EquityFC Blog

Austria (again) | 30 May 2008

Although these are testing times for domestic Austrian private equity houses (see last post), if you fancy a stint as an FC in Vienna, you might want to tap up any contacts you have at Blackstone and its portfolio business Merlin. They're interesting in buying the giant Ferris wheel in the Wurstelprater, an amusement park in the centre of Vienna. Most famous, of course, for its appearance in Carol Reed's superb The Third Man - although any suggestion that Blackstone's Steven Schwartzman might look down from the apex of the wheel and describe "the little people" as expendable in pursuit of profit (like a latter-day Harry Lime) is obviously way off the mark.

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Taxing times | 28 May 2008

Although the debate around private equity's tax status and disclosures has calmed down a bit from last autumn, there are plenty of things happening elsewhere in the world that provide an interesting counterpoint to the UK's position.

For example, in Austria, where in December the government passed a new law related to funds investing in "Mittelstand" (SME) companies - effectively limiting tax breaks previously earned under the catchily-titled Mittelstandsfinanzierungsgesellschaft. And in the Netherlands, where tax on carried interest could rise from a theoretical minimum of 1.2% to 52% if plans currently under consideration are enacted for the start of 2009.

Of course, changes to CGT rates in the UK have already shaken up the industry to some degree and the carried interest debate is still bubbling. At it's heart is the question of risk. No one objects to anyone making pots of money by investing in businesses that would otherwise never exist or grow - precisely because many of those businesses never will, creating a more-or-less reasonable return over a portfolio. But this seems to me to be an area where financial minds - you - have an important voice.

We can only promote a good environment for business by encouraging a rational and informed debate about risk and return. So step one is to make yourselves heard - lobby your MP about this sort of thing - try using Write to Them, a site that makes contacting our legislators easier than ever. (I recently used it to complain about proposals for a new system to spy on UK citizens, and my MP replied within the day).

And if governments think the tax take from investors or management in PE situations is too low - well, that throws the ball back into the courts of the FCs and FDs of investee companies. Risk management, cashflow, profit and strategic planning will become that much more important to PE investors if they have to start looking for a way to drive value from their portfolios. So your value to them should increase.

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"We risk all - we win everything!"* | 21 May 2008

A survey from Grant Thornton and Directorbank on the vulnerability of FDs in private equity situations has picked up some good coverage (in detail, here and also here, for example). The relevant bit: " CEOs and finance directors have a one in four chance of being sacked after being invested in by private equity firms. This risk has not deterred both management and non-executive directors from becoming PE 'serialists', however. The survey of 283 executive and non-executive directors that have completed at least one private equity deal, found financial directors (FDs) have a 28 per cent chance of being replaced should they become involved in a private equity backed business, while CEOs have a 24 per cent chance of being replaced."

Back in the Real Finance days, we covered this on more than one occasion. There are two main problems. First, an MBO often comes with an FD who was little more than a divisional controller. A PE backer may need a more rounded group-type FD in place, so the incumbent gets the can. Second, the FD is stuck in the middle. The PE guys need a financial enforcer combined with a supergrass. The rest of the management team want an ally who can buy them time when the business goes off plan. Result? Both sides end up shooting you.

Actually, that can be good news for FCs and FDs. After all, positions in PE-backed businesses only open up when the incumbent gets the boot - and although it's clearly risky to hold a senior finance role given the circumstances I've outlined, if you pull it off the rewards (both monetary and in terms of job satisfaction) are great. Which is why, of course, the survey shows finance execs are well up for it - you guys actually understand risk, after all. There's no upside without a downside...

* The quote is from Time Bandits. Still a great film...

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Mixed messages | 21 May 2008

It's been a pretty dramatic nine months, what with the credit crunch, private equity disclosures and an economic slowdown. (There is a slowdown, right? Only, I can't tell at the moment.)

So where are we now? Well, the signs are mixed. Take, for example, the prospects for private equity. On the one hand, these intellectual titans have adapted to the new environment, according to The Economist. With the courts close to deciding the case, the banks that committed funding to the $18bn Clear Channel take-private have agreed to stump up the money - despite ongoing gloom about the credit crunch. So even mega-deals are getting done, and with PE managers sharpening up both their portfolio management skills and engaging in whole new types of financial engineering, things seem to be bubbling again.

Sounds promising, until you glance at 3i's disappointing results. CEO Phil Yea (a former FD, of course) talked up the situation, highlighting a reasonable slew of investments - the downside being that 2007 exits have suffered from a dearth of buyers. As a solid smaller-to-mid market investor, the results for the year to March tell us a lot more than Clear Channel about what's happening in the real economy. But frankly, I'm reasonably positive: 47 investments over the period, compared with 62 during the previous year? That's no collapse...

In short? We're still in a tense time, but the message to FDs and FCs considering a PE move is "don't panic". And I mean that in a cool, Hitchhikers Guide to the Galaxy way, not a hysterical Corporal Jones tone...

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