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EquityFC Blog
Showing entries posted in August 2008
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Bad money drives out good | 20 August 2008
One of the good things about being a finance exec in a PE backed firm is that you're always important. When things are going well, the PE guys want top-notch bang for their buck - their winners need to win big, so they like a "maximiser" in the finance function. When things are going... not so well, the general partners need to know that they have a sharp, smart and disciplined teams in their portfolio businesses to limit the damage. So, as I've said many times, a rocky road for the PE industry is in some ways good news for no-nonsense FCs and FDs. The PE guys aren't afraid to turf poor performers out, which creates openings for tougher execs.
Which is just as well. According to this article from Pensions and Investments Online, the PE industry is in returns crisis. Money committed to funds in 2007 now looks unlikely to make any return at all. Worse, investors may lose a fair chunk of change (what with all the management fees...). Of course, pension funds were late to the PE party. But then, they were late to the equities party in the mid-1990s and late to the bonds party in the early 2000s.
Which got me thinking: perhaps pension funds are the proverbial "bad money" that drives out the good. The US stats on PE illustrate the point: "In comparison to the $301 billion raised between 2005 and 2007, only $192 million was raised from 2000 through 2004." No wonder returns are plunging! Even without the credit crunch, PE funds would have to have been risking more equity just to clear their committed funds.
Well, as my old mum always says, proverbs don't get to be proverbs without having a grain of truth.
PS - There's a reason Jon Moulton is in my top ten interviewees ever list - and his recent warning about PE debt purchases merely cements his position as top bloke in PE.
Positive signs (sort of) | 14 August 2008
Given this week's gloomy news on inflation figures (hooray for index-linked savings certificates!), jobs and growth, you'd think we were ready to head into a terrible slump. But not if you're reading the headlines around private equity.
This week's positive signals include:
* Jobs news! "Mid-market investment bank Investec
has made two hires to its London business in private equity and debt
advisory, citing a rise in demand from corporates and financial
sponsors for advice on their debt arrangements." (Actually, that's sort of bad news, really, isn't it?)
* The PE secondaries market is booming! Except: "Historically, the secondaries market has grown fastest during
downturns, when short-term private equity performance suffers and times
are tough for investors, forcing them to rethink their strategies." Oh.
* Energy-related buyouts set to surge!... which is just as well given the declines in activity elsewhere. Also, deals in the energy sector are booming because of high commodity prices... just as oil drops off its peak.
Er, so maybe not that different from other parts of the economy, then. But I've said it before, and I'll say it again: if PE isn't dealing, that means it's holding onto portfolio businesses longer - which means it needs more and better finance execs in place to make sure things are running tight and tidy. And when the downturn comes, you know that the FC is the go-to guy to make sure next month's wages get paid...
PE investment values holding firm | 8 August 2008
Great chat this morning on the Today programme with those two old media tarts Terry Smith and Jon Moulton. (I've interviewed both in my time, so I feel qualified to give them - intelligent, direct, articulate and insightful as they are - that slightly cheeky descriptor.) They were discussing RBS's woes with (as Moulton put it) "alphabetic assets", but had a warning: yes, we've probably seen the worst of the exotic and toxic write-downs, but the real economy has some blows to dish out yet. And retail customers are probably a lagging indicator of bad debt. Joe Bloggs is proud: he doesn't want to admit he can't meet his loan repayments until the very last minute. And he won't admit his house has plunged in value until he's forced to sell.
It's with that in mind that I read that "Listed private equity funds are continuing to retain strong
valuations of their assets, contrary to public market and analyst
expectations that they will have to write down their net asset values". One the one hand, this is great news. A year into the credit crunch and things aren't as bad as they might have seemed. On the other, a slowing real economy will catch up with portfolio business eventually - hence the market's discount of listed PE firms, which trade around 10% below NAV.And it's hardly surprising that a bunch of ill-understood derivative products tanked long before proper assets like portfolio companies.
Nevertheless, it's still good news. I remain convinced we can avoid an all-out recession. Most businesses - especially private equity backed ones - operate a pretty tight ship. They're responsive to market conditions and primed for fast reactions. That makes it a tougher job for the FC and FD - especially in areas like forecasting and budgeting - but if everyone keeps their heads, there's every possibility that in 2010 economic growth will be back on track. And with any luck, the capital markets will have learned their lessons about "alphabetic assets" and will focus on investing in real businesses again.
Last week, good news for PE. Now, the bad... | 4 August 2008
We've covered some good news for private equity (like, Q2 2008 delivering strong performance for PE deal in Europe) in recent weeks. But August has started with some contradictory messages for those of you interested in PE activity
First up, technology, and Scotland on Sunday says larger tech groups feeling the pinch is drawing financing away from start-ups. In fact, this isn't a disaster for more FCs and FDs. Start-ups often make do without senior financial management, and the most fertile ground is post-start-up, development capital businesses where you can get in with both a decent equity upside and a bit of clout. Nevertheless, fewer VC deals means fewer devcap deals down the line, so watch this space. More on US VC trends here.
Second bit of bad news: there's a buy-out slump in Manchester. According to the Centre for Management Buy-out Research, between April and July only £210 million worth of buy-outs and buy-ins
were completed in the North West region, less than half the £535 million achieved
in the first three months of the year. Deloitte, sponsor of the survey, says there's still a price expectation gap (which is kind of good news: sellers obviously aren't that desperate) and buyers are dragging deals out with enhanced due diligence. That's a trend to keep your eyes on, especially if you're between assignments and can network your way into a bit of market DD for a PE house. Don't expect a recovery before 2009, adds the firm.
Finally, just a few days after KKR backed itself into its own listed Dutch subsidiary - an action which, on its own, is a negative indicator for the PE sector - some downbeat thoughts on PE-backed business and IPOs. First, Q2 2008 was the first quarter since 1978 without a single venture-backed IPO in the US. Worse, buy-outs that have relisted are coming in for a kicking (Debenhams down 80% from its re-list price... ulp) and there's plenty of knockers for the ones that haven't managed to IPO again.
Conclusion from all this uncertainty? The crunch/downturn/slump/consumer panic/housing crisis has a way to go yet. But look at it this way: PE firms (and the economy more widely) need smart, creative, ambitious financial managers more than ever right now. When the going gets tough - the tough take a PE-backed FC role and balance the high risk with equity that ought to be fairly cheaply negotiated in these conditions...