A case discussion link below would give you background perspective on this post { Private Equity Case: Dialogic Carve Out from Intel}:
http://randomjunkyramblings.blogspot.com/2009/02/private-equity-case-dialogic-carve-out.html
Synergies
I checked with a technology industry focused private equity investor on whether his investment committee considers synergies across its operational portfolio in its investment decision making. After all, technology is a pretty broad term- do they see an advantage in narrowing their focus?
His rejection of the idea was couched in an excellent example. The investment team would not buy competitors. This was a pretty straight forward discounting of the potential of merger efficiencies, and we can list numerous reasons for it- from strategic ones like the hypercompetitive nature of the technology industry, to investment ones like the heightened risk of a larger company’s underperformance weighing down upon the rest of the portfolio.
Microeconomics
However, this should remind you, as it reminded me, of microeconomics. Does rejecting competitors also mean you would reject complements? Strictly as an investment strategy, wouldn’t investing in complements also increase the correlation across investments?
Investment examples in the technology industry would be:
1. Investing in Facebook and Fun Wall, or investing in Twitter and Twitterdeck.
2. Investing in the Transmeta Crusoe process and a windows power management utility for that processor
Would this mean that the investing team needs to have processes in place to monitor revenue correlations across portfolio companies?
The Venture Capital Context
Lets look at this in the venture capital context, discussed in my post here: {Venture Capital: “If it ain’t broke…” Does the VC Model Need Fixing?}
http://randomjunkyramblings.blogspot.com/2009/02/panel-venture-capital-if-it-aint-broke.html
Investing in startups, especially the very early stage ones, needs to account for some strategy shift. However, sometimes even late stage startups may need to adjust their strategy to account for monetization opportunities in tough economic times.
How would the venture capital firm react if this strategy shift made this investment a complement of anther portfolio investment?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Showing posts with label private equity. Show all posts
Showing posts with label private equity. Show all posts
Sunday, May 31, 2009
Sunday, April 05, 2009
Is Private Equity The American Industry that protects American Enterprise?
Here’s a potential title for future historians to consider for the Private Equity industry in this decade:
Flush with liquidity, which you could call a “Greenspan Blessing”, the Private Equity industry, a truly American Industry, invested over a trillion dollars into American enterprises that were/ are strategic players in their industries, protecting them from a future downturn that would make many vulnerable to hostile takeovers from international buyers.
My thoughts went down this path thanks to a question posed by David Rubenstein from the Carlyle Group.
While lobbyists in D.C. would be salivating at this spin- the idea behind the headline is to answer David's question on the Private Equity industry's place in the economy.
I have an answer that's more an essay, however, I am sharing below some questions that I structured to effectively, and comprehensively answer David's question. Hope this helps you in understanding the Private Equity industry better.
Back to our headline- does it really make sense?
1> Would America’s rebound from the downturn have to lag that of other economies (discounting the opportunities for Brazilian, Chinese and Indian companies) for this to even be a potential story?
2> Can we prove the industry’s deal making and execution can have this unintended, headline making, consequence?
3> Could this unintended consequence have happened as an explicit strategy to protect, store and manage American value? Would this strategy have worked if it were run by the American government?
4> Given America’s history and promise as the land of reinvention and rejuvenation, does this unintended consequence or strategy make sense? Specifically, why save and protect when failure makes you better and stronger?
5> Or couldit truly be an example of reinvention and rejuvenation?
6> Can the Private Equity industry even be called a truly American industry? Could we truly say "Only in America!"?
How would this trend of over a trillion dollars in Private Equity investment have worked out during the 1981-82 recessions? Are the market structures today substantially different than they were in 1981 for the comparison to be odious?
While I have an opinion and can weave a story…
What do you think?
Flush with liquidity, which you could call a “Greenspan Blessing”, the Private Equity industry, a truly American Industry, invested over a trillion dollars into American enterprises that were/ are strategic players in their industries, protecting them from a future downturn that would make many vulnerable to hostile takeovers from international buyers.
My thoughts went down this path thanks to a question posed by David Rubenstein from the Carlyle Group.
While lobbyists in D.C. would be salivating at this spin- the idea behind the headline is to answer David's question on the Private Equity industry's place in the economy.
I have an answer that's more an essay, however, I am sharing below some questions that I structured to effectively, and comprehensively answer David's question. Hope this helps you in understanding the Private Equity industry better.
Back to our headline- does it really make sense?
1> Would America’s rebound from the downturn have to lag that of other economies (discounting the opportunities for Brazilian, Chinese and Indian companies) for this to even be a potential story?
2> Can we prove the industry’s deal making and execution can have this unintended, headline making, consequence?
3> Could this unintended consequence have happened as an explicit strategy to protect, store and manage American value? Would this strategy have worked if it were run by the American government?
4> Given America’s history and promise as the land of reinvention and rejuvenation, does this unintended