The key reason for private equity's success

The massive profits that some private equity firms make on their investments evoke admiration and envy. The mainstream reason (which has been true for a large portion of private equity funds) is due to the firms' aggressive use of debt, concentration on cash flow and margins, freedom from public company regulations, and hefty incentives for operating managers.

But I believe the key reason for private equity's success is the forced strategy of buying to sell.

Why do I say forced? Mainly because it is my experience that  public companies, which, in pursuit of synergies, usually buy to keep. This attitude or frame of reference brings very different pressures to bear on management.

The chief advantage of buying to sell is simple but often overlooked. Private equity's sweet spot is acquisitions that have been undermanaged or undervalued, where there's a onetime opportunity to increase a business's value. Once that gain has been realized, private equity firms sell for a maximum return. A corporate acquirer, in contrast, will dilute its return by hanging on to the business after the growth in value tapers off. Public companies that compete in this space can offer investors better returns than private equity firms do. (After all, a public company wouldn't deduct the 30% that funds take out of gross profits.) Kinross is doing this by getting into diamonds, not just gold. Their more inexperienced investors attracted by the gold price hike, get nervous and want a concentrated stock. More experienced and professional investors appreciate the subtle nuance of the management team.

Corporations have two options: (1) to copy private equity's model, as investment companies Wendel and Eurazeo have done with dramatic success, or (2) to take a flexible approach, holding businesses for as long as they can add value as owners. The latter would give companies an advantage over funds, which must liquidate within a preset time--potentially leaving money on the table. Both options present public companies with challenges, including capital gains taxes and a dearth of investment management skills. But the greatest barrier may be public companies' aversion to exiting a healthy business and their inability to see it the way private equity firms do - as the sale and cashing in of a successful transformation, not a strategic error.

Jacoline Loewen, author of Money Magnet, Attract investors to your business

How Private Equity is using Social Media

Details of Simmons Bedding Co.’s bankruptcy reorganization plan have been translated into Chinese and posted on a Web site in Guanzhou to encourage Chinese bids, the Wall Street Journal reports. The move is unlikely to disrupt the company’s plans to be sold to Ares Management LLC and Ontario Teachers’ pension plan, but it does show growing interest by Chinese bidders in U.S. assets, especially at discounted prices, the WSJ writes.

Do you want to make money or do you want to tick all the boxes correctly?

"We are rowing against a tide where people are more interested in how you are ticking a box, instead of how you are running a business. In private equity we have a very simple job: make money for our shareholders. It is a purity I quite like. Lack of clarity is the source of the trouble; not knowing what your job is." The head of the British Venture Capital Association spoke out about why entrepreneurs and private equity, not government, will be the partnership to save the British economy. (Read more)

The Canadian Venture Capital Association also talks about the power of private equity versus other forms of lending or public market capital. The theme you will see repeated at CVCA conferences and their work with private equity funds,  is the superior performance of aligned interests of privately held capital versus the public markets. The private equity investment is a much more involved and engaged form of ownership that the dispersed model found on the stock market. There a company's shares are typically held by a wide range of institutions, leading to the phenomenon of the "ownerless corporation", where investors fail to hold a powerful management to account.

At Isis, which targets mid-market businesses that are seeking between £2m and £30m of equity, Kolade is looking to sectors such as healthcare and online retail for growth, along with traditional shops.

"If I were to buy into mainstream retail now, the leasehold deals I could do would be extraordinary," he says.

Jacoline Loewen, http://twitter.com/jacolineloewen

Succession Planing sounds easy - it ain't

Careful succession planning has a key part to play in a firm’s survival and long-term business sustainability, particularly given the current economic climate, PricewaterhouseCoopers (PwC) has said.

Speaking about his experience in running, and subsequently selling, one of Ireland's largest family businesses, the Gunne Group’s Pat Gunne said: “In my experience, when running the Gunne Group, long-term business success will be determined by building and maintaining business relationships, having a real focus on cash and a clear vision for building the brand around the optimum strategy.

“In addition, having the right structures in place including strong non-executives are critical. Another key issue for success in any family business is fast-tracking succession planning. Planning for the transfer of wealth in a tax efficient manner, that it is well communicated and has the buy-in from all family members is critical,” he added.

“There are a number of important planning steps for effective succession planning. Firstly, it is hugely important that a tax-efficient will is put in place in order to avoid a tax trap. There are also a number of corporate exemptions that can be availed of in order to release wealth efficiently which should be investigated,”

“Family partnerships should also be considered as a mechanism for efficient participation in the future growth of wealth,” he added.

The six key steps for efficient succession are:

• Have a clear process to manage potential conflict
• Agree a clear ‘family constitution’
• Manage the tax
• Have clear reward policy for both working and non-working family members
• Have a clear and efficient sharing of wealth framework
• Communicate clearly .

Is offshoring good or bad for Canada and why?

If offshoring going to wind down our economy and hollow out our skills? I asked Paul Hogendoorn, owner of OES manufacturing and here are his comments:
"It is a necessity, but it must be done wisely. I have seen a number of companies offshore much of their manufacturing requirements, but end up greatly weakening their product development capabilities. When you no longer buy many components through distribution, the technical support routinely delivered by those companies dries up. The engineering department loses valuable resources. New technologies come along and the company no longer has the ability in-house to pursue and develop them. No one can, or wants to design or build the prototypes, or suggest the best new components or methods, or assist in anyway. (There's nothing in it for them."
So, offshoring usually leads to lower production costs in the short term, but done wrong, it also leads to reduced competitiveness (and even viability) in the long term.
A successful formula used by some companies is to offshore production when it becomes mature production, and keep leading edge production here until it becomes mature (and you are working on the next).That way, your engineering and product developments stay healthy and adequately supported by the leading manufacturers and distributors.

