and Jean-Jaques Rouseau have very little in common, but they would both agree that all is in flux.  Last week every investment bank in America went the way of Yankee Stadium.  The movement of the markets finally overwhelmed all of the banks and they have all sought the security and stability of commercial banks.  Private equity funds have found it difficult in the last few weeks to close deals, most notably Private Equity Partners' close of target Informa PLC.  Reports suggest that banks were not able to provide enough senior debt to leverage the deal.  A familiar story.  

According to this report from the Financial Post, small to mid-market firms continue to aggressively pursue buyouts.  These deals require far less debt to execute and can rely more on mezzanine financing to structure a deal while securing the required returns.

The Day the Baton Passed

Michael Power is with us today as guest blogger. He has a take on the world economy that every North American should understand:

As a sporting spectacle, the Beijing Olympics exceeded even the advanced hype. But, as the images fade, we should remember that this contest was not the only one of Olympian proportions to be playing out in the world. There is also an economic marathon taking place between runners in the West and those in the East, a national relay race that will eventually see the baton of economic primacy being carried – symbolically that baton having been dropped by the US Men’s and Women’s Teams in the 4x100m relay heats in Beijing – by China. The final medal table of the 29th Olympiad may yet come to symbolise the start of this hand-over process.

Final Medals Tally
1 China
2 United States
3 Russian Federation.
4 Great Britain
5 Germany

Many in the West probably still think – and the lazy love of the familiar more than brute logic is often the father of such thoughts – that the West’s current economic malaise is nothing more than a very bad case of cyclical flu. In such a context, aspiring Western politicians will continue to peddle promises to build a better tomorrow: witness Barack Obama and his “Yes, we can!” pledge. By contrast, few will dare articulate just how structurally passé the West’s current model might soon be and therefore just how difficult delivering on those electoral promises could become.

Overriding the forebodings of that small clique of Westerners not in denial, the ‘yes we can’ apologists for the West still dominate the airwaves of CNBC and Bloomberg. Those daring to suggest that something more seminal might be happening are usually dismissed as the economic equivalent of doomsday merchants wearing “End is Nigh” sandwich boards.

I believe profoundly that the essence of what makes mankind such an optimistic species is our dogged faith in the idea of “hope springs eternal”: indeed Obama’s book captures this determination in its title, “The Audacity of Hope”. For it is humanity’s pre-disposition to dream of a better tomorrow that is the source of that river of human endeavour that irrigates the seeds of a brighter future. And so powerful can be this confidence, it can cut gorges through the granite of counter-logic in forcing its way to the greener pastures of progress. But hope alone cannot guarantee progress and the wellspring of industriousness that feeds the West’s river is not nearly as plentiful as it used to be. Instead, today’s sweaty optimism rises most abundantly where the sun also rises: in the East.

In this game-changing world, a few commentators – George Soros, Marc Faber and Jim Rogers – have suggested that the West is in its worst financial crisis in 30 years precisely because the economic baton is being passed from West to East. As the great economist, Joseph Schumpeter, might have noted, perhaps we are at a crossroads in history where Western destruction is now being offset by Eastern creation. In our far from decoupled world, the West’s economic yin cannot change without impacting the East’s economic yang, and vice versa. So as one zone waxes, the other wanes.

On the one side, the West (and especially its Anglo Saxon heart), by living way beyond its means on the chimera of easily available credit, ever rising household indebtedness and ever increasing fiscal and current account deficits, has enjoyed many decades of prosperity. And, even in the wake of the credit crunch, most Westerners still believe that this model of prosperity is both soundly-based and sustainable. The last year has proved to us it is not.

On the other side, the East (and especially its Chinese heart), by living well within its means with a high domestic savings ratio (45% in China compared to a negative rate in the US), regularly running current account surpluses and maintaining high levels of foreign exchange reserves (the Greater China Club – China, Hong Kong, Taiwan and Singapore – now have over $2.5 trillion) has deferred consumption today and, by funding investments from these savings, set about building a better tomorrow. Indeed, the same time, a not insignificant portion of the East’s savings have also been diverted to plug that savings gap in the West and especially in the US.

By postponing consumption for well over a decade, the East’s hoped for tomorrow has now started to materialise in a better today – Beijing’s emerging splendour is surely evidence of that! And despite the desire by some of the East’s Old Guard to extend its era of abstinence, many Asian governments are now encouraging their constituents to enjoy a bigger share of the fruits of yesterday’s labours. This suggests that the Asian model – one based not upon self indulgence but rather self denial – may ultimately not be sustainable either.

The near mirror-image of these two faces of post-1989 global economic development – one built on using debt to consume tomorrow’s income today, the other built on using today’s savings to build an income-rich tomorrow – was a convenient liaison whilst it lasted, but eventually the complementarities of this so-called Bretton Woods II arrangement were outweighed by its contradictions.

Destabilized by the detritus of the past year’s credit crunch, the unstable equilibrium that arose from this fantastical arrangement has started to implode. Whether the West overindulged or the East eased up on its self-denial is a moot point. Either way, both ways, the one side no longer got all it wanted from the other: perhaps the East saw the West’s thirst for its exported manufactures being slaked, or perhaps the West saw the East’s demand for its debt instruments decline.

