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EquityFC Blog
Showing entries posted in September 2007
Showing items 1 to 8 of 8
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Mid market holding up | 21 September 2007
Interesting little post from BuyOutwatch which highlights a couple of recent deals for smaller mid-market companies in the food sector in the US: "The multi-billion buyout business may be stalled, but private equity continues to snap up medium-sized food companies with little letup. On September 17, the private equity firm Palladium Partners - a fund specializing in businesses targeting US Hispanic consumers - acquired the Castro Cheese Company, a Texas-based maker of cheeses and creams. Palladium's other portfolio companies in the IUF sectors include the fast-food chain Taco Bueno and snack food manufacturers Sahale Snacks and Wise Foods.
The same day, in the UK, Hermes Private Equity bought into the Symington's Group in a deal reported to be worth some USD 80 million. Symington's - which has already undergone a round of leveraged buyouts and management buy-ins - makes a variety of products best known under the Ainsley Harriott and Crosse and Blackwell brands, mainly ready meals and soups."
Finding true value | 21 September 2007
The best private equity deals create internal value at investee companies - that's why it can be so stimulating for polymath FDs and FCs to get involved in them.
But for many private equity houses, the rationale is to deliver final value to the fund they manage. Where there is evident value in the changes the investment has wrought, exits ought to be straightforward. But on many mega-deals, it's hard to find buyers - even on the stockmarket - who can find enough cash to make the acquisition.
So today's stat of the day (yes, I make up these categories on the fly...) comes from the FT: "According to Dealogic, private equity firms have announced $675bn of acquisitions globally this year, but have pulled off less than $250bn in exits. The mega-funds that private equity groups have raised in recent years remain in investment, rather than exit, mode. To offset the ballooning funds’ purchases this year would require their exits from the past three years combined."
Even more reason to look at the engaging opportunities that the mid-market presents, where true growth is the spur. And as one CFO (of a multi-billion dollar PE-backed business, ironically) told me recently: "People talk a lot about the intentions of the PE backers, and particularly the exit. What we always say to people in the business is ‘don’t think about it’. Creating value is always the right thing to do, and the better we do, the more options everyone has for decisions later down the line."
Great column from the FT | 18 September 2007
On Sunday (?!) the FT published a column about the future for private equity - in part based on the Wharton report we mentioned here last week. Click here to see it. It's brilliant stuff.
It argues that the boom in PE has been driven by the power of debt in M&A markets. Last time (in the run up to 2000), the M&A boom was fueled by equity, keeping PE players quiet (too much risk). But debt gives them leverage and minimises their risk - hence the boom times.
Now that's all over - it seems, anyway - so the future for PE looks trickier. But the FT knows its stuff. It knows how much value PE can add - with the right management input - especially when it's smart enough to look for genuine transformation opportunities... that's growth, re-organisation or turnaround. And those play best in the mid-market. As the column concludes: "There was a time when private equity did a humble but useful scavenging job – picking up family firms and the unloved divisions of big companies, then brushing them up for sale. Once the fog lifts, that could well be its role again for quite a while." Good news for those of you working in, or seeking out, PE-backed businesses where a smart FD or FC can really make a difference.
Friday pick | 14 September 2007
A nice little pointer from the ever-readable bloggingbuyouts.com towards a Wharton study showing just how much PE money is made from fees compared to the carry: "The study shows that, on average, leveraged-buyout funds can expect to collect $10.35 in management fees for every $100 they manage. In comparison, slightly more than half as much -- $5.41 for every $100 -- comes from carried interest," says the Wall Street Journal. Worrying - if the Wharton numbers do actually stack up, that is. PE firms like to align management with shareholder interests, but appear to be less intense about their own income being tied to genuine business success...
UPDATE: For a more complete academic study on the economics of private equity, click this link
Which skills do you sell? | 14 September 2007
I was chatting with a CFO acquaintance a few years ago about the nature of the role. Jim Weight has cut his teeth at the super-creative Kingfisher central strategy function, and had been CFO at the Westminster Healthcare take-private. (He's currently CFO at HIT Entertainment.) Top guy, then, and a very smart thinker on all things private equity. (He taught me the importance of debt as a tax shield - an early lesson in financial engineering that has stayed with me ever since.)