So we can stop panicking...

Firms run by private equity companies have been more productive in the recession

Looks as if the private equity model of growing businesses pays off with its extra alignment of interests. Factual article on the British PE scene:

Firms run by private equity companies have been more productive in the recession. The claims by the British Private Equity and Venture Capital Association (BVCA) were based on results from a portfolio of 47 major companies including Alliance Boots, New Look, Travelodge and CenterParcs. Based on results for 2008 and the year to March 2009, the firms' average productivity reached 7.7%, "significantly in excess" of the average 1% UK rate during the same period. The association's second annual report, which comes under new transparency rules for the buyout sector, said average annual profit growth was 11%, although employment levels fell after acquisitions were taken into account.

BVCA chief executive Simon Walker said the figures were "promising" given the bleak conditions. But he added: "While the profit and productivity growth figures are testament to private equity's focus on portfolio management through the recession, the economic outlook remains uncertain.

"Private equity-owned companies are not immune from the continuing recessionary pressures."

Read more.

Perplexed by the stock market rally off the March bottom?

The stores this year have far fewer Christmas wreathes and decorations and since I am not a shopper, for me to notice that means there is a big cut back in retailing to this holiday season. Is everyone tightening the belt a few notches or is the recession finally over? Have the retailers estimated potential sales below potential? I suppose it depends on whether you are a bull or a bear. Here is the email I received from Lynn Lewis, Sr Wealth Advisor, ScotiaMcLeod, and I think it gives a very practical view from John Gudritz and Jason Tank from Front Street Investment Management.

Here's a Market Review worth reviewing:
It is fair to say that we are perplexed by the huge stock market rally off the March bottom. The bulls believe the market is just “climbing the wall of worry” as it always does. The “walls” we see are more than just worries. These walls are long-term structural problems in the economy that will not be easy to climb over and should hinder economic growth for years to come. We think that makes stocks very risky assets at current prices.
We respect the fact that bull markets normally do climb a wall of worry coming out of a recession or a sudden and severe financial crisis. The stock market rises on the relief that the actual economic data turned out to be better than what investors were worried about.
Today’s bullish investors argue that this is what has happened this year. The market had crashed to the March lows based on fears that our economy (and the global economy for that matter) was heading into a financial abyss. By avoiding the abyss through the use of massive amounts of government spending and guarantees as well as some accounting tricks by the banks, the stock market has recovered about half of its decline from its peak in 2007.
We get it. The economy is better off than it was a year ago. We would expect to see some improvement with the banking industry back up and running and those stimulus programs encouraging people to spend. And with the Federal Reserve keeping savings rates near zero, they are doing their part to entice people to do something else with their money than put it in a bank.
But how much better is the economy? How sustainable is this growth? Is it enough to justify a 65% rally from the market bottom? Are these worries of ours as unimportant as the market makes them look today? Have we really missed the start of a new secular bull market? We still don’t think so.
The bulls believe that while the recession was a bad one, it was just a recession. Therefore, using history as a guide, an economic recovery is right around the corner. Businesses will invest, consumers will shop and corporate profits will grow. It is just that simple.
Having friends and family members who have hit their own personal walls of financial difficulties from this Great Recession we would like to believe that scenario. However, the so-called recovery we have seen so far is not suggesting that will be the case. Let’s look at the data.
Job growth (and higher wages) is one of the biggest hurdles that we will have to overcome to get this economy on a higher and more sustainable growth path. Since the stock market started to rally in March the United States has lost over three million jobs and the unemployment rate has climbed to 10%. We would expect to see the unemployment rate actually rise in the months to come as more people re-enter the labor market.
While the number of job losses has substantially declined from the extremely high numbers a year ago (a favorite “less bad” statistic for the bulls), we see little hope for large gains in the job market anytime soon. In the month of November there were almost 48,000 fewer people hired than in October, which was the worst in over two years, according to the Challenger, Grey & Christmas Employment Survey.
The bulls believe that companies were too severe in the number of people they fired this past year. They will have to rehire many of them as production is increased to replenish the inventories of goods that have been depleted. That may be the case but there is another wall to overcome before that new job is created.

