Does Private Equity Have to Do Deals?

Private Equity funds are in the business of doing deals and buying into companies. What they want to see is usually the opportunity to do something with a flagging business, and to have their strategy for growth ready before signing the Term Sheet. In Carlyle's case, the market is thinking its vitamins deal is not that great, as the opportunities to grow it seem to have been taken.
The suspicion is that Carlyle needed to show its Limited Partners that their money was better off with them, rather than in gold.

Not so fast. In my opinion, the products are beautifully designed (check out the bottles), and with an aging population, there is always growth opportunity. I think it is a smart addition to their portfolio
Here's an interesting take by Christopher Swann, Breakingviews, National Post

Carlyle Group is hoping a big dose of vitamins will boost its portfolio. The private-equity firm's US$3.8-billion purchase of supplements-maker NBTY is its biggest deal in years. But it's not immediately clear what extra juice Carlyle can add to the business to generate outsized returns. Without that, NBTY could just be a deal for a deal's sake.

Carlyle has had to sate its appetite with small snacks in recent years. Its last deal on this scale was back in December 2007 with the US$6.3-billion purchase of HCR Manor-Care. Yet for all its waiting to jump back into big deals, Carlyle's latest target would appear to lack some of the wrinkles private equity firms usually find so attractive.

True, NBTY has recently fallen out of favor with investors -- losing a quarter of its value since mid-April. But Carlyle is offering a 57% premium, more than making up for the shortfall -- and even surpassing the company's all-time high set back in 2007. The enterprise value -- at just over eight times this year's EBITDA -- falls smack in line with the buyout median since the start of 2009.

 http://www.financialpost.com/Carlyle+takes+dose+vitamins/3284358/story.html#ixzz0u2Z9al8l

Do you know where you are in your industry cycle?

Visiting a large manufacturer located in Waterloo, the town looks shabby. My client has a large facility though, kept spotless and with a full car park early in the day. Looked good. I was impressed by his plans to sell his business in a few years.

"This is will be the culmination of my life's work," he told me.

Two years ago, he had gone out for private equity with a top bank taking them to 12 private equity firms in Canada and 12 in the USA. Since he was in cyclical business of machine parts, I said it probably was not a success as the valuations given by PE would not fit his estimates.
"You are correct," he said and went on to ask me about this business cycle issue.
It is very important to know your industry and the cycles it follows. Mining and oil has big cycles while the food industry may have lower ups and downs. (A flatter cycle means fewer overnight millionaires in that industry.)
During this owner's capital raise process, no one had mentioned to this owner that his business happened to follow very steep dips and slopes. Th is team of bankers took him to private equity when he was at the absolute peak of the cycle.
No wonder he coud not get the valuation he deserves.
Even more shocking, if he follows his current plan which is to sell in three years, he will be back smack dab at the peak again.
For this owner, it is time to strike now while the industry is in the trough. We are seeing him again this week. I hope we can help him retire really rich, rather than with regrets.

Bull is not Bullish - Gloom to Continue

July is shaping up to be a tough month for public markets. If you had sold in May and come back in September, 2010, you would be fine but my account statements are not looking happy. Meanwhile, I got to spend some time with David Rubenstein of Carlyle and private equity is able to be the nose of the dog when it comes to investing. His company has been busy this July as it bought NBTY for $3.8bn, property in London in the billions and also in China too. The Financial Times reports:

Taking NBTY private is reminiscent of the buy-out bubble that burst in 2007, when big listed companies were regularly taken over by private equity.However, buy-out activity remains at a fraction of pre-credit crisis levels, even after a rally in recent months. The NBTY deal is different from most recent buy-outs, many of which have involved private equity selling companies to each other.

Carlyle is now doing mega deals in China and it is those size of deals that were done originally by the early private equity firms in America with which gave them their lead. It put cash in the bank for later and gave enormous market profile. All of a sudden, the deals will now flood to Carlyle before any other PE player as they have put serious cash into China.
For those of you still all in the public market, here is a quick recap that arrived in my email today from KJ Harrison and a great market analyst with the right name - Ms. Sarah Bull:

The catalyst for the current correction continues to be the fear of a relapse of the 2008 global economic recession. This is really being fuelled by the:

• US debt and deflationary issues, 
• European problems and 
• Prospect of much slower growth in China. 

Here's the detailed analysis:

• China’s growth rate has slowed – not good given its “engine” status for global growth.

• European sovereign and bank capital issues continue to remain unresolved issues.Uncertainty as to the Euro sustainability is a large issue for global markets.

• U.S. employment growth appears to have peaked – in fact last month the U.S. lost 125,000 jobs, and the average work week fell. Average hourly earnings fell, and widely defined measures of unemployment actually rose. In short, the anemic recovery in employment seems stalled, suggesting the private sector is incapable of taking the “hand off” from government stimulus.

• The G‐20 in Toronto came out strongly in favour of fiscal restraint – unfortunately major economies are not strong enough to withstand near term restraints, and as such investors are now very worried about policy error. If we are at the end of Keynesian policy initiatives, what happens if we double dip?