As one side pulled back, by definition, so too did the other: the credit that the East extended to the West had been recycled by the West to buy products from the East, thereby creating arguably the largest vendor financing scheme in history. Reduce the flow of one and you necessarily reduced the flow of the other.

And the result of this reduction? The West in particular is enduring the cold turkey shakes that follow the quick withdrawal of the amphetamines of easy credit. For its part, the East is being forced to move beyond an era where “we make TVs and Americans watch them” to one where they too are tentatively starting to become tele-addicts, which is to say ‘consume’.

Invariably a Newer World is emerging, one where the Western consumer will no longer be able to live off the back of the Eastern saver. And this world will be one where the Western consumer, sans that Eastern credit, will no longer be able to afford an ever increasing standard of living, at least until that consumer has broken his addiction to debt and rediscovered the magic of saving.

Not so in the East. By spending more and saving less, the make-up of Eastern economic growth will change, even slowing from its current plus 10% levels. But, given the scale of reserves the East has squirreled away relative to the emptiness of the Western larder, the East has the wherewithal to keep its GDP growing, its currencies strengthening and its wealth accumulating and do so far more rapidly than will henceforth be possible in the West. Thus will play out the particulars of how the baton of economic leadership will pass not between hands but hemispheres, from West to East. Indeed, China will overtake the US in terms of industrial output next year.

History, with its tidy desire to pinpoint such watershed events, may yet decide that the time and the place when this baton began to be passed was 8pm on 08.08.08, as the Olympic Games opened in Beijing, China.

Where were you when this historic moment happened?

What Every Business Owner Should Know

Why is it that smart business owners resist the idea of bringing in investment partners even if those partners will make them far richer than they could believe possible?

What are the four questions every investor will ask as you present your business and the money you will need to take it to the next level?

What are all the forward thinking owners lookin ginto private equity right now, before they need to retire?

Find out the answer at this radio interview broadcast by the show called Small Business, Big Ideas as David Cohen interviews Jacoline Loewen, author of Money Magnet and partner with the private equity investment company Loewen & Partners.

The Renaissance of the Platinum Age

Though he does point out that it may not be for another year, David Rubenstein co-founder of The Carlyle Group, mentioned last week that "the greatest period [for private equity] is probably ahead of us as you will see the industry coming back into the Platinum Age".  This is not surprising. As noted in previous weeks in this blog, private equity firms are currently raising incredible sums of money right now; when these funds will be discharged is anyone's guess, but informed opinions, such as Mr. Rubenstein's, point to a renaissance in about a year.  

This is not to say that the industry has fallen flat on itself this year, it has simply come to more reasonable levels of activity, compared to years prior.  We saw the prices paid for firms in buyout deals rise significantly last year.  Josh Lerner of the Harvard Business School noted that EBITDA multiples were, on average, 8.3 times earnings before interest, taxes, and depreciation/amortization, however, this was in an environment where returns generated by firms were 25% on average and as much as 40% in the upper stratospheres.  Over the next year, returns are expected to come down from their 25% average to around 14%; still respectable outperformance, but not at the leverage-induced performance of last year.  However, the private equity industry is not experiencing the same hang-over as some of the banks that are forced to write-down significant portions of their balance sheets, but the effect of the tightened credit market is sobering, causing many to point to happier times when billion-dollar buyouts will once again spread the elixer of good fortune.

Finding Private Equity Investors

The number one issue for every entrepreneur is money - getting money, raising money, or convincing investors to give you money - that according to Jacoline Loewen who is one of the Nation’s best known advisors to entrepreneurs who seek capital, venture captial and private equity.business pod cast. Loewen & Partners raises capital for companies with revenues over $10 million.
Listen to Robert Gold to talk about Jacoline's latest book, Money Magnet, which explains how to find private equity investors. This lively interview will appear in a future episode of the BusinessCast podcast.

The UK's Telegraph is reporting that TPG Capital has raised a $20 billion fund, one of the largest ever raised; Blackstone raised the world's largest ($21.7 billion) in August, and Goldman Sachs raised another $20 billion last April.  So what is going on?  Aren't private equity funds suppose to be dwindling without access to the credit they so desperately need from the banks? Apparently not.  

The credit crisis has created enough uncertainty in the public markets that investors are looking to private equity funds for the stability they crave.  Of course, it may be a while until we see the blockbuster, highly leveraged, billion dollar buy-out deals that we saw in 2007's "summer of love" (some say another year), but this does not mean that private equity funds are not active, quite the contrary.  

These funds continue to buy the collateralized debt obligations (CDO) that the banks so desperately look to offload.  Last month Lone Star was the latest private equity fund to buy CDOs from a distressed vendor, Merrill Lynch.  The financial firm sold $7 billion worth of CDOs at 22% of their face value to Lone-Star.  These deals make a very small splash in the pages of newspapers today; part of the credit is due to PE professionals' growing media-savvy in their efforts to keep their faces from front covers, and partly due to the complexity of these deals that really do not make for engaging reading in 500 words or less.