There are currently 9 million people working part-time who want full-time jobs. Also, the workweek is at a low 33.2 hours. Therefore, companies will first increase the workweek and then put part-time workers back to full-time before they hire new workers.
The bulls will also point out that existing and new home sales have been strong over the last few months. Once again we have our government to thank for that good news because of the tax credit for first-time homebuyers. The question is, did that government program create new sales or just take from what would have been future sales. We shall see in the next few months, especially with the FHA looking to tighten their lending standards.
Unlike the bulls, we think that falling home prices are still a major obstacle for future growth. We believe the studies that show that there is a large “shadow inventory” of homes that banks have foreclosed on but have not put on the market to sell. And to make matters worse, over the next couple of years there will be another wave of foreclosures as Option ARM mortgages that were so popular on 2005 through 2007 begin to reset at a higher payment levels and mortgage balances that are much higher than the appraised values of the homes.
Lastly, the bulls point to the better than expected corporate earnings as a reason for this rally. While earnings were better than expected, revenues were disappointing. In fact, revenues were down by a substantial amount. In order to achieve the earnings expectations next year we are going to have to see revenue growth of close to 10%. Good luck with that.
Like it or not this will not be a typical economic recovery because we are coming out of a different type of recession. Normal recessions are caused by rising inflation and interest rates and excess inventories. Once the inflationary pressures recede, the Fed cuts interest rates and production increases to meet rising demand and the economy is back on track and growing again. The worries are easily resolved.
The Great Recession was caused from the bursting of the real estate bubble that was the result of a decade of easy credit. Our economy expanded on the ability of almost anyone with a pulse to be able to get credit, whether from multiple credit cards or home equity loans. Those days are over.
We are in what we think will be years of credit contraction, and therefore, deflationary pressures on assets, especially real estate. The credit lifelines have been pulled from many people and severely reduced for others. That has limited their ability to quickly recover from the financial strains they are currently experiencing. Many more people are going to hit their personal wall of financial stress or ruin before this economy is on more solid footing, in our opinion. The timing of that will depend to a large degree on the government lifelines that continue to be extended.
Speaking of our government, the largest wall that we as a nation will have to confront with in the years to come is the debt we are accumulating at over a TRILLION dollars a year. Even using the Obama administration’s estimate of a 4% annual economic growth rate (which we think is too optimistic) we will still be looking at $10 TRILLION of additional debt in ten years. State and local governments have some sizable walls (budget deficits) of their own to overcome over the next two years.
We think these walls are real obstructions to our economy’s growth over the next few years. The exact timing of their effects is not clear. However, they will be a drag on our economy as we make our way over them. We don’t believe that current stock prices reflect this risk, which is why we remain in a protective mode.
Maybe it will turn out that we are too pessimistic about this recovery. Maybe we can borrow, tax, and spend our way into prosperity. Maybe our walls are just worries that we will easily be able to surmount. We should know the answer to that soon.

Lynn Lewis, CIMA, CIM, CMA, FCSI
Sr Wealth Advisor
ScotiaMcLeod

It's jobs, not cranes

A private equity fund manager just got back from Chicago and told me he was shocked that he could not see any cranes building new buildings. I told my private equity buddy that I had heard that the signs people use to try and find patterns has changed from cranes to jobs, and a press release from Reuters reiterated this point:

Crucially, consumers in Canada and around the globe now view job creation as

the most concrete symbol of economic revival, Wright says. That stands in

contrast to the early 1990s, when the presence of construction cranes was a

key sign of economic growth.

The RBC Canadian Consumer Outlook index also found that, while 56% of

Canadians view the current state of the national economy as good, that is down

from 59% in September and 62% in May. But 48% are extremely optimistic the

economy will improve over the next year.

The November survey results will be set as the benchmark of 100 against

which future results will be compared.

-By Monica Gutschi, Dow Jones Newswires; 416-306-2017;

monica.gutschi@dowjones.com

Jacoline Loewen, author of Money Magnet and Managing Director of Loewen & Partners, Private Equity, Toronto.

Can Green be profitable? Ask Al Gore, our first Green billionaire

Does being Green pay off?

Ask Al Gore - he's a billionaire from Green.

Al has figured out to make a profit from global warming and urging new behaviors on the rest of us. Environmentalists think that it’s a Disney movie and that we should use earth’s resources carefully because it is a good thing and tend not to think about how to use money as a motivator. For some of the environmental people, the words green and profits should not be said in one sentence. I wonder what they think of Al Gore's financial success.

For business though, Green is showing that it can be good business. Bullfrog Power released their list of the top 10 Green enterprises and Wal-Mart is top. They have discovered that Green means cost savings too. They are pushing inventory storage as far back to the supplier as they can. Instead of having a thousand delivery trucks come to a store half empty, they have 100 trucks. The real estate inside those trucks now becomes very valuable as now every inch of the pallet holding goods must be used. New boxes that lock into each other and are reusable and reusable pallets.

I was glad to see the City of Toronto is on the list as they are buying Gardens in the Air to put plants on roofs using the tax payers’ dollars to support Green products and develop a market to support their business. They have the biggest pockets and by being a first customer, can support a young industry grow and then bring down the costs.

Nortel Board thinks we are still in the dotcom boom times

With layoffs and pension losses, the Nortel Board should be managing the optics of bonus payments to top executives. This is not the dot com boom. We are in a new era where we are haemorrhaging jobs to countries where smart, educated people work hard for far less.

Nortel should have got the bail out not GM because it is new technology while GM is old technology.

Are these Nortel executives so talented? Well, yes, turnaround people are a rare breed so there is probably (hopefully) some truth there. I do wonder if the Nortel Board members have picked up the latest in compensation package trends. Roger Martin, University of Toronto, is saying bonuses should be tied to performance measures like customer satisfaction measures, not to increasing the share price.

How you pay people makes them mercenaries or patriots. Nortel executive is looking rather mercenary.

Would you pony up cash for a ski resort in a desert?

What does the billions of dollars bust of Dubai mean for North Americans? First of all, it is a reminder that our global economy is still fragile and interlinked. Secondly, it is the British banks who were one of the main lenders to the troubled, slowly deflating, glittering and formerly fabulous Dubai. So North America will be relatively unscathed.

