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EquityFC Blog
Showing entries posted in October 2007
Showing items 1 to 6 of 6
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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...
The only topic: value | 5 October 2007
No-one going into a private equity backed business should be under any illusion: it's all about value creation. For the PE fund, that's about exit multiples; for the debt providers, cash flow. For management, it has to be growth, profitability and... well, fun. All of those value drivers, of course, are inter-related.
But does it really work? There has been plenty of scepticism around the private equity model of late. Ernst & Young thinks it has the conclusive answer in a recent report on how PE creates enterprise value (click here to go to their site). Take this headline: "The annual rate of growth in enterprise value (EV) achieved last year [2006] by the largest Private Equity-backed businesses significantly outperformed equivalent public companies in the same country, industry sector and timeframe. Average annual EV growth rates were 33% in the US and 23% in Europe, compared to public company equivalents of 11% and 15% respectively."
Interesting stuff - and a challenging benchmark for an FD or FC going into a PE business, of course. I have one other thought about value, though. I was chatting to the CEO of a PE-backed food business yesterday, and he mentioned that they were just coming up to the fifth anniversary of the BIMBO. I speculated as to whether this might have prompted a few calls from the PE firm about how the exit plan might be put into play. But the guy was nonchalant: the company had increased turnover 25% in 2005/06 and was on course for another big year of expansion. Why would any investor - PE or otherwise - want to get out when the business was booming? Luckily, the mid-market backers are able to play a more flexible game. I wonder if the big LBO firms can be quite so accommodating?
Equity and exits | 1 October 2007
Chatting to a mid-market general partner last week, the conversation turned to the current market uneasiness around private equity transactions. Were they suffering? No, he replied, for two reasons. First, deal rationale is all about identifying great management who understand their market, then creating an environment in which they can grow their business. That means financial support (not just masses of debt) and people skills (either through networking or the introduction of an exec chairman with complementary skills).
Second, while the IPO and secondary buy-out pipeline was looking shaky for the LBO players, in the mid-market exits are more usually trade sales. And there are always compelling reasons - synergies, new markets, intellectual property - for a large groups to snap up exciting mid-market businesses.
Another reason for the poor sentiment in LBOs is that some high profile deals - such as Debenhams, which has lost half its value since floating despite the PE backers quadrupling their investment - have done poorly when they re-floated. That hurts the credibility of the whole industry, of course, and means it's doubly important to celebrate PE investments in people, growth and development. And as I've said before, those situations are just so much more stimulating for FCs and FDs than simply creating and managing leverage debt positions...