Private equity firms are glorified loan sharks

Private-equity firms are basically glorified loan sharks that take a hands-on management role in restructuring companies in return for a big cut. Sometimes it works. Sometimes it doesn’t. The biggest profits come from arriving on the scene when a target is weakest, and turning it around, but taxpayers can wind up paying for that in other ways, too.

Scathing condemnation, sweeping generalizations and hugely damaging misinformation for business owners. This article has it all. 
Read the full article here.

Advice to Mitt Romney on Private Equity

Private equity blackballing by the US media continues with Mitt Romney not exactly helping the cause. He recently commented that the 1% create wealth, yes, Mitt, with a little help from their friends - those politicians in Washington. It is the system that allows for this rigging of the system. Even a good, ethical Jimmie Stewart from It's a Wonderful Life would be altered to take advantage because of the system.
Crony capitalism is disgusting and it is destroying America.
The 99% have a right to speak up. They might not be articulate, but they are upset about something with the system. They have figured out that the system is rigged.
Quite right.
The middle class has plummeted. Life is not as good. When a New York mayor goes into office with $1B and then changes the law to stay past the usual 2 terms, and ends up with is it 50 times more cash, something is seriously wrong. When every New York cab driver asked me about how to move to Canada because they are sick of the corrupt mayor and the crony capitalism, when the Starbucks Manager near my hotel asks me how to become a Canadian, Washington, you have a problem.
Mitt, you need to see this pus-like boil of a problem because if you do not, you will not get to be President.
I am glad to be in Canada. My business club invited Stephen Harper to speak and he said he did not want to address Bay Street as it could be seen that he is being influenced by business. I was quite taken aback because we have Bob Rae and Michael Ignatieff grace our list of past speakers. Why not Harper? At the time that they spoke, Bob and Michael were running for office, not elected yet, so that makes sense. I have come to realize that Harper was right with his decision, and although Canada is slower than America, you get the sense that Canada is a fair place to do business.
So here is my advice to Mitt Romney:

Mitt, your Wall Street buddies might think you will roll things back to 2006 but don't do it. Clean up the US political Crony Capitalism system. 

Three misconceptions about USA economy that need to be put to rest

My investment group has a few sages and I was surprised by these three pieces of information given by one of the wisest members and wondered how accurate they were. 