Finally, for North American business, a strong message is to get back to basics where you know your clients.

The important question to ask is who is the customer? British banks made assumptions that the Dubai sheiks had oil, that the price of oil would continue to climb and so sure, they would be good to pay back the loans. These bankers did not do sufficient risk analysis.

The other critical question to ask is use of proceeds. Did these bankers ask, “What are you going to use the loan for?”

"Hmmm...let me see, you are going to build a ski resort in the middle of the dessert? How good will the pay back be for that expensive project?”

A little bit of market research would have helped. If a ski resort in a hot place was such a good idea, I’m sure Vegas would have done it already.

I also recommend the last question to ask is if you, the loans executive, personally, would make the loan. This is not in the manual. However, by briefly contemplating whether you would give your own money to the project idea does push your thinking to a more sensible place. This artificial question perhaps, but briefly gives an alignment of interests. Perhaps if the loans executives were asked to assign some of their bonus to the loan repayment, it might have saved the British tax payer (who are now the proud owners of said banks) yet more pain.

For North Americans, check your executive compensation packages. Study how these British bankers were being paid for the amount of loans they made. Were they made into mercenaries, more interested in getting paid a bonus than watching for clear signals the loan might not get repaid?

Now the British tax payer is backstopping these defaults, but they do not have a ski resort in the middle of the desert as compensation.

Dubai should not affect Canada too much. Canadian bank stocks have gone up and we have a commodity backed currency.

Is it time to invest in property?

Not a chance, the Canadian Mortgage and Housing Corporation is creating a Fannie Mae, Fannie Mac house disaster. This impending crisis should be front-page news.

Low interest rates and the government Canada Mortgage and Housing Corporation’s (CMHC) dramatic increase in mortgage backstopping for people who put only 5% down is creating a Canadian housing bubble that will echo that horrible popping sound of the USA housing market.

In January, CMHC was allowed to insure up to C$600-billion in mortgages, up from C$450 billion the year before. This was done in the dark days

Making housing affordable is a noble cause for any government or bank, however doing it by allowing for easy lending does not work at all and we see it in the US. All it does is let people borrow more ultimately as we are seeing right now, it is driving house prices skywards. It is a well meaning government program but it is distorting the markets. What it means for any tax paying Canadian is that housing risk is carried by the taxpayer here in Canada.

If you compare average salaries to average house prices it just doesn't add up, especially in bubble cities such as Vancouver. Clerks and baristas buying shoe box condos for over 300K is a disaster waiting to happen. In Vancouver it is going to end particularly badly, whichever way it pans out.

The CMHC has disturbing similarities to Fannie Mae and Freddie Mac which helped set up the US housing bubble. The issues raised were solvency because of the ease of credit, market distortion as well as the fact that CMHC represents an indirect and increasing bailout to Canada’s profitable banks.

In the end, someone ‘always’ has to pay. Otherwise, the result will be similar to the US with increased foreclosures and taxes. That someone is the tax payer. I don't want my children to have to pay for our train wreck. While I do enjoy the company of my sons, I don't want them living with me until they are in their mid-thirties.

The CMHC is a sacred cow and it needs to be barbequed.

Jacoline Loewen, private equity expert, author of Money Magnet, panel of CBC show - Dollar Signs with Dianne Buckner on at 1:30 Saturdays.

The Billionaire List is out again - any surprises?

The billionaires list is out again and any surprises?

When I looked at the Canadians who made the Billionaires list, I was blown away by how many self-made entrepreneurs made the list. You know they had start-up ventures, went out begging for money, took big risks and had sleepless nights.

Many people think billionaires are tainted and got their money through corrupt means but in Canada you can see that is just not true. The billionaires are Canadian entrepreneurs who figured out how to take their product outside of Canada to the world.

The Canadian Billionaires are so accessible too. It is remarkable that I have met so many of them in person, they were not surrounded by an entourage seen in other countries; and it’s not because I am some big wig. Far from it!

Jimmie Patterson started as a bell hop at a hotel and says that is what taught him how to do business and who mentors young business people whenever he can.

There’s Guy Laliberte who bankrolled Cirque du Soleil by walking across Quebec on stilts eating fire and asking people to invest in him. He’s now keeping Vegas going.

Gerry Shwartz, a highly thought of private equity leader who acts with great integrity, growing companies with a positive spirit. He’s no Donald Trump or Goldman Sachs type.

Michael Lee-Chin, classic entrepreneur story from Jamaica and he is donated $30M to ROM demonstrating responsibility to the community.

Jim Balsillie of RIM and the Blackberry, was the Angel investor who stayed. He and Mike are creating an Ontario technology powerhouse with their work with universities and start-ups. Jim gives his time to talk at conferences for start-ups and the early stage market. He coaches young entrepreneurs too. I remember seeing him at a conference where he was urging young entrepreneurs to get up and ask him questions, to be more pushy. He also gave me time for a book I was writing on technology.

There’s Jeff Skoll, of e-Bay, creating an out of the box Internet service which started with him just trying to be helpful to his girlfriend.

It is all achievable for every Canadian. You don’t need connections. You don’t need to be corrupt. You do not need to be born into the right family. You do not a costly university degree.

It also shows Canadians taking their brand to the world – eBay, Cirque du Soleil, Rim. Every Canadian entrepreneur should be excited and inspired by this list.

