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Reading round-up | 26 November 2008

I've been storing up a whole bunch of interesting reading for FCs and FDs seeking positions in PE-backed companies or already working in them. Great news on finance exec pay, some interesting challenges (and opportunities) for the PE industry and some food for thought. Enjoy:

Watson Wyatt has some advice on successful PE firms during the credit crunch. "The new world will reward those long-term and selective managers with strong track records of creating value through accelerating the earnings growth of their portfolio companies.” Great news for finance execs, who are well-placed to help.

At last, a half-decent look at recession planning for mid market business from the mainstream media - including positive input from PE managers.

And a positive piece on how PE is keeping its powder dry, from the Economist - well worth a read (and read Barbarians at the Gate if you haven't yet. Really. It's important.)

Another "PE returns to managing for growth" piece, this time from the FT: "A lot of people in private equity, and the managers they’ve brought in, are all about delivering significant growth. Now they have to put in downturn plans and think about restructuring, and that’s not their core competency – this is where consultants can come into their own." Enter the finance function, natch.

All this demand for strong, creative finance execs is pushing up pay for those that can deliver, according to CFO.com. the downside? Turnover among senior finance execs is on the rise - it's the sack for those who can't deliver.

Two excellent posts from a blog you should really add to your RSS feed: PrivateEquityBlogger. First, on growth in PE-backed businesses: "A key advantage of private equity firms holding a company is that it can focus on long-term needs and changes, unlike many public companies." Second, a post about CFOs at PE-backed businesses: "As chief financial officers anticipate a greater role and higher compensation in private companies the transition from large public companies to smaller private equity firms may become more and more attractive, even with the inherent risks." (Actually, let's add a third: this examines issues in PE-backed turnarounds, which I suspect is getting more relevant by the day.)

Happy reading! (Oh, and feel free to email if you don't know what an RSS feed is: richardDOTyoungATgmail.com

How to | 17 November 2008

Check out this brief review of a short book by Orit Gadiesh and Hugh MacArthur called "Lessons from Private Equity". It sounds pretty high level, but if you're considering a move into a PE-backed business or you're getting to grips with PE backing, it could be just the train reading you've been looking for.

Blogger Theo O'Brien picks out these lessons form the book - as I say, basic, but useful:
1. Define the Full Potential: Use strategic due diligence to set a target "increased equity value".
2. Develop the Blueprint: Develop a plan for achieving that goal.
3. Accelerate Performance: Putting the plan into action by matching the blueprint to your company and overcoming obstacles to success.
4. Harness the Talent: Hiring the individuals that can make your company's blueprint a reality by either looking inside the company or seeking outside talent.
5. Make Equity Sweat: This is a fundamental aspect of private equity firms managing a company, relying on "managing working capital aggressively, disciplining capital expenditures, and working the balance sheet hard."
6. Foster a Results-Oriented Mind-Set: Take the private equity disciplines learned in the book and implement them permanently into your firm's culture and periodically reevaluate your company to ensure it is maintaining the formula for success.

LBO houses struggle, but PE keeps its powder dry | 13 November 2008

There's still a lot of money committed to PE funds*. They have a great opportunity to ride out the recession and pick up some sweet assets on the cheap. (Heck, just ask those guys from the Gulf about the great deal they've got with Barclays.)

But for the big LBO players, there has been pain and misery to endure - albeit fairly quietly. According to Dealbreaker, it's not just a scarcity of debt for new deals - old debt is causing headaches, too.

The blog cites a Deal Journal piece stating: "Debt funds managed by Apollo Management and Blackstone Group's GSO Capital Partners recently fended off margin calls from banks as the prices of debt that they invested in were hammered, according to people familiar with the matter." Yikes. So buying that debt - which might have looked a good way to circulate your money and boost fees 12 months ago - is now looking iffy. My heart bleeds.

Here at EquityFC, we love the PE crowd, of course, but the mid-market players are most secure in our affection. Minimal financial engineering, maximum management transformation - that's the secret of sustainable value creation. Which is more fun for FCs and FDs too, of course.

(*Well, why not? Interest rates are practically zero, public equities are tanking, corporate debt is pretty much all junk now and commodities are plunging. Hell, even if those guys never deploy it and still charge a management fee, at least you'll get some money back...)

Is this a big day for FDs and FCs? | 4 November 2008

Yes, the US general election has finally arrived after a $2bn campaign and plenty of hot air. But does it mean anything for this community - private equity and the FDs and FCs at the companies the industry backs? I'm going to say.... yes.

The reason is simple: sentiment. Right now, as the polls are opening (Dixville Notch in Coos County and Hart's Location in Carroll County cast their votes at 5am GMT), this feels a little like the election that brought Tony Blair to power in 1997. Tired of an ersatz conservative regime - Bush's budget deficits are about as far from fiscal responsibility as you can get without going bust - the people are turning to a younger man in the race, one promising change and a new beginning. Remember what it felt like when Blair won? There was a renewed sense of vigour in the UK, a feeling that we had a fresh start when anything was possible.

