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EquityFC Blog
All that money must mean... bubble! | 25 March 2010
Earlier in the week, we highlighted the $500bn-odd burning a hole in private equity pockets. And based on antedotal evidence (the deal-doers we've been speaking to), that money seems to be chasing only the high quality deals. M&A is back in 2010 - but you've got to be peddling the good stuff.
Well, there's more evidence mounting up of a stampede for quality - and it's starting to look like a bit of a bubble. (Full story here, but requires WSJ.com subscription.) Dealogic says the value of buyout deals in Europe alone so far this year is EUR9bn, compared with just EUR3.7bn for the first three months of last year. Jennifer Dunstan, partner at 3i is quoted as saying: "Prices have stabilized and debt is trickling back, but there is a very limited supply of high-quality assets and some funds are looking to make deals very aggressively."
Bubbles are almost always bad news, of course, and it begs the question: should you get involved in a PE-backed business you think has been overpaid for? There's no easy answer. It depends on the company, the other members of the management team and the PE firm (as well as its general partners). You might argue that PE firms that have "aggressively" bid for assets are going to be a whole lot more... "attentive" and that might make the finance function's job a bit tougher.
But if the team, the time and your talents are right - well, so long as your eyes are open and the incentives good, being a FD or FC in a backed business can be as rewarding as ever.
$503bn seeks quality deals. No time-wasters. | 15 March 2010
According to BusinessWeek, there's $503bn (yep, billion) sitting around in the "committed" column for the big leveraged buy-out houses. And time is running out. Many of them need to spend a fair bit of it before investors a) freak out at the management fees the money is earning the PE houses; and b) no longer have to commit it. It's a bit like seeing the same desperate lonely hearts ad over and over: "Wall of money seeks decent business for medium-term relationship. Me, overweight and no sense of humour. You, decent balance sheet. No time-wasters."
Part of the problem is that the list of targets that PE firms - of all sizes - are chasing has split decisively into two leagues. In the Premier Division are attractive assets with high-quality earnings and predictable revenue streams. Buyers can see growth opportunities and sell the deal to finance providers. (Despite that wall of money, the LBO model doesn't stand up without a fair chunk of debt, of course.) Everything else is Blue Square South - and the banks are still running scared of anything where the risk can't be tied down six ways from Tuesday.
There are two pointers here for FDs and FCs in, or chasing, equity-backed opportunities. First, if there's even sniff of a deal, due diligence is now central to the process. Jonathan Heathcoate, partner at Palamon Capital Partners, told me last week (for a piece coming up in Real Deals next month), “I think [at the moment] you might describe it as ‘more than comprehensive’ and maybe even a little bit anal." There's plenty of cynicism to go round, and according to a couple of dealmakers I spoke to, and no-one believes a hockey-stick revenue or profits forecast right now. The numbers are all important.
Second, chase the money. OK, it's true that even the mid-market companies are going to struggle to get a slice of that $503bn; the sub-£100m deals that make up the really interesting, rounded finance jobs that crop up have no chance. But where the numbers stand up and the opportunities are clear, there is money available from all sorts of PE players. Go for it.
Beyond finance | 21 December 2009
Private equity firms need their portfolio finance teams to be sharp, accurate, open and disciplined. But finance execs (in any type of company) must never forget the source of the numbers they report. So this article in the New Republic about the dangers of a finance-skewed management style is well worth a read (potted version at the site that pointed me to it, Boing Boing).
In short, it says America has got rubbish at manufacturing because MBAs have come to dominate management teams - and finance (rather than production or logistics) has come to dominate MBA courses. As a cheerleader for finance functions, I don't see this a critcism of FDs or controllers. Instead, it's a rallying cry for rounded FDs and FCs, people who have a good grasp of operations and other disciplines. In my experience, they tend to be better at the finance bit and more suited to CEO and chairman roles (if that's what they want).
I'm not alone. An old friend Jim Weight used to be CFO at Westminster Healthcare and HIT Entertainment, so he has bags of PE portfolio experience. Now he’s working with EPIC Private Equity looking for turnaround situations, where a vice-like command of the finances is job one. But he argued that the recession has forced FDs to look more broadly.
“A real understanding of the commercial aspects of the business is important too,” he says, “because without that you can’t really achieve a key attribute we look for in an investee FD: an ability to forecast. If you go to the bank and say, ‘I’ve been doing lots of work and I think I’m going to have a cash problem in 18 months time’, usually the reply is that you can have as much money as you like. If you’re that on top of your business, then you’re exactly the kind of person they want as a client.”
Great point, Jim. Get your hands dirty out in the business and you'll be a better - and much more valuable - finance exec.
Social media for FDs | 2 December 2009
How's your LinkedIn profile? Got one? Updated it recently? I ask because I was emailing an old FD contact yesterday and he mentioned he was tarting up his profile on the popular business network. (It's like Facebook for suits.) He's CFO of one of the biggest companies in Austria - and has a track record as long as your arm as FD at mid-tier public companies and subsidiaries of major brands. So I wondered why he was bothering.