Canadian Billionaires

The Thomson family (The Thomson Corporation) $24.41 billion[1]

Galen G. Weston, George Weston, W. Garfield Weston (food/fashion) $7.7 billion [2]

Arthur Irving, James Irving, John Irving (natural resources) $5.45 billion[3]

Jim Balsillie (Research in Motion) $5.6 billion[4]

Edward Samuel Rogers, Rogers Communications Inc $4.54 billion (Deceased December 2, 2008) [3]

Paul Desmarais and family (Power Corporation of Canada) $4.41 billion[3]

James (Jimmy) Pattison (founder of Jim Pattison Group) $4.17 billion[3]

Jeffrey Skoll (eBay) $3.93 billion[3]

Mike Lazaridis (Research in Motion) $3.6 billion[4]

Saputo Family (Saputo Inc.), Montreal: $2.78 billion[3]

Michael Lee-Chin (AIC Group) $2.6 billion[3]

Bernard Sherman (Apotex Group of Cos.) $3.23 billion[3]

David Azrieli $2.44 billion[3]

Fred and Ron Mannix $2.38 billion[3]

Daryl Katz (Rexall Pharmacies / Edmonton Oilers) $2.37 billion

Gerald Schwartz (Onex Corp) $1.57 billion[3]

Guy Laliberté (Cirque du Soleil) $1.5 billion

Jacoline Loewen, private equity expert, author of Money Magnet, panel of CBC show - Dollar Signs with Dianne Buckner on at 1:30 Saturdays.

Horror movie

This little video is actually frightening to watch. It is the unemployment trends of America as the recession takes hold. Interesting how the center of the country is impacted less - is that because of population or types of jobs?

link to video: http://cohort11.americanobserver.net/latoyaegwuekwe/multimediafinal.html

Jacoline Loewen, private equity expert, author of Money Magnet, panel of CBC show - Dollar Signs with Dianne Buckner on at 1:30 Saturdays.

Take a leaf out of Wal-Mart's play book

Wal-Mart’s growth got everyone excited until you see that the increase in revenues is from their growth in Asia. Before you get all depressed, learn from the winners in business. That translates to - Take a leaf out of Wal-Mart’s book.

Your strategy needs to include Asia.

Now again, do not get in a panic because this seems so enormous. Start by planning to take a Chinese or Indian business connection to dinner. Talk about your business. Could this person tell you about a similar business in China? Could they introduce you to someone there? You do not have to fly over there either; you can use Skype video conference.

Maybe explore if you could set up a relationship where you could list their phone number on your brochure? You might never do any business or get any referrals, but think about how your brochure would look with “Offices in Toronto – Beijing – Bombay”. Then if your clients needed a connection in those countries, you have a referral point and at the same time, you are beginning to have Asia in your company.

Business is baby steps.

A client of mine, manufactures and distributes light bulbs. He lives in Montreal and twenty years ago he did just that – took a Chinese buddy to dinner. This contact introduced him to a manufacturer in China and the business relationship grew. The Montreal business owner began small. Today, this Montreal light bulb company is the largest supplier to Wal-Mart of green light bulbs. See...baby steps. Make a call today and have dinner with an Asian buddy.

Jacoline Loewen, strategy consulting, Loewen & Partners.

Jacoline Loewen, private equity expert, author of Money Magnet, panel of CBC show - Dollar Signs with Dianne Buckner on at 1:30 Saturdays.

Does OPEC mean Canadian busineses should shift away from the USA?

OPEC is holding a big summit this weekend. Does this mean Canadian companies should swing away from America and look to Asia as their main trading partner?

America is still the largest economy in the world and will continue to be a great marketplace. No question, American entrepreneurs are beaten down psychologically right now. I am working with clients to do acquisitions there and they are keen to do business. it is worth taking a re-look.

But also, no doubt that Asia must be in every business owners’ strategy. That can mean the business owner plans to have on their "To Do" list to make one Asian connection. This could be by using Linkedin (Facebook for business) to chat with Asian connections or join an Asian Business Group.

All big business started with one single human conversation.

Tell your City councellor to organize a summit – call it Asian Business Summit.

Jacoline Loewen, private equity expert, author of Money Magnet, panel of CBC show - Dollar Signs with Dianne Buckner on at 1:30 Saturdays. Loewen, Money Magnet - How to Attract Investors to Your Business

Do we need a job summit?

With the job loss figures out, does Canada need a Job Summit? Obama will be holding a job summit, what about here in Canada?

Turns out that our Our Canadian government has been doing a great deal to support job growth for years. Obama needs a better marketing expert because it should be called Entrepreneur Summit or Small Business Summit because these are the sustainable jobs that grow a country’s future wealth.

Our government is sending junkets to India where our entrepreneurs can meet Indian business owners interested in Canada and the trade consulate to smooth the way. In addition, we have the Export Development Corporation (EDC) which helps even further.

One of my clients has begun to sell motors to China and it is stretching his cash flow. His bank would not take on that risk. Quite right. The EDC, though, worked with the business owner and his business plan and backed 80% of the loan. Then the bank was confident that the risk was better and gave the loan. The entrepreneur has the comfort that the risk of doing business in China will not bankrupt him and now he can take the small steps to grow.

