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EquityFC Blog
Showing entries posted in 2007
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Get PE interested... before it's too late | 4 December 2007
Just a quick pointer to a Euler Hermes survey looking at German insolvencies. They see private equity investment as a great replacement for reluctant banks when it comes to rescuing ailing smaller and mid-market companies, but stress PE practitioners are most keen to engage before potential investees enter any formal administrations process - it helps them keep control. It's going to be worth watching closely as PE funds remain full of cash while asset prices could wobble in a coming slowdown (especially if the banks keeps their safes closed...). FDs with turnaround experience - it could be an opening into PE...
Weakness in the public markets? | 28 November 2007
The see-saw indices tell a story: however bullish the market says it's feeling in the face of credit crunches and a looming economic downturn, there's a stack of nervousness about and, in the US at least, it's making it harder to get public placements away.
Interestingly, with the potential for changes to the tax treatment for AIM (which is hardly the most robust market in any case - collectively, it's back where it was at the start of 2005), this is looking like a moment of opportunity for mid-market businesses to seek out PE investment... just as PE investors start to get even more interested in non-leverage, development capital deals. True, market weakness can limit exit options - but while that's a major factor at the high end, for fast growing and entrepreneurial companies, trade sales and secondary deals have always been a more realistic option in any case.
Conclusion: Why fret on a float? If you're a finance exec looking for some action, the PE players offer a much more predictable investment model. And for PE players - if companies are fighting shy of going to the markets in these troubled times, it's a great opportunity to ride to the rescue, pick up a good company or two and in the process generate some good PR for the industry...
Private equity gears up for 2008 | 27 November 2007
We've been looking at the key pressures on private equity firms and their portfolio companies in 2008, not least because it feels like the debate (admittedly generating more heat than light) has stepped up a gear. So here's a couple of links you might want to follow to keep your finger on the pulse.
The main one is a major feature in Fortune magazine which has chosen to focus on a topic we've covered here many time: management. "There are management strategies and techniques that enable PE-owned firms to produce stunning results that others can't match," says the report, focusing on the ability of privately owned businesses to get on with crucial, often difficult, decisions that are harder for quoted or family businesses to take.
It all starts with the time-frame PE firms work to: "Facing a goal like that changes a manager's mindset - usually in positive ways. No longer seeing a corporate future that stretches indefinitely into the distance, executives realize that they gain nothing by resisting change: With the exit looming, driving change is their only hope."
It's not all good news heading into the new year, of course. And the PE firms - and their investee management teams - need to stay on the ball as the economy dips and debt becomes a bit pricier than it has been. Financial management, needless to say, will be a core skill for those companies (of any size) backed by PE investors. And with some analysts openly doubting the overall returns of PE deals - once the fees and carry are factored in - expect backers to continue demanding tight cost control, rigorous reporting and on-the-money forecasting as never before.
PS: if you missed it yesterday, "listen again" to the 8.10am interview slot on the Today programme (link only good until Sunday Nov 2) to hear Alchemy's Jon Moulton talking sense about Northern Rock. We need more clear thinking, straight talking PE guys like him around...
Nerves into 2008? | 15 November 2007
Here at EquityFC we've been looking into our crystal balls to see whether there are any discernable patterns in private equity for 2008. More on that another time, but the fact that some firms are having trouble getting exits away as planned is an interesting indicator.
Gaucho Grill (which I love, by the way - it's a great chain for any serious meat-eater) was supposed to have been floated this week to raise funds, but the IPO has been pulled - its backers include Phoenix Equity Partners. As the Times reports, this echoes Lion Capital's decision to pull the listing of Wagamama last month.