Here's how he replied: "I had lunch in London with an old friend who had checked me out on Linkedin and mentioned that my profile suggested I had only had two jobs. Given that I did not even know I had a profile, I was quite impressed. But he, being a headhunter, said this was terminal for my non-exec aspirations as Linkedin apparently is 'all the go' in the search community."
It's not uncommon for people to have a dormant profile. Perhaps this CFO accepted a LinkedIn invitation via email a couple of years ago, and never did much more than acknowledge he'd worked with the people connecting to him. But whatever the reason, a quick update of "positions held" and skills is on his to-do list now.
The point being: you can be checked out online, so you may as well make it easy for people to see a rounded version of you there. I'm not saying a PE firm or the guys at EquityFC and EquityFD will see it as a clincher (far from it!). But it can't hurt to present yourself in a forum that some people might be using to evaluate the basics about you.
In for the long haul | 1 December 2009
File it under "no surprises": Q3 2009 has been one of the worst quarters on record for buyouts. So says the Centre for Management Buy Out research (CMBOR) in its most recent survey. According to Nottingham University fellow Rod Ball (a researcher at CMBOR): "In terms of the number of deals, we’re going back to mid-1980 levels; in terms of deal value, we’re back in the mid-1990s." Deal volume has plummeted from almost 700 in 2008 to fewer than 300 in the first nine months of 2009.
Is there any good news in the numbers? Well, secondary buy-outs have plummeted as PE firms play cagey with each other in the absence of debt to justify deal mechanics. I think that's broadly good - SBOs do skew the market a bit and can often come across as being justified by financial clout rather than operational excellence.
More interestingly, two-thirds of buyouts so far this year have been under £10m. That is very good: it shows that smaller and potentially high growth companies are still in vogue - and they make the best businesses for broad-minded FCs and FDs, too.
The decline in deal activity is forcing many PE firms to think long-term - which is also good for smart financial managers. Lots of other people think so, too. When PE firms go long, they look for operational gearing, not financial. That means a more interesting and creative role for the finance function, a better shot at job security and - perhaps best of all - a chance to learn a huge amount from the operational experts that the PE firm will wheel in to help effect performance improvements.
Yes, your shares might gather a bit more dust on the shelf. But when they pay out, it'll be a much sweeter taste in your mouth - and you'll be more versatile as an FD to boot.
Is regulation for PE a bad thing? | 28 November 2009
The EU is on the brink of passing new disclosure regulations for private equity firms. Opponents claim this will cost funds £30,000 a year and that's got the BVCA's back up. They argue smaller PE firms will be worst hit and that could damage investment in smaller businesses.
I'm not so sure. Private equity should be working very hard right now to put itself well above any suspicion. After all, with hundreds of billions of dollars-worth of debt falling due in the next couple of years, there's going to be an awful lot of bad press as funds' equity is wiped out by bondholders.
This looming PR disaster (well, PR and, y'know, collapsing companies and mass unemployment) is well articulated by Josh Kosmanin this video, where he's plugging his new book. It's worth watching for a reminder about the danger of high leverage - although the fact you're reading this at EquityFD and EquityFC suggests you're looking for a challenge that's not merely about financial engineering.
Kosman signs off by asking why the debt interest tax shield is still in place. And his argument is pretty good. Tax relief on interest is there to promote investment in growth, not a gamble on enterprise valuation. And if ever politicians did get bold enough to repeal it (hint: they won't...), PE firms would have a lot more to complain about that a few extra disclosures.
The value of management | 26 November 2009
There's been a lot of talk recently about distressed private equity businesses getting sold off cheap. The culprit? Debt. Take Springer, for example, the scientific publisher. The Times reports that Cinven and Candover were trying to flog half of it for €400m - but failed, and with a £2bn debt roll-over around the corner are now asking for bids of half that amount. It's reverse leverage: tiny changes in perceived value kill the equity stake while the senior debt holders hover menacingly on the sidelines. (Menacingly and nervously, of course – a frightening combination.)
What's telling, however, is how management figure in all this. I was surprised, for example, that when one of my old employers breached its debt covenants, the bank left a chunk of management's equity in place. Incisive Media is now owned by RBS, more or less, with Apax having taken a bath - its stake fell from 49% to 2%. But management kept a big slug of equity on the grounds that no-one's going to see much of a return if they just toddle off in frustration.
That's worth bearing in mind if you're looking at a PE-backed position. Of course, PE investors have a (some say deserved) reputation for being tough on management - and for rewarding them well if they perform. But they also need management to be bright-eyed, bushy tailed and in a positive, well-incentivised frame of mind. So if you know you can add value to a business - don't be shy about getting the right rewards.
(Oh, and get your PE backer to borrow far too much money, too. They might have ideas about how to run your business - but the bank almost certainly has none, so when they're in the driving seat, they need you even more!)