The government gave CYBF $20 million. I work with this foundation and we give loans of $10,000 to young entrepreneurs along with a mentor. Many of those entrepreneurs went on Dragons’ Den and got deals with the Dragons and those create good jobs for businesses.

Jacoline Loewen, private equity expert, author of Money Magnet, panel of CBC show - Dollar Signs with Dianne Buckner on at 1:30 Saturdays.

Does our Canadian Government need to do a job summit like Obama?

With the job loss figures out, does Canada need a Job Summit? Obama will be holding a job summit, what about here in Canada?

Turns out that our Canadian government has been doing a great deal to support job growth for years. Except our government recognizes that jobs come from small and mid-sized businesses, not government. Obama needs a better marketing expert because his Job Summit should actually be called Entrepreneur Summit or Small Business Summit because these are the sustainable jobs that grow a country’s future wealth.

Our Canadian government is sending junkets to India where our entrepreneurs can meet Indian business owners interested in Canada and the trade consulate to smooth the way. In addition, we have the Export Development Corporation (EDC) which helps even further by guaranteeing 80% of bank loans for export cash flow. Entrepreneurs appreciate the risk being carried by government, and banks love it because they can continue providing cash but with an 80% reduction in risk. Canadians appreciate it because this government support means jobs for Canadians. How great is that synergy?

One of my clients has begun to sell motors to China and it is stretching his cash flow. His bank would not take on that risk. Quite right. The EDC, though, worked with the business owner and his business plan and backed 80% of the loan. Then the bank was confident that the risk was better and gave the loan. The entrepreneur has the comfort that the risk of doing business in China will not bankrupt him and now he can take the small steps to grow.

The government gave CYBF $20 million. I work with this foundation and we give loans of $10,000 to young entrepreneurs along with a mentor. Many of those entrepreneurs went on Dragons’ Den and got deals with the Dragons and those create good jobs for businesses. Thanks to our government. I was at a business summit in Toronto and heard Tony Clement say, "We in the government want to help business and then get the hell out of the way."

Sounds good, Tony! I think the government s doing a great job and this is one entrepreneur who appreciates it.

Jacoline Loewen, private equity expert, author of Money Magnet, panel of CBC show - Dollar Signs with Dianne Buckner on at 1:30 Saturdays.

Jacoline Loewen, private equity, Toronto.

When do you raise capital?

A big decision for business owners is whether to take outside capital. Let's assume you've decided to go ahead and raise outside money. When do you do it?

Here's the short answer, which is written in stone for all private equity people on Bay Street: Raise money when you can, not when you have to.

What does that mean?

It means raise money when economic conditions mean that private equity investors or lenders are pitching you. Raising money means selling a piece of your business (equity) or making a lender confident that you have the cash flow to pay back a loan (debt). You will find the situation much more pleasant in a seller's market rather than a buyer's market.

As with every other kind of market, capital markets go through cycles. At the peak of these cycles, such as 2007, so many investors are trying to put cash to work that money is cheap and terms are good. At the bottom of these cycles, meanwhile, such as from October to last spring, investors can tell you whatever terms they want because you need the cash.

Similarly, the attractiveness of investing in businesses goes through cycles. Nothing is more attractive to an investor than a company that doesn't need money. Then the investor feels privileged to be “allowed” to invest. I hear from prospective clients that they do not need money and that is exactly when to bring in private equity and boost your bottom line while taking risk off the table.

Bob Roy, Roynat, used to say, “Go and ask for money when you have a tan.” Along the same lines, nothing is less attractive than a company that needs money desperately and is talking up a storm to anyone.

So, from the perspective of a business owner, the best time to raise money is in a white-hot capital market when you do not really need it. In these periods, you should raise more money than you think you'll ever need.

The worst time to raise money, meanwhile, is at the bottom of the cycle when you're running low on cash. If you wait until then to start fund-raising, you will be forced into needlessly painful situations. Perhaps you will take debt at a higher rate or you may have to give up part of your business you did not plan to give. This is not a position of strength.

Of course, when times are good, many entrepreneurs make a common mistake: They plan the revenues for the year ahead based on the past few years growth. In doing so, they base their outlook for future cash requirements on this past success, instead of asking what would happen if, say, their revenue got cut in half. So, when the cycle turns, they get shocked and cannot believe their good times have stopped and they suddenly need money just to survive. We saw this unhappy situation with more than a few clients who could have avoided their cash squeeze.

Raising money when you can instead of when you need to means avoiding this mistake.

Never assume that good times will continue forever - because they won't. Instead, when everything is going smoothly, ask yourself how much cash you would need if the economy suddenly collapsed. And if someone is willing to give that money to you on reasonable terms, take it.

With the markets running now and interest rates unlikely to rise, now is a good time to raise capital. Give Loewen & Partners a call to help you raise capital.

Tim Hockey, TD Canada Trust, says stock options makes mercenaries of us

The SpencerStuart panel on executive compensation warmly applauded Tim Hockey and humanistic approach to executive compensation. Here are a few of Tim's key points:

Tim Hockey, Group Head, Canadian Banking, President and CEO, TD Canada Trust, says that executive compensation needs to be carefully balanced or else it can make mercenaries out of us all. Tim used the scale of “Patriot versus Mercenary” as a range of behaviours exhibited by management. In banking circles, a retail banker is a Patriot who does it for the community and on the other side is the investment banker who seeks revenue in the same manner as that of a Mercenary. Tim says that human capital must be made to be worth more.

