War and Private Equity

Last week, Private Equity Hub's Dan Primack interviewed Michael Bleyzer, CEO of Ukrainian-based private equity firm SigmaBleyzer, to discuss the impact of the conflict in Georgia.  Though Mr. Bleyzer admits that the Georgian market has not drawn much of his interest, he does point out that an aggressive Russia cultivates politically-driven volatility in the large country that remains unattractive to him.  Naturally, he advises to stay away from sectors vulnerable to political or oligarchical influence, (i.e. energy, defense, etc.).  British Petroleum can attest to this, of course.  However, he does mention that though the "Bear" may be winning the fight to expand its regional sphere of influence, this is raising moral considerations for investors when considering to put their money in the country.

These sentiments do contradict reports from big institutional investors, such as Credit Suisse, on Russia (a member of the famous BRIC nations) but it is difficult to argue with a professional that is "in-country", operating in the region, looking to make returns from the best risk/return opportunities.

Private Equity Update

Banks have been in fashion for some time now.  A rare thing.  Papers are filled with glamourous headlines announcing the latest billion dollar "Writedown" or "Loss".   A year ago it was billion dollar "Deals".  It would seem that the bank's cousin, private equity funds, is also suffering from the same bad press.  Many in the newspaper business are assuming that because of the lack of credit, private equity is at a stand-still, licking its wounds from failed projects. This is not true.  

Private Equity's strength is its versatility.  As the banks began shutting the door to LBOs in late 2007 and selling debt at a discount to shore-up some cash, private equity funds abruptly changed course and bought much of that debt, and continues to do so today.  

Currently, some of the most activity is focused on infrastructure.  Around the globe, 71 funds are raising US$90.8 billion to invest specifically in infrastructure, a particularly stable investment with steady cash flows.  Private equity professionals are looking to outmaneuver any market volatility by preparing to support the CAD$150-billion that must be invested over the next 20 years to meet Canada's growing demand for electricity.  

It would seem, then, that the industry of private equity is never so much under attack as it is remobilizing and assessing new fronts of opportunity.  The only thing that is permanent now for these bankers and fund managers is having to cope with being splashed all over the front pages.  If David Rubenstein is any indication, it seems they will be able to adjust to this as well.

Don’t only hire the top students

In a recent article, MacLean’s magazine threw a stone in the waters of education with a story about C students who grow up to become captains of industry (or Presidents of the USA.)
According to the senior president of a top Canadian bank, head-hunting only top students can be limiting. “During my Masters program, the academic superstars loved working on the sheer beauty of a math simulation, but people like that are a better fit in research and can add much more in that role.”
According to John Loewen of Loewen & Partners, "To move beyond the mechanical stage of corporate finance you need to be smart enough to create the product, but you must be able to communicate your ideas to your peers, team manager and larger groups. If you get into a boardroom and freeze in the headlights, then you will stay at the product level. I would much rather hire an interesting, energetic person than have the whole team be top graduates. I look at the drive of the person."
To rise to leadership roles, you need the energy to create a long-term relationship with clients; to get them to reach into their pocket and pay you cash for your technical skills and ideas. This client-cash transaction is the toughest part of business, one that most working Canadians do not do if they work in research, government, marketing or a team supporting the actual rain makers. A cold, naked, money focus is the life blood of a business, yet few can do it. It is done by those with resilience and that means high EQ (emotional intelligence) and as Jacoline Loewen, author of Money Magnet, points out - those with resilience get to raise capital to grow their companies.
The owner of a fund, Richard Wernham, filled his entry level jobs with only the top academic students from universities. After a few years, he noticed a disturbing trend: although these bright sparks could do the complex work assigned, they did not take risks, try fresh ideas or push for change. Without this creative tension the business was not evolving. When the fund owner sat down with his senior team and analyzed the reasons, he threw out their hiring criteria and began again. Sure, they wanted recruits who could handle the technical work but they also needed the self confidence to tackle incoming problems in new ways. The traditional “learner” may not have the inner rebel required to challenge the way things get done.
“The trouble with a top student is that they have bought into the system” says the management guru Tom Peters. “Crazy is the friend of innovation. Your people need to question the boss and speak up.”
Richard Wernham put his money behind his recruiting philosophy by starting a school with the vision of educating children to grow into well rounded, confident adults and leaders of tomorrow. Part of the curriculum is to spend time camping and canoeing in the Canadian North. There, it’s the great equalizer as children step away from the comfort zone of Lululemon identity brands to pitch tents, paddle canoes, swim in murky lakes, swat mosquitoes but most important of all, sharpen up those EQ skills with fellow campers. It is the quintessential Canadian cultural rite of passage – singing songs around camp fires with your mouth full of smores and burnt marshmallow.
Immigrant parents, new to Canada keen to see their children become leaders in Canadian business are strongly advised to pack off their children to summer camp - even the day camps - and watch the growth in their children. They will absorb Canadian values of taking personal risks but with awareness and co-operating within the group, not just working for their own achievement.
So parents concerned that little Jill or Sarah is not number one in the class, take a chill-pill and get her booked into a camp for next summer. Broaden her character and who knows where she will lead.