More on PE's turnaround | 2 October 2009
Earlier this week, we highlighted anecdotal and incidental evidence that PE might be turning a corner in terms of exits. We end the week with hard data, although it suggests a proper upturn is still some way into 2010.
The US National Venture Capital Association's exits survey shows that Q3 2009 was... well, OK at best. Certainly the down trend is over, and there's plenty of optimistic talk. But the NVCA's chief Mark Heesen had this to say: "The fact that the many in the media are classifying three IPO's as resurgence is evidence of how low our expectations have become. [That includes this blog, of course. Although we didn't put a rogue apostrophe in "IPOs", so nyah.] ... While the psychology of the market is trending positive, our original forecast of a true recovery not beginning until 2010 still unfortunately holds true."
Meanwhile, Dow Jones had slightly higher numbers for Q3 exits (71 M&A exits for $2.25 billion), but was equally cautious. Green shoots, then, but no mighty oaks.
On one other measure, we can only hope PE has bottomed out: fundraising. According to data from Prequin, Q3 2009 was the lowest quarter for harvesting new funds since 2003, with only (only!) $38bn raised worldwide.
Actually, I think that's still a lot of dough, and the fact that deal activity has remained limited means many funds must still be sitting on some of that $400bn global cash overhang that was much talked-about in the summer. So I'd be cautiously optimitic about next year (except for the big LBO players, who remain terminally borked by the debt markets and the collapse of sentiment in their model).
Caveat: A big factor looks likely to be the stock market in the run up to year end. If the froth - and it is very bubbly - blows off, that might dampen the enthusiasm for IPOs. Equally, higher unemployment could stall an economic recovery, making even operational improvement plays tough for PE firms. In the UK, then, we'd better hope this silly politicians' game of "who can promise the deepest cuts in the public sector payroll" goes away...
PE out of the doldrums? | 29 September 2009
Finance execs looking for private equity-backed posts, take heart. There are lots of signs that the exits market is picking up. A decent bit of churn in PE portfolios open up options for fast-thinking FCs and FDs. So what are the portents that things have improved?
Well, I'll start with fantastic news from NVM Private Equity, which has just exited from medical diagnostics firm DxS for a record-breaking return of 13 times money (providing earn-outs all click, of course). Disclaimer: I do help NVM with writing tasks, but the numbers are impressive. And they show one thing very clearly: smaller and mid-market PE houses are fun to work with. DxS had its hiccups on the way - including a big change of strategy when the market it was targeting didn't play out. But NVM backed the business through thick and thin over eight years. They also tweaked the management team when the strategy demanded it - creating opportunities for new finance execs, of course...
But the exit joy is not confined to these shores. FT Alphaville reports that things are looking up in AsiaPac, with big IPOs and trade sales. As confidence creeps back into the markets - particularly important as the secondary buy-out market hasn't quite yet taken off - we can expect more of these deals. Just look (ahem...) at the New Look IPO, slated to value the PE-backed business at £1.7bn.
It's not all buoyant. Richard Fletcher in the Telegraph reports a doomish conversation with a PE GP, alleging that the party's over for the PE model. Well, he's wrong. Massive leverage and debt-enhanced equity multiples might well be a thing of the past - as Fletcher points out, public money investors will be wary of debt-laden companies like Jessop's coming onto the markets.
But PE is so much more than that – as hands-on, operationally driven firms like NVM make clear. Slaving away over the working capital and thrashing the cost base aren't any financial controller's idea of a good time. But spotting, evaluating and executing on market opportunities with a motivated operational colleagues and an interested, experienced and enthusiastic backer? That's more like it.
Jon Moulton's shock resignation | 4 September 2009
A great scoop from Amy and the guys at private equity magazine Real Deals: they've got hold of Jon Moulton's resignation letter, and seemingly before big guns like the Telegraph. Moulton founded Alchemy Partners as a upper-mid-market turnaround shop in the late nineties, and since then he's carved out a name for himself as the nation's PE figurehead.
Perhaps most famous for the deal he didn't do - he was denied the chance to buy Rover, which went instead to a group who had no idea about turning it round but managed to pay themselves handsomely while it went bust again - Moulton was nevertheless a highly effective, straight-talking accountant of the old school. I interviewed him about six years ago and thought he was articulate, direct, fair and trustworthy - not bad for the PE industry!
That makes his departure all the more shocking - although the openness and directness of the resignation letter are not so surprising. He reveals that he's fallen out with fellow board members - whose own limited deal-doing record he exposes - over a shift in strategy from turnarounds to deals in the financial services sector.
Moulton is a loss to the industry. Although many a management team feared his no-nonsense approach (he told me that he fired around 60% of the FDs of portfolio companies they invested in!), the turnaround market is poorer for his departure. If I saw a chance to generate massive operational gains by rescuing a battered business, I know which backer I'd have wanted.
Happy retirement, Jon.