For investment decisions, the biggest problem I see is a tsunami of misinformation. You can't have a rational debate when facts are so easily supplanted by overreaching statements, broad generalizations, and misconceptions. And if you can't have a rational debate, how does anything important get done? As author William Feather once advised, "Beware of the person who can't be bothered by details." There seems to be no shortage of those people lately. 
 Here are the three misconceptions that, according to my wise sage advisor says, need to be put to rest:
Misconception 1) Most of what Americans spend their money on is made in China.
Fact: Just 2.7% of personal consumption expenditures go to Chinese-made goods and services. 88.5% of U.S. consumer spending is on American-made goods and services.
I used that statistic in an article last week, and the response from readers was overwhelming: Hogwash. People just didn't believe it.
The figure comes from a Federal Reserve report. You can read it here (link lost - apologies!)
A common rebuttal I got was, "How can it only be 2.7% when almost everything in Wal-Mart  (NYSE:  WMT   )  is made in China?" Because Wal-Mart's $260 billion in U.S. revenue isn't exactly reflective of America's $14.5 trillion economy. Wal-Mart might sell a broad range of knickknacks, many of which are made in China, but the vast majority of what Americans spend their money on is not knickknacks.
The Bureau of Labor Statistics closely tracks how an average American spends their money in an annual report called the Consumer Expenditure Survey. In 2010, the average American spent 34% of their income on housing, 13% on food, 11% on insurance and pensions, 7% on health care, and 2% on education. Those categories alone make up nearly 70% of total spending, and are comprised almost entirely of American-made goods and services (only 7% of food is imported, according to the USDA).
Even when looking at physical goods alone, Chinese imports still account for just a small fraction of U.S. spending. Just 6.4% of nondurable goods -- things like food, clothing and toys -- purchased in the U.S. are made in China; 76.2% are made in America. For durable goods -- things like cars and furniture -- 12% are made in China; 66.6% are made in America.
Another way to grasp the value of Chinese-made goods is to look at imports. The U.S. is on track to  import $340 billion worth of goods from China this year, which is 2.3% of our $14.5 trillion economy. Is that a lot? Yes. Is it most of what we spend our money on? Not by a long shot.
Part of the misconception is likely driven by the notion that America's manufacturing base has been in steep decline. The truth, surprising to many, is that real manufacturing output today  is near an all-time high. What's dropped precipitously in recent decades is manufacturing employment. Technology and automation has allowed American manufacturers to build more stuff with far fewer workers than in the past. One good example: In 1950, a U.S. Steel  (NYSE:  X   )  plant in Gary, Ind., produced 6 million tons of steel with 30,000 workers. Today, it produces 7.5 million tons with 5,000 workers. Output has gone up; employment has dropped like a rock.
Misconception 2): America owes most of its debt to China.
Fact: China owns 7.8% of U.S. government debt outstanding.
As of August, China  owned $1.14 trillion of Treasuries. Government debt stood at $14.6 trillion that month. That's 7.8%.
Who owns the rest? The largest holder of U.S. debt is the federal government itself. Various government trust funds like the Social Security trust fund own about $4.4 trillion worth of Treasury securities. The Federal Reserve owns another $1.6 trillion. Both are unique owners: Interest paid on debt held by federal trust funds is used to cover a portion of federal spending, and the vast majority of interest earned by the Federal Reserve is  remitted back to the U.S. Treasury.
The rest of our debt is owned by state and local governments ($700 billion), private domestic investors ($3.1 trillion), and other non-Chinese foreign investors ($3.5 trillion).
Does China own a lot of our debt? Yes, but it's a qualified yes. Of all Treasury debt held by foreigners, China is indeed the largest owner ($1.14 trillion), followed by Japan ($937 billion) and the U.K. ($397 billion).
Right there, you can see that Japan and the U.K. combined own more U.S. debt than China. Now, how many times have you heard someone say that we borrow an inordinate amount of money from Japan and the U.K.? I never have. But how often do you hear some version of the "China is our banker" line? Too often, I'd say.
Misconception 3): America gets most of their oil from the Middle East.
Fact: Just 9.2% of oil consumed in the U.S. comes from the Middle East.
According the U.S. Energy Information Administration, the U.S. consumes 19.2 million barrels of petroleum products per day. Of that amount, a net 49%  is produced domestically. The rest is imported.
Where is it imported from? Only a small fraction comes from the Middle East, and that fraction has been declining in recent years. So far this year, imports from the Persian Gulf region -- which includes Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates --  have made up 9.2% of total petroleum supplied to the U.S. In 2001, that number was 14.1%.
The U.S. imports more than twice as much petroleum from Canada and Mexico than it does from the Middle East. Add in the share produced domestically, and the majority of petroleum consumed in the U.S. comes from North America.
This isn't to belittle our energy situation. The nation still relies on imports for about half of its oil. That's bad. But should the Middle East get the attention it does when we talk about oil reliance? In terms of security and geopolitical stability, perhaps. In terms of volume, probably not.

How to Pitch and Get Investment

Having a business innovation is easy: pitching to investors for funding is much harder.

Entrepreneurs, business owners, sales people and corporate innovators often do remarkable presentations to pitch their concept—only to be rejected by corporate decision makers or private equity managers who do not grasp the long term value. Why does this happen?

Having watched private equity managers who access business pitches, the person on the receiving end—the “catcher”—tends to gauge the pitcher’s competence at carrying through, as well as the deal. An impression of the pitcher’s ability to open up and discuss the business in detail will quickly overshadow the catcher’s assessment of the value of the deal. In other words, if the pitcher can work with others, the deal moves forward. If there is any hint of resistance to team input, the deal is dead.

Having interviewed many private equity managers, there are patterns for those judging business opportunities.

Catchers subconsciously categorize successful pitches as show runners (smooth and professional), experts (quirky and unpolished) and neophytes (inexperienced and naive).

Research also reveals that investors tend to respond well when they believe they are participating in developing the business going forward. As Jacoline Loewen, a private equity expert, recommends, “ CEOs pitching their business should pull back and encourage comments on the business. Then use these comments to build on the Private Equity manager’s comments to make them feel they are adding to the future plans.”