OK, we shouldn't blow this out of proportion. But there's an interesting angle here for FDs and FCs. If the original investment plan gets scuppered by uneasy markets (and in Gaucho's case, toppy valuations - £10m per restaurant is a pretty hefty price-tag), then the finance function at a portfolio company has to be able to go into "options mode". Think Ed Harris in Apollo 13. Fleet-footed, creative FDs - and FCs with an iron grip on the numbers - are the order of the day when you don't know exactly what the ownership structure, sources of funding or strategy are going to be. In fact, these moments provide smart finance execs with a gilt-edged opportunity to feed into strategy - laying out scenarios that can adapt to a secondary (or tertiary, or quadruciary... OK, I made that last one up) buyout, a new slug of debt, delayed IPO or "hold fast" situation. Interesting times, indeed... and it pays to remember that (to use the American vernacular) the FD "owns" uncertainty in a business.
Ronnie Cohen speaks | 12 November 2007
Sir Ronald Cohen is not only the co-founder of Apax Partners, he's also a close confidante of Chancellor Prime Minister Gordon Brown. So when he writes an article about entrepreneurship it's worth taking a look.
Unsurprisingly, he thinks the growth of private equity has been a boost to entrepreneurs. But his musings do serve as a couple of useful reminders to finance execs at entrepreneurial businesses. First, that "'risk' masks the value of uncertainty, and uncertainty is the stuff of entrepreneurship, because you cannot make great gains out of situations that are certain." So finance execs need to get better at measuring the cost of not doing something risky. And second, he cites as crucial "the ability to create a team that can make decisions with surrounding uncertainty, and the ability to collect a group of individuals whose collective judgment ends up being proved correct in a marketplace that is often evolving very quickly." Which means having a finance function that's trusted throughout the organisation and gives the right answers and the most pointed analysis - quickly.
There's some other fine bons mots in the piece, so have a read. (For what it's worth, I disagree with Terry Smith who said he'd fire an entrepreneurial FD on the spot on the basis that you want the finance chief giving the CEO six reasons not to do almost anything they suggest... OK, so the finance function needs to be a sanity check (see Leeds United FC c. 2000). But good FDs can be both!)
Credit crunch? Good news, bad news... | 5 November 2007
We've been saying it since the beginning of August: the credit crunch might be bad news for the big leverage guys, but in the mid-market there never was "covenant lite" and it's still quite possible to get debt deals away for the right businesses. Well, now we've been joined by some pretty impressive commentators: Lehman Brothers Private Equity managing director Joseph Malick has apparently said "'The credit crunch has been impacting the large-cap buyout segment," leaving other areas relatively unscathed. (Check out this lawyer's view on how well PE will weather the storm...)
But is this good or bad news for management teams hoping to get a deal away in the mid-market? Well, good in that there are still lots of opportunities in the sector, and that development capital and debt finance are still available if the company is growing - which makes it more fun to be on the management team. But when Blackstone is starting to play in the upper reaches of the middle market - well, that's going to stiffen competition for assets. Higher asset prices means more sweat for management in order to get the business in shape for exit.
Still, if the big boys do come to play in he mid-market - well, that would be a terrific entry on your CV: "FC of a regional distributor backed by Blackstone/Permira/CVC/Apax...."
The NED challenge | 23 October 2007
One of the major plusses of being PE-backed, say most of the management teams I've interviewed, is that professional investors bolster the board. Often the PE manager will become a non-exec, but it's quite common for them to bring in or recommend an exec chairman to beef up the top team.
That's great news for FCs and FDs of smaller and mid-sized companies. You can tap into their experience - learning is always a good thing - and, equally important, they become a valued part of your professional network.
I mention this because the ACCA has sponsored a study into board effectiveness at SMEs and found disappointing results: "Entrepreneurs typically have little interest in having boards of directors in their companies, and believe Non-Executive Directors (NEDs) would simply put constraints on them running their businesses... few SMEs even had working boards, and the handful of NEDs were usually relatives. Business owners liked to take the key decisions themselves and feared losing control and being constrained by ‘outsiders’. Even those who acknowledged that additional directors could fill existing skill gaps did not believe they would be able to afford them."
It's one more reason why PE investment can effect a step change in a company's performance if management are buying out (or buying into) a firm previously dominated by a founder MD. And it shows where the real opportunities are for ambitious financial controllers wondering whether to join a family-owned firm (say) or one backed by a venture capitalist.