What is the role of a business? As Peter Drucker says, it is to fulfil a customer’s unmet needs and get rewarded. At TD, every executive is compensated on customer satisfaction. If an executive is "incentivized" only on the stock price, that would not fit the TD culture. At TD, executives are to act in a Patriot way.

Jacoline Loewen, private equity expert, author of Money Magnet, panel of CBC show - Dollar Signs with Dianne Buckner on at 1:30 Saturdays.

David O'Brian says CEOs must be trustees of a business

More from the SpencerStuart Executive Compensation panel. Here is David O'Brian:

David O’Brian, Chairman of the Board, Royal Bank of Canada and EnCana Corporation, said in his time as CEO of Canadian Pacific that executives were more like trustees of a company than the types to "game the game" just to drive up the stock price. It is better to align management with shareholders interests and that although stock options have not worked well across the board, it would be foolish to throw out the baby with the bath water. David disagreed that CEOs would hype the stock although he did agree that the stock market could be a bit of a casino.The method of pay and the level of pay both play a part of it, and CEOs have been divided about it. How much do you have to pay to attract talent? This is a societal issue too.When looking at compensation, you want to reward for performance and judge it by net income before tax, level of employee engagement. At EnCana, customer satisfaction will not play a role but oil price and low costs of production is key.

When I was a CEO, I did not ask myself every day, “How can I maximize shareholder value?” Instead, I would ask, “How can I make this business model work better?” That is the nature of that business in comparison to banking, for example.Stock options can be part of the package but these need to be long term.

As Warren Buffet said, “In the short term, the stock market is a voting machine, but in the long term it is a weighing machine”. Compensation needs to be on the long term performance of the company.Restricted stock and deferred shares are better than stock options which give huge leverage. You can remove stock options but our tax system encourages short term stock options. Long term tax deferred past three years is not allowed and this needs to be changed.Senior executives should have share options deferred, but we also have to realize that they need the benefits of the job while they are in their high spending years of their families and lives.Originally, stock options were created for start up technology firms and oil & gas exploration companies who could not afford to retain the talent of executive they needed. This deferred cash payment was not an expense as there was nothing to expense it against. For executive compensation, as part of the package, stock options should be de-emphasized.

Roger Martin, Rotman, asks whether executives "gamed the game" because of their stock options?

With the US Government’s Pay Czar taking unprecedented action in cutting bankers’ salaries and bonuses, the go-go years seem a faded memory. Executive compensation is now a hot topic. What is fair pay and how should talent be rewarded? What went right and what went so badly awry? SpencerStuart, Canada’s top recruitment company, held a fascinating panel with heavy hitters Roger Martin, David O’Brian and Tim Hockey dissecting the past thirty years of corporate performance and how this will affect executive compensation in the years to come. Roger Martin shifted my thinking on compensation and since I am designing pay for a top CFO and COO in a public company right now, even changed the compensation plan. Here are some random takeaways from Roger Martin:

Roger Martin: The evidence is damning that the stakeholders doing very well from the Standard & Poor top 360 companies listed in the New York stock exchange are not the shareholders but the managers. Roger Martin, Dean of Rotman Business School, ran the statistics of management compensation and discovered that between 1980 to 1990, CEO compensation doubled for each dollar of income produced. In other words, CEOs did unbelievably well.

No big deal, you may say, but how about shareholders? How did they fare in the same time period? The shocking picture that emerges is that, no, shareholders did not do as well. The performance of companies worsened and the returns were worse than the previous period. What happened in this time period was that there was an article written in 1976 by Michael C. Jensen and William H. Meckling, discussing the merits of stock options. This philosophy of aligning executive interests with shareholders caught fire and within years, every Standard & Poor CEO wanted stock options as part of their compensation package.

Why? Don’t stock options make sense?

On the surface, stock options seemed like a great idea but as with many well meaning programs, they had unintended consequences. Jensen and Meckling said that it was good to get employees’ interests aligned with the shareholder interests and that seems to make good sense. However, the CEOs realized that one way to get share price up (improving stock options), was to boost shareholder expectations by raising the dreams of future performance. After all, what is a stock? It is a collective expectation of future performance. This hyping of the stock soon became the top way to raise the price, not through hard work and actual growth. Smart CEOs figured this out.They learned to game the game.

Roger Martin says that this thinking clouded CEOs’ behaviour. A CEO would do a flurry of activities. Do acquisitions that never pay off. Do aggressive accounting to change the value on the balance sheet. Expectations raced ahead of value. The CEOs knew they could not beat the expectations and needed to run up the stock, cash out and get out quickly. Consequently, Roger Martin believes that stock based compensation further diverges interests of shareholders and CEOs, and should be removed as a tool from a CEO compensation. Unless the stocks can only be recouped years after retirement, stocks should not be used as a reward.

Chrystia Freeland, US Managing Editor of Financial Times, thanked Roger Martin and commented that Facebook is a stock that is priced on future expectation. The Facebook CEO says not think of it as a business but as a service, but it has yet to make a profit. I think Rotman will pull ahead to be the leader in the MBA pack because we are fortunate to have erudite and involved Dean like Roger Martin who gets out into the real world and debates with the big hitters in industry. I like Roger's gutsy style and I recommend you buy his books to get more of his views. I changed my actions and so will you.

Death of Macho?