To be successful pitching, whether marketing ideas, sales innovations, a start-up or a mature business, portray yourself as one of the three creative types – show runner, expert or neophyte. Then engage the catcher in a discussion where their views are discussed and integrated into the plan going forward.

By giving catchers a chance to shine, you sell yourself as a likeable collaborator.

You can Google back programs of The Pitch on BNN and watch how the private equity investors either warm to the pitcher or shut them down. See if you can categorize the pitchers who do achieve the thumbs up from the private equity panel. You will see they fall into one of the three categories and that they embrace comments enthusiastically and open up to ideas.

Jacoline Loewen on the three steps to create value

As financial advisors, our focus is on companies in the lower middle market. This typically means companies with annual revenue between $15 million and $75 million. Since the smaller revenues, mean less room to do financial engineering, our strategy for value creation is different.

We, by contrast, base our value-creation strategy on three elements:

1.      leadership development,

2.      enterprise improvement and

3.      growth. 

From our experience, we know that if we accomplish the first two, growth usually results. Even if it doesn’t, such as during the recent recession, significant value can still be created.

Good leaders make good companies. It is not required that our leaders have a long track record of success. We can support them in accomplishing that. What is required is that the leaders possess the personality traits and capabilities that are required to realize the vision of the company. The leadership for the Post Office is different from Apple. For a less extreme example, if the success of a company hinges on continually developing creative, new products, then the leader of that company must possess a personality and leadership style that fosters ideation and creativity. By contrast, such a leader likely would not be effective if they needed to streamline manufacturing processes. Good “fit” of leadership is paramount.

Be sure you have the right team in place. Do a critical and honest analysis of your senior leadership relative to the company’s needs, and adjust accordingly.

If you are the owner and at the center of most activities, this may mean firing yourself.

YIKES!

Owners who realize they are the biggest block to growth and have the ego to hire a CEO will be far more likely to find greater wealth within the next five years.

One of the elements we look for in an investment is the ability to evolve the enterprise. If accomplished, this also will create value without the need for growth. However, when coupled with growth, the value creation is multiplied. Enterprise evolution, typically, is accomplished by harvesting one or more of the following:

Strategic planning. For us, the strategic plan is the cornerstone of enterprise improvement. It is not a just a budget. It sets the management team’s vision.

Sales and marketing. This is an area that often can be improved. In our experience, a majority of lower middle-market companies have not invested sufficiently in this area.

Systems. Often there is an opportunity to evolve an enterprise by improving or replacing systems, including accounting, ERP, oversight, reporting and accountability.

Asset utilization and balance sheet. In lower middle-market companies, there almost always is the ability to improve and create value through better asset utilization and balance sheet focus. This may include using a return on investment framework for capital budgeting, as well as basic items such as improving accounts receivable, accounts payable and inventory turns through focus and technology.

If you are able to accomplish some or all of the leadership development and enterprise improvement initiatives described in this article, you will create value irrespective of business cycles. Even better, you are likely to also create growth.

Jacoline Loewen is a Director of Loewen & Partners Inc., an Exempt Market Dealer, specializing in finance for owner operators and family businesses, specifically acquisitions, restructurings, sales, successions, strategy and private equity financing.

Jacoline began her career with Granduc Mines, Northern BC, and then Deloitte in their strategy unit. She developed a strategic planning model and published it in a book called "The Power of Strategy”. She also wrote "Business e-Volution" and “Money Magnet: How to Attract Investors to Your Business” (Wiley), which has been used by Ivey as a text book.

She is a Director on the Board of the Exempt Market Dealers Association (EMDA) responsible for brand and communications. She is on the advisory board of DCL International, Bilingo China and Flint Business Acceleration. She has been a Director for other Boards such as the Strategic Leadership Forum.

She is a regular panellist on BNN: The Pitch, a contributor to the Globe & Mail and National Post, serves as a judge for the UBC and the Richard Ivey School of Business’ Business Plan Competitions and is a guest lecturer at Ivey and Rotman Universities. Jacoline holds an arts degree in Industrial Relations from McGill University and a MBA from the University of the Witwatersrand.  Her MBA thesis was selected by Cambridge University and published by Cambridge’s Engineering faculty.