Are You Being Crowded Out?

Canadian business owners are realizing that the world is indeed flat and that no matter how much they try to ignore other competitors, it is getting tougher, meaner and just not as nice out there.

What to do?

"If you are a business owner," says Jacoline Loewen, author of Money Magnet, "There are so many more options for you. It's not all bad." One of these is to take on private equity partners who can see if your competitive pool is too crowded and it's time to find a new spot. These partners are not just lending you money, they are actually partners too and have an incentive for your to grow the business, not just pay back the loan.

Is Social Networking Over-Hyped?

It seems as though every second start-up business is about social networking.
Is it over-hyped?
Is it like a movie with famous faces but no plot?
Just remember, high tech has always been over-hyped, whether for cars, phones or electricity, the Internet, or the current new bubbles of alternative energy and climate change.
As discussed in the new book on private equity, Money Magnet, companies put their business plan together, obtain funding from venture capitalists, open an office, and hire engineers and PR types. They talk up their technology and hope that the Bay Street analysts will declare the new product a world-changer.
"The technology for social networking is just beginning," says John Loewen of Loewen & Partners. "It will be a world changer. No longer just for swapping music files or photos, business people are using social networking to market and communicate."
Just as Nicholas Negroponte predicted in his 1995 best seller, Being Digital, the three separate industries of computers, broadcasting and publishing have merged. Imagine a Venn diagram, which Negroponte describes as three teething rings – the interactive world, the entertainment world, and the information world. The convergence of these three giants – who had power comparable to Soviet-controlled industries – changed how decisions are made regarding who gets published and what gets broadcast. The impact on society has been extraordinary.
To access this ocean of information, we are all hooked into a giant grid by means of various devices – iPhone, Blackberry, laptop, car navigation system or TV. It gives us marketing, entertainment, business access, our child’s latest school marks and social connections to school pals from thirty years ago. Technology does determine the future of the human race but as we have learned over the course of history, the social bits around the technology are more critical.
“To control or not to control?” is the question asked by parents watching what appears to be the slothful, antisocial behaviour of their online children or by anxious employers eyeing their staff online during work hours. Yet this social networking allows staff to play, explore, take journeys far from the office and bring back useful nuggets for your next marketing piece or customer sales presentation. Merging your soft (people) with the hard (technology) is good business and if you are worried, remember, the more you use the reins, the less they’ll use their brains. China has developed MBA schools to teach these soft skills, encouraging employees to think for themselves. Xiang Bing, Dean of the Cheung Kong Graduate School of Business, talks about the hard-working ethics of the Chinese and their excellent technology but also points out the challenge of further developing their soft skills.
Less democratic governments are anxious about social networking. Many are trying to control this sharing of ideas and have convinced Google to co-operate in censoring online access to content. Thank heavens Canada seems to have more confidence in the ability of its people to maintain harmony despite the blogging of nutjobs or hate-mongers.
Are people sitting inside their four walls connected to this giant grid but not getting outside to meet real people? Yes, but they are also meeting others from far away neighborhoods that they will never visit and they can read blogs by people with radically different political views. All of this may raise their blood pressure but it surely develops mutual understanding. These online journeys and conversations are teaching people more about social interaction and how to argue a point. Up until now, fake personas and fake names have been used by many online people and anonymity - not owning your own words - is one of the biggest contributors to the rudeness on comment sections of blogs. It seems that people have forgotten their manners (I’m being kind here in assuming they had them in the first place); they quickly move off the debate topic and resort to name calling: “Gawd, Joey99, how do you put your pants on in the morning?”

I am still waiting for the business version of YouTube with real names only, so we can do without the juveniles and can we get some grown up brand names while we are at it? Saying Twitter, Dig this or Bebo makes me laugh!

Absolutely, social networking is a great journey, but do keep your real life. My sons have assigned me a “technology hour” when I’m at home so that I don’t bury myself in blogs. It seems they understand this technology thing better than I do