Most business owners and senior leaders build a relationship of trust with their service providers. The bulk of these relationships, generally, are the outsourced activities of accounting and legal work performed by accounting experts and lawyers.
When Private Equity partners are making an investment, it is my experience that they appreciate and respect those relationships.
One warning to family business owners, particularly those approaching the age of 50 who need to begin succession plans, your accountant and lawyer may not want to start any conversations that may change their circumstances. It pays for them to keep the Status Quo, the river flowing along the same route, so to speak, even if it is at a detrimental cost to the owner.
From years of observing the familiar level of complacency with lawyers and accounting firms, I often ask the same question, "Are you out for what's in it for you or for what's in it for the business owner?" As Adam Smith will attest, humans do go for the "What's in it for me?"
Getting an owner to change their goals for growth, for example, is just too risky. Getting a family business owner to contemplate a CEO other than themselves is just plain suicide.
As a business owner, understand this human fear of upsetting the person who is paying the bills and who could fire the lawyer or accountant from a nice, regular source of income.
Watch for complacency in your law and accounting service providers.
Often, the mere introduction of a competitive scenario from the introduction of Private Equity partners on the board, will yield better service at the same or even reduced cost. This is most often true with auditors, senior lenders and insurance and benefit providers.
Providing services should not be an evergreen annuity for the service provider. Yet it is too often the case.
January 16, 2012
January 14, 2012
Is Private Equity supported by pension funds?
Private equity is getting a schellacking thanks to Mitt Romney's time as the leader of Bain Capital.
As someone who has been in the PE industry and written a book about Canadian Private Equity specifically, the American Private Equity scene sounds like a Shark Tank, as compared to the Canadians who tend to be more like the dolphin species.I have met and worked with American funds and there is a wide range to their investment styles - some just want to give expensive money, some want to be on the board and push the strategy and a few will actually do some operational work.
It is ingenuous to say the least, to tar the whole group with one brush. Worse still, it is destructive to the whole economy to make a Salem witch trial for private equity managers like Mitt.
Private companies make up a large part of the economy in a majority of countries and the lion's share tend to be family owned. This type of ownership can too often result in stagnating companies or declining businesses on average. Private equity partnerships helps these companies to grow, morph and find new, invigorating life. Without private equity shaking up the neighbourhood, it is too easy for all the competitors to be complacent. In Canada, McGregor Socks found new life with its private equity partners. Yes, they moved the manufacturing to China which upset the union. The business was going under and the two brothers were not working well together. McGregor saved some of the Canadian jobs and expanded a whole new range of design jobs in Canada. As for the union, well I studied Industrial Relations while at university and worked in a mining union which showed me the selfish nature of unionism. So let's put it this way. Unions have chased jobs away far more than private equity - if you want to talk about who is shellacking the jobs.
One of the themes emerging is that PE is "supported" by pension fund money. It is true that the largest sources of capital looking for a good return in Canada is the Ontario Teachers' Pension Fund and the Hospital Workers Fund, both union funds.
As someone who has been in the PE industry and written a book about Canadian Private Equity specifically, the American Private Equity scene sounds like a Shark Tank, as compared to the Canadians who tend to be more like the dolphin species.I have met and worked with American funds and there is a wide range to their investment styles - some just want to give expensive money, some want to be on the board and push the strategy and a few will actually do some operational work.
It is ingenuous to say the least, to tar the whole group with one brush. Worse still, it is destructive to the whole economy to make a Salem witch trial for private equity managers like Mitt.
Private companies make up a large part of the economy in a majority of countries and the lion's share tend to be family owned. This type of ownership can too often result in stagnating companies or declining businesses on average. Private equity partnerships helps these companies to grow, morph and find new, invigorating life. Without private equity shaking up the neighbourhood, it is too easy for all the competitors to be complacent. In Canada, McGregor Socks found new life with its private equity partners. Yes, they moved the manufacturing to China which upset the union. The business was going under and the two brothers were not working well together. McGregor saved some of the Canadian jobs and expanded a whole new range of design jobs in Canada. As for the union, well I studied Industrial Relations while at university and worked in a mining union which showed me the selfish nature of unionism. So let's put it this way. Unions have chased jobs away far more than private equity - if you want to talk about who is shellacking the jobs.
One of the themes emerging is that PE is "supported" by pension fund money. It is true that the largest sources of capital looking for a good return in Canada is the Ontario Teachers' Pension Fund and the Hospital Workers Fund, both union funds.
"With $107.5 billion in net assets, the Ontario Teachers' Pension Plan is the largest single-profession fund in the world." OTPP has also been behind the largest PE deals in the world, including the BCE failed deal.
OTPP is busy investing in China now, taking Canadian earnings and allowing Chinese companies and their workers to get access to capital. Do the union membership know their money is going to Chinese businesses? They would also be interested to know how much gets invested in the USA and how little in Canada.Remember, those who can access capital get to grow their business. Investing Ontario teachers' money into Ontario businesses is actually the fairest investment. But when did "fair" be the pension's investment criteria? Would the teachers want their retirement money invested in OK companies or growth companies if it impacts on the amount they get for their retirement? You be the judge of that.
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.
January 13, 2012
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:
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.
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.
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