Anyway, the conversation turned the different types of FD. In boom times, he argued, everyone wants an MBA finance chief, someone full of strategic M&A nous who'll get out there networking and deal-doing. In down times, they want dour CAs who know how to get a tight grip on fundamentals and drive cost control. It's pretty logical, but I think FCs and FDs who can read the runes and sell themselves according to those wider currents will get the plum jobs.
So what's in vogue now? Well, Northern Rock and the hype around the credit crunch notwithstanding, it's starting to look like you should be playing up your restructuring, cost control and distress finance chops. According to the Times, the lawyers are heading in that direction. Private equity firms and their investee companies will still need legal support whatever the economic climate. But many law firms are looking to swap M&A deal-makers for insolvency and restructuring practitioners.
So for those of you keen for an in with PE, don't be surprised if more of the potential engagements are based on your abilities to turnaround stuttering businesses, break up erstwhile buy-and-builds and find value from distressed investments. In many ways, the financial controller and FD become much more important in more troubled times - just ask Jon Moulton - so it's not all doom and gloom. It's just a question of being willing to turn your hand to some of the more traditional finance tasks.
Playing with the big boys | 11 September 2007
We bang on a lot about the difference between the mega-PE players and the more development-oriented mid-market buy-out firms. (And, OK, I tend to side with the mid-market crew...) But I was chatting to a CFO the other day whose business is backed by Blackstone, founded by the now-infamous (and VERY media shy) "Steve" Schwarzman - click here for the recent Economist article about how his fame has affected the PE industry. And I think he had a couple of interesting lessons for FDs about dealing with PE players of all stripes.
First, don't be fazed. Pre-deal, these guys climb all over your business and do pretty damn thorough due diligence. But rather than feel uneasy about the nooks and crannies they're poking into, solicit advice on problems and opportunities and how they might be addressed. "They're smart guys, they're useful to have on the other end of the phone," said this CFO.
Second, have a good grasp of the big picture. I asked the CFO what Schwarzman was like (given that he's such a legend - and so loathe to give interviews). "Really nice guy," says my chap. "He was very laid back, and while his lieutenants did ask some pretty probing questions during the presentation, he wanted to get a feel for how we viewed the business. He patted the paperwork from the DD and said he knew all about the numbers - but what was the vision, where was the business going?"
Your financial skills ought to be a given - that's your ante to the buy-out management team game. But the investors - whether PE or otherwise - will get the most value from your insight, your feel for the business, your ambitions. Good stuff!
PE PR | 11 September 2007
An interesting article from The Private Equity Council in the US (their equivalent of the BVCA). It's a bit of boosterism for the benefits to companies of PE ownership (and given who its from, perhaps a pinch of salt might be in order...). But the thing that caught my eye was this:
"The Burger King story exemplifies the benefits of this singular focus. At the time of private equity acquisition in December 2002, Burger King faced significant challenges. In the previous fiscal year, the company had lost $37 million and closed more restaurants than it had opened. On top of that, one in four franchises was nearly bankrupt. By the time that Florida-based Burger King went public in 2006, the company’s income had risen to a $27 million profit, average sales per store had grown by 33 percent and the number of franchisees in distress had dropped by 2,700 to less than 100."
I've been quick to point the finger at the PE firms in the BK deal, not least because they got a kicking in a now-famous BusinessWeek article. But while it's true that the investors were... "aggressive" in taking value out of the business - way too aggressive - if those stats are true, there is clearly another side to the story.
Mind you, there are so many more "value enhancing PE" stories in the mid-market they could be shouting about...
Niche funds: it's the market, stupid! | 11 September 2007
Following on from the post below about India's success in attracting deals, news reaches us that "investment banking group Climate Change Capital has closed its Private Equity fund at ?200m". The investors in the fund - including HSBC - see it as a means of gaining exposure to "high growth clean technology areas of power, transport, waste recovery and water. Funds are invested in expansion and later stage companies including buyouts," says Investment Week. In other words, it's the market opportunity that's important, not the financial firepower.
Excellent. This is exactly the kind of positive story that the PE world should be shouting about. Better yet, companies operating in new areas and with high growth potential need strong but imaginative financial management to ensure they grow in a controlled and (ahem) sustainable way. These businesses tend to have intellectual property and entrepreneurialism in their DNA, but they often lack the business nous and financial acumen to make it long term. Provide that - alongside the increasingly prevalent FD/FC attributes of good communication and strong commercial sensibilities - and you have a role that's both interesting, challenging and rewarding. More like this, please.