That feeling boosts activity, it makes people more confident, more positive, more energetic. And that can only be good for a world economy - after all, it's no exaggeration to say people in every country are interested (in the truest sense) in how today turns out.

The dissenting opinion? It could be more like 1992. After all, the economy is in a similar state now. We were militarily involved in the Middle East, house prices had plummeted, there was a recession... and the seemingly unstoppable juggernaut of the opposition to a long right wing government faltered at the last, making fools of the pollsters.

Ironically, of course, while the Major government destroyed itself over the next five years, the country didn't do too badly. Even "Black Wednesday" is now seen as a boon to the British economy.

But on balance, the US and the world needs its fresh start. Barack Obama might well end up disappointing us as Tony Blair did eventually. But if he can indeed instill a sense of hope in consumers, business people, the international community - even bankers and the enemies of the US (who might, just might, be a bit less barbaric when faced with a conciliator - and I'm talking about both groups there) - then we can set about our business with a bit more vigour.

"Look them in the eye..." | 23 October 2008

Thanks to the miracle of National Express (fast train, running on time, with usable internet free of charge, decent food and *gasp* real glasses and cutlery), I'm able to let you know about a great chat I've literally just had with Michael Denny, recently retired chairman of NVM, the smaller-mid-market PE firm that's been quietly getting on with creating value for 20 years.

It would be unfair of me to go into too much detail about his views - I'm writing them up for NVM's own newsletter - but he said something about backing businesses that I just had to pass on immediately. For Denny, the problem with PE has been one of a surfeit of people with "keyboard skills". Looking at the balance sheet and and the p&l will take you so far, he argues. But the chief skill of the venture capitalist is looking an MD or FD in the eye and deciding that you trust these guys to run a good business.

That's important for FDs and FCs in investee businesses. You can be as strong as you like on the numbers, but - in a world where pure theoretical analysis of the figures isn't providing anyone with any comfort right now - you need to be able to carry people along with your vision. Of course, that means you need a vision to begin with, and Denny also mentioned that that he really likes to see in an FD is someone who's excellent at monitoring their company's environment and coming up with options for the board - and the shareholders - to discuss.

So today's lesson is, be proactive, be positive and be persuasive - the three Ps to succeed with private equity.

(I've just been told the train is now 20 minutes late. Ah, well...)

So where are we, exactly? | 22 October 2008

Now that we've talked ourselves from a credit crunch into a full-blown recession (well, probably - the numbers aren't in yet, but Mervyn King et al have fallen in with the Pestonites, so that settles it), what are the prospects for private equity firms, their deals and their portfolio companies

Well, as we've been saying all along, the signals are mixed. First, some good news. According to Goldman Sachs (wait, do we trust them any more?) lack of deal opportunities means a renewed focus on managing investments. "Buyout firms were now likely to hold on to their corporate investments longer as a result, perhaps for five to seven years, rather than the previous horizon of two to five years," according to Reuters's interview with Martin Hintze, MD responsible for Goldman's buyout business in German-speaking Europe.

Now the bad. This interview with Ray Baltz, a partner at King & Spalding in Atlanta which helps PE firms on deals, is typical of a new mood since the end of the summer: the deal drought has moved beyond big LBOs into the mid-market. That doesn't dent the positive spin from point one, of course (and running a tight ship at portfolio businesses requires good financial management - i.e. you), but it's worth noting.

Of course, the Americans are prone to hyperbole, and here in the UK there are some more positive views. At the smaller end of the PE mid-market - and particularly in start-up - dips in the market and recessions can be good things. It clears out the competition and creates opportunities. This contribution to a round table in Leeds hosted by YFM Private Equity is typical: "Gary Lasham, managing director of DS Smith Multigraphics in Bradford, agreed: 'This is not the time to batten down the hatches, it's exactly the time to invest.'"

That's the spirit: asset bubbles are a pain for businesses. When they burst, you can either cry about how terrible it all looks - or look for real business opportunities in the fall-out.

A little context | 13 October 2008

While the broadcast media gets itself frothed up over a financial story appears not to understand very much (egged on by experts who do understand, but who have cunningly spotted that level-headedness isn't terribly telegenic, doesn't get them invited back onto the gogglebox and won't help them with attractive women), a bit of context.

So let's take Robert Peston's "wow" about the £50bn bailout for UK banks. A big sum of money, right? But not quite as big as the $222.6bn raised by "264 private equity funds during the first three quarters of 2008, 11% ahead of the $200.4 billion raised by 298 funds in the same time last year," according to Dow Jones Private Equity Analyst.

