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...