Not since the movie Wall Street, have financial bankers been tarred with such an ugly brush as during this recession. The shock waves have sent cracks into the foundation of the world of finance and there is definitely a great deal of self examination going on in Board rooms, and universities. Some are calling for the end of macho, saying it was this aggressive, male-dominated attitude of Wall Street that took us on this wild and devastating ride.

It is true that 80% of job losses in the US are male dominated roles in manufacturing and construction, leaving women to step into the bread winner role within their families. Reihan Salam believes the end of macho began years ago and that there has been a quiet revolution where power has shifted from men to women in the Western world. He says the Great Recession has sped up this transfer, “The consequence will be not only a mortal blow to the macho men’s club called finance capitalism that got the world into the current economic catastrophe; it will be a collective crisis for millions and millions of working men around the globe.”

Having seen financial instruments level their economy, Reihan Salam points out how the people of Iceland replaced their President with a woman who some say, brings a calmer and more level headed approach.

When it comes to Toronto's finance world, there has always been a wide spread between the type of males who dominate. Tim Hockey, President & CEO of TD Canada Trust, describes the range as Patriots and Mercenaries, with Patriots being the people at the branches working for their communities, while investment bankers need to seek out the revenue which requires a more "Mercenary" nature. Tarring them all with a macho brush is simply not valid.

Financial men are very diverse in character. Sure, you have the macho cowboys; but there are many intelligent, hand firmly on the rudder types too, who are strong, determined and have the energy to do the long hours. Ironically, their positions may be the first roles to get filled by women in the future because in my experience, these men help women get ahead. They want the skills for their teams and are not threatened by smart women. I have also observed that the finance community in Canada does work hard to get women up the career ladders.

I believe the trading floor where the adrenaline flows, will be the last position to be filled for women. It's not because men keep women out, it's because women self-select themselves out of direct sales and trading positions. Again, a trader needs to be more mercenary and aggressive; they are paid to take risks within the boundaries. The ability to take risk is what gives a competitive advantage.

I have two sons so I am very aware of the feminizing of boys in our culture. And I have to work hard to make my boys happy to be aggressive through sports, debating and martial arts, etc. Girls in Canada are now getting sports training too and are encouraged to debate and compete, so young females are changing. There will be female Madoffs in the future too. Women are not perfectly behaved, thoughtful, compassionate creatures who will not want to be greedy. We are just getting going because the birth control pill only started in our life times. Give it a few more decades.

So maybe Reihem Salam is right and that macho is at an end but I think that is a rather idealistic and sexist view and ask if women will prove to be any different in the long run?

blog at http://www.moneymagnetbook.blogspot.com

Jacoline Loewen, (jbloewen@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.

If a family business wants to remain competitive

Family business is profitable and brings many rewards, but it can also be very tricky when bumping into bottlenecks caused by gaps in staffing.

Family-owned companies present special challenges to those who run them. The reason? They can be quirky, developing unique cultures and procedures as they grow and mature. That's fine, as long as they continue to be managed by people who are steeped in the traditions, or at least able to adapt to them. But what happens when a firm grows to a point that it must hire outside professional help to remain competitive? That can be a difficult task for all involved.

Just ask Melanie Kau.
Stewart Thornhill at The National Post has a great case study. Read here for more details:

Contributing experts weighing up the case are Jacoline Loewen, author of Money Magnet and a partner with Loewen & Partners as well as Rick Howard of Zodiac Swimming Camp.

http://www.financialpost.com/scripts/story.html?id=2176257

We swaggered and rode high but not any more...

Private equity used to be the Gods of the world of finance but that has changed.

Now, the US Government knows better than a Board of Directors and the CEO how much to pay staff. These changes in public attitude and more about the business world are topics of discussion with Tony James, the head of Blackstone, private equity's leading investor over the past decade.

See Video below:

http://www.ft.com/cms/8a38c684-2a26-11dc-9208-000b5df10621.html?_i_referralObject=11076613&fromSearch=n

Jacoline Loewen

The next hit to the economy could be private equity debt

The next hit to the economy could come from the debt used by private equity to buy ownership in companies. With cheap debt readily available from the banks, many large private equity firms used leverage as their main tool in their box to grow companies. What this meant was that private equity would put in 20% and use up to 80% of bank debt to build a massive war chest to grow a company's market share by acquisitions, not organic growth.

Do remember that the smaller funds were more into rolling up their sleeves and doing the sweat equity of sales and marketing to find customers and make them very happy, earning revenue and loyalty. Here is the rest of the story about the leverage kings of private equity:

The debt piled on companies amid the decade's $1 trillion buyout boom is coming due. The only question is about the extent of the fallout. The day of reckoning could simply be disruptive for the parties involved, or it could bring down the whole economy in much the same way bad mortgages broke confidence in the credit markets, effectively grinding them to a halt. Witness Hilton Worldwide, a portfolio company of Blackstone Group LP. Like almost every private-equity buyout, Blackstone acquired Hilton by putting down about 20% of the deal price. The rest was financed by borrowing, except Blackstone didn't assume the debt, Hilton did. Now Blackstone is in talks with Hilton's creditors to cut $5 billion from the $20 billion debt load carried by hotel and resort chain. Blackstone may pay down some of the debt at a discount in return for taking a bigger equity stake. (See WSJ story on Hilton.)

Jacoline Loewen, author of Money Magnet and partner in a private equity firm based in Toronto.

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