We believe that this pessimism will continue and that we will have higher than normal volatility in the markets over the next few months. Given this view, our disciplined approach is more important than ever and we are allocating our client’s capital to securities with good balance sheets and a significant margin of safety.

 by

Sarah Bull

Partner

KJ Harrison Partners Inc.

Why is Productivity Private Equity's Obsession?

What if you heard there was a way for an investor to achieve improved results; secured jobs; created more jobs; made the Canadian office the Head Office which means more high level careers for our CFOs and CEOs. Sounds pretty good, doesn’t it? Yet, when I was visiting private equity in Boston, they were skeptical about Canadian companies ability to improve their productivity.

The Globe & Mail is running a fantastic series on productivity and Canadian attitudes. I appreciated that openness to the growing resource of private equity, not only the Bank money. Partnering with investment experts helps owners grow their businesses -- although this mantra of growth, I have discovered, is not what many owners want. Anyway, here is the article.

What could do all this you might ask? Well, the answer lies with something that most Canadians know little about—improving “productivity.” And while improving productivity can help us achieve such benefits, there are no guarantees that all these benefits will be realized. It will depend on the decisions that are made if we are successful in improving productivity. So, at the outset, let’s be clear that improved productivity brings opportunity for economic benefits—not a guarantee. 

But What is Productivity?

Productivity is essentially concerned with how we combine our various resources—labour, tools, equipment, etc.—to produce goods and services. That is, it relates to the decisions we make, and the actions we take, to try to make the best use we can of all the various resources we have available.

I heard Frank McKenna speak about making Canada a high tech expert in oil and mining products and services. This makes great sense if industries cluster and the state encourages this market - Paul Bremmer touches on this in his book, The End of the Free Market. Here is one of the comments to this article that adds to that theme.

Rather than playing to our strengths - i.e. the basic geographic and institutional make up of the country (firms, governments, land, capital, labour), most economic policy wonks and practically every government talks about the "knowledge economy", "innovation", and "productivity" in complete isolation from what it is that Canadians *actually do*. If we want those things (and in some ways we have innovative financial services for the mining industry, a technically advance energy sector, etc) then policy and thinking needs to explicitly connect them to the reality of the country. For example we are the world's *experts* in energy use and production. Per capita we use (and waste), distribute and produce the most, it's a cold country. Let's get "productive" in energy, it's a big input cost across the board. Focusing on the "strength of our banking system" and the sexy high-techiness of Blackberries and bio-tech without linking that to productivity improvements in forestry, water and energy use, mining, oil, etc. etc. proves that there is no real national effort to improve economic productivity. If it happens it's an accident of statistics and of policy.

6 Bear Traps sabotaging funding efforts for mature companies

Having seen many family companies who think they can get money because the investors will fall in love as hard as they have, I thought I would write a quick list of 6 Bear Traps of raising private equity. I asked a few fund managers for their opinions which are quoted in the book, Money Magnet. I also checked out some blogs where these sorts of lists are popular. Here are the top Bear traps sabotaging most funding efforts, in decreasing priority sequence:

1. Lack of a growth story. That story has to begin with the painful problem shared by a large collection of viable customers, with your competitive solution and why your company needs to grow. It has to be a big enough difference to get people to switch. Clay Christenson, Harvard Business School, wrote an entire book about how to get people to move from using the stairs to a new technology called the escalator. Many mature companies have not thought about how to grow their business, preferring to stay in the same, safe markets. Additionally, you need to be able to communicate the essence of that story and value to investors in a couple of sentences – your elevator pitch.
2. Lack of simple goals. Often, the number one question that owners fail to address is: “How much money do you need, and what valuation do you place on your company?” Then you have to have evidence to support your request. I’ve asked this question many times of presenters in angel meetings, and often get a blank look. What are the three things you would do with the money and in what time frame? Keep it to three. How much is your company worth and over five years forward, how much will it grow? Remember, the investor's other options are the stock market and putting the same amount of capital on gold - can you beat that growth?
3. Failure to prepare for due diligence. Any serious investor will perform a thorough archeological dig on your business and your background. Make sure there are no surprises, so you should explain any possible issues first, in the best possible light, before being asked. Get a professional financial advisor to ge you and your company ready and that should include 100% of due diligence already done and ready for the investors to merely review.
4. Lack of understanding of the fund. The book Money Magnet helps you get inside the head of the person with the capital. The key here is to create a win-win situation for your investors. Discussion of risks and rewards in an open fashion, without sleight-of-hand or shortcuts, will convince investors that they can count on you, and will avoid shareholder lawsuits later. 
5. Reliance on inappropriate business professionals. Using well-respected professionals to find you capital and introduce you to the right people as well as stick handle your way through to the check signing is smart. If you can attract well-known advisors, attorneys, and accountants, it will give potential investors comfort that you have been able to get an implied endorsement of your concept, as well as your integrity.
6. Being unprepared for the next steps. After a good elevator pitch or initial presentation, investors will ask for your formal business plan and financial projections. Don’t derail their enthusiasm or risk your professional image by not having these materials immediately available. The same thing goes for incorporating your company, having key hires lined up, and facilities arranged as required.