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EquityFC Blog
Showing entries posted in October 2008
Showing items 1 to 5 of 5
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"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.