Snapshot of Canada's 2009 Budget

Finance Minister Jim Flaherty delivered Canada’s 2009 federal budget earlier today on January 27, 2009. Members of the KPMG National Tax Centre attended the budget lock-up in Ottawa and have prepared a new edition of TaxNewsFlash-Canada summarizing the announced tax changes.
Thanks to Scott Tomenson, Wealth Management Consultant, for providing us with this link. Read.
Visit Scott at http://familywealthmanager.blogspot.com/

Business owners need private equity

Entrepreneurs and business owners would like Frank McKenna - the fellow who was put forward to head the Liberal Party, but who sadly declined.
I was at my Secret Handshake Bay Street Club - The Ticker Club - where Frank McKenna was the guest speaker and he blew the roof off with his dynamism. Coming from New Brunswick, Frank is prgamatic and gets the role of the manufacturing and other technology businesses in building a strong Canada.
He said, "We need to expand our thinking around innovation from just pumping oil to other countries. We need to be the best at the supporting manufacturing, equipment, technology and service busineses around oil. The same goes for forestry."
"Sounds great but the reality is tough. Many of those types of companies suggested by McKenna are potential clients for Loewen & Partners' services - raising capital for owner managed companies," says Jacoline Loewen, author of Money Magnet. "The problem is that these companies do need to get to be over $100M to survive in the global market. It is very difficult for these companies to do this on their own. Yet, many of these owners do not understand or trust private equity, their ideal partner to grow their companies."
http://www.moneymagnetbook.ca

$1 Trillion and Counting...

Astoundingly, and possibly incomprehensible to most, London based Private Equity Intelligence reported this month that Private Equity Funds raised the second highest level of annual funding in 2008.  Approximately $1 Trillion of capital is currently ready to be deployed.  Only a quarter of this was raised by large buy-out funds, though this amounts to $284.2 billion last year, about the size of Ireland's GDP.   The rest was raised by funds with other focuses, such as real estate funds ($153.5 billion) and funds focused on SMEs, 217 funds raised money in this category, the most of any other.  

However, this news may seem counterintuitive to the news released today, that 50,000 jobs were lost in the U.S. in one day.  Coping with the shock is likely on the mind of all of 50,000 newly minted unemployed.  However, to fund managers with bulging war chests, the wait is on to discover the bottom.  With asset prices falling, demand slumping, and credit inaccessible for most, fund managers are in a very comfortable position to deploy the tremendous amount of cash at their disposal at the plethora of deals not finding an investor right now.  The difficult part is finding the bottom.

A report in the Globe and Mail today suggests that the worst of the economic turmoil may now have passed.  The argument made by Allan Robinson is that Treasury yields have stabilized and have actually shown preliminary signs of rising (judge for yourself the significance of the the rise, but the decline seems to have stabilized...for now).  This means that investors are looking to move their money from out of the wing of the Treasuries and into, likely, investment grade corporate bonds.  This is significant because it means investors are beginning to trust the relative stability we are seeing right now.   

Of course, the economy is not going to recover overnight, but it is likely that by June the consensus amongst economists will be that we have turned the corner, and look to activity in the private equity market to lead the way, and likely significant deal activity to begin in half that time. 

Jack Welch blames the i-bankers

The major banks have taken the biggest hit from last year's financial crisis and they continue to feel the effects of it. The sheer numbers in terms of wealth destruction due to the ongoing de-leveraging process in the financial sector will blow your mind. Check out the financial rapidly dissolving value from a different perspective; thanks to a friend from JPMorgan who sent the above chart.

I was listening to a Businessweek podcast from Jack Welch, former CEO of GE, who said the banks used to be privately held with the result that the top executives - in the form of a Partnership - were lending their own money. They got the upside but they also got the downside.

Jack Welch says that if there is someone to blame for the financial mess, he would lay it at the front door of the i-bankers taking their companies public. Suddenly, they had access to other people's money to lend.

"This is like going to Vegas to gamble," says Welch. "If you get upside, you keep the gains but if you lose, well you come back and apologize."

Jack goes on to describe i-bankers coming to him at GE to invest in risky oil deals.

"If that had been their own money," says Jack, "They would not have risked it. They were looking for my deep balance sheet to take the hit for the risk."
Private equity will be coming into its own for exactly the reason Jack says - these are mostly privately held funds. The best funds will be those that risk the fund partners' money, not just yours. Otherwise, you can put your money back into the public market, but maybe you should head for Las Vegas instead.

Lending to Friends

Banks are not lending and owners of companies suffer.

Why is this not happening? If you could lend a $1M to an entrepreneur and get back that sum plus a measly 2% interest for your trouble, would you lend that amount of money with even a small risk that you might not get it back?

No, of course not.

So, for the Bank of Canada to keep cutting rates, it does not help capitalism that does need a healthy return for lending risk.

"At the moment, banks can borrow money at 0.25%," says Clemens Kownatzki, "But yet, they lend it out at 5.5% for a 30 year mortgage (rough average this week), if they lend at all. To me this is almost criminal and really calls for a complete elimination of the "middle man" i.e. the bank in between ultimate lender and the consumer."

Clemens suggests, "If a bank made poor decisions and took on too much risk, it should deal with the consequences. Instead of bailing out banks, governments should consider lending to the consumers directly. Eliminate the mortgage broker or mortgage bank altogether and give out a mortgage at 4% directly from lender to consumer, but obviously with reasonable down payments say 20% or higher."

"As the credit situation unfolds," says Jacoline Loewen, author of Money Magnet, "It does seem that governments may be favouring sectors and specific companies who seem to have the highest influence over elected officials. Paulson is such a case. It is whispered that he hated the head of Lehmann and that it was a personal decision to let the firm collapse."