Being a PE-backed financial exec | 17 October 2007
My old magazine Real Finance got renamed Real FD after I left, and although it's no longer a physical entity (paper is soooo 2006), it is newly emerged as a web magazine. They've been posting up a few of my old bits and bobs, so I thought you might welcome a link to a piece I wrote a couple of years back on being an MBO FD. Reading back over it, it's not too shabby! It's based on a couple of guys who've "bought the t-shirt" in MBO postings, so there's lots of solid front-line war-stories.
I'll see what else is up on the Real FD site that might be relevant to FCs and FDs aspiring to or working in PE-back positions and update this list. Stay tuned!
CGT snowballs | 12 October 2007
We picked up on the problems for businesses around the removal of taper relief on capital gains tax when they were highlighted in Wednesday's papers. But if you were lucky enough still to be listening to Radio 4 at 08.10, you'll have heard Chief Secretary to the Treasury Andy Burnham try to defend the move in the face of the latest round of condemnations from not just the CBI, but even the GMB.
Click here to listen to the broadcast. Although I'm afraid Robert Peston isn't getting much better (I think he gets confused as to how much he should be dumbing down for Radio 4) and Humphreys is well past his sell-by date, hearing a politician squirm that much over a policy that does, on the face of it, look pretty obviously dumb is quite a lot of fun.
Mind you, be careful what you wish for: bringing back taper relief might remove a small penalty from PE partners, and help a few entrepreneurs. But if the alternative is to remove the corporate tax break on interest payments - well, that's going to hurt a lot of businesses, particularly capital intensive ones that have had a tough enough time surviving in the UK as it is.
Ironically, I think left-wing PE-baiter Michael Meacher MP said it best when I interviewed him recently: "Undoubtedly the market can be a corrective force. The credit crunch, for example, is a major issue and it is a self-correcting mechanism [for over-aggressive leverage]. By contrast, politicians are fairly plodding and slow..." Too right, Mike...
PBR: an opportunity for the mid market | 10 October 2007
There's plenty of comment around today on Alistair Darling's first Pre-Budget Report. To sum it all up, you'd say it's a little bit of smoke and mirrors, with few enough interesting changes to make it hardly worth taking the flak for stealing opposition policies.
On the private equity front, the changes to taper relief on GP's interests is the big news (shifting from the maximum of 10 per cent to a flat rate of 18 per cent), but reaction is mixed. On the one hand, this is easy going on the PE industry - after all, if things are bad enough to make that eight per cent material to partners, the industry is in worse shape than we thought; but on the other, it's a sign that the more marginal deals will become less attractive and scare-mongers are already talking about the industry moving overseas: "New Star economist Simon Ward says: 'The capital gains tax changes represent a welcome simplification although there is a risk that some private equity activity will now shift offshore.'" (Yeah, right, coz the CGT is just the excuse PE firms have be waiting for to justify a move to... France? Italy? Gibralter? Jersey? Tsch - follow the deals...).
However, it may also have been a spur to deal-doing, particularly in the smaller mid-market sector. The Guardian's Ruth Sunderland explains: "The private equity industry may shout in public, but behind closed doors will no doubt consider it got off relatively lightly. Not so small firms, who are the hidden victims of this PBR; employee share ownership schemes will also be affected. Many genuine, long-term family businesses will see their tax rate almost double, and we can expect a rush to sell before April in order to avoid the increase. These firms have already been hit by a 2p in the pound increase in the small companies rate of corporation tax, announced in the last budget, an increase in business rates and the abolition of retirement relief back in 1998 - to pave the way for the taper relief now being canned. But then small firms probably don't munch vol au vents with the chancellor and the PM quite as often as the likes of private equity baron Damon Buffini."
Interesting. If you're not currently engaged in a permanent role and know of family businesses that might be affected - and can see how your financial management skills can offset these effects as well as chart a plan for growth - there may be a window to put together a deal and get some backing...