Point being, while the banking crisis is real - and is both caused by, and worsens, the down phase on the economic cycle in the real economy - in fact there is still plenty of money out there. People are still alive, and they work and eat and reproduce and want a flat screen telly (to watch Robert Peston on, no doubt) and a pint after work. PE is funds are doing well at the moment because investors don't have anywhere else to commit their cash; and because unlike quoted companies, they look over the immediate horizon and try to spot fresh opportunities (well, some of them do...) based on their understanding that life - and business- goes on.

M&A: reports of its death... | 3 October 2008

First the bad news. I'm starting to hear anecdotal evidence that deal pipelines are a little bit... blocked. A mid-market advisory boutique manager says things look a little thin (well, are we *that* surprised?) and some law firm contacts are saying that this is a good time to earn pro bono brownie points. And yet...

Cleaning out my inbox I read an interesting release from PKF about an M&A report it compiled at the start of September. (OK, so things have taken a turn for the worse since then, but it's not like we went from the sunny uplands to the pit of despair in four weeks.) Key sections? "[A]ctivity rallied in Q1 2008 with 363 transactions. The second quarter was slower with only 305 transactions, but over the whole of H1 2008 the 668 transactions accounted for around 26% of Europe’s overall deal value and volume showing the UK continues to lead its Western European counterparts." Heck, if you can't be great in absolute terms, I figure relative is a near thing.

There's more: "The mid-market followed a similar pattern with a stronger first quarter. There were 231 deals in Q1 and 184 deals in Q2. The revision to the Capital Gains Tax rules was one of the main reasons behind this as many SME business owners speeded up their sales processes to meet the April deadline. The influence of private equity funds was a big overall driver in the mid market. There were 164 buyouts in the first half of 2008 worth £14.3bn. This is down on last year’s figures, but private equity funds still remain active participants in M&A activity across most sectors in the UK."

Call me an unbridled optimist, but that doesn't sound like a total disaster. And it's worth bearing mind, while confidence is so critical to our immediate future, that life does go on. Congessional bailout today or not, as long as we live, we need business. We just have to be smart and brave about it.

Working capital: now sexy | 2 October 2008

Late last year I wrote an interview-based report into the role of the FD, and one of the conclusions was the despite spending the past 20 years getting all strategic and communicative, the last 20 months have seen financial execs return to some of the traditional roles with gusto. IFRS (and complex standards in general) have put accounting back on the map. Economic slowdown means cost control is up the agenda. And the credit crunch has put the emphasis back on cash.

OK, so cash never really goes away as an FC or FD's number one concern, but when finance is hard to come by and sales less predictable, working capital (WCap - "WC" just makes us sound trivial...) management gets pretty critical. I was chatting to a private equity manager last night, and he re-affirmed this view. He had a nice spin on it, though. In many businesses they evaluate for acquisition, the outgoing owners tweak WCap to give themselves a nice little dividend. Stretch supplier terms and collect all your outstanding creditors, plus empty the bank account and hold off on that tax bill, and you can give yourself a nice pre-sale pay-day, leaving the buyer to stump up a bunch of extra cash as soon as they take over.

Actually, this is cool stuff. As FCs and FDs going into a PE situation, being a WCap maestro earns you big brownie points right away. And since the PE guys tend to be fairly adept at this stuff (after all, WCap freed up equals debt paid down, and that's a nice bump to equity value), you can probably learn a lot, too, when you get involved. Today's lesson, then? Downturns and shifty vendors can make heroes of the finance function.

How are your integration skills? | 22 September 2008

Loving this quote from Owen Trotter, founding partner of private equity firm Key Capital Partners: "I’m looking at a bolt-on acquisition for one of our portfolio companies at the moment. If you can’t sell companies you bought because of market conditions, you need to do something to enhance their value. Either you make them bigger or you add one or two smaller companies to extend the range of the company. It’s a way of creating value if you can’t rely on prices."

Why do I love it? Two reasons. First, it's fundamentally upbeat. The titans of the investment banking world may have dined royally on toxic investments (at our expense, if the seemingly wrong-headed US Treasury bail-out plan gets copied over here), but elsewhere in the world people are getting on with business. Like most PE firms, I'm guessing Key Capital has uncommitted funds to play with, and it wants to create value for its investors. We should all remember Col Kilgore's final words in Apocalypse now: "Some day, this war's gonna end." And this credit crunch/financial meltdown/recession-ish period will end, too. At that point, the positive people are likely to surge stronger than those who just gave up and shut their eyes.

Second reason I like it is because it's a mid-market, regional PE partner saying that good management is the key to success. That's reassuring for all the FDs and FCs out there: just because the media thinks we're all doomed, that's no reason to stop doing the right things in "Mittelstand" finance functions up and down the country (whether you're PE backed or not).

It also means FDs and FCs with a bit of M&A nous in the mid market are also going to be a hot ticket, either as pemanent placements or as advisers. So keep looking up - and dust off your notes about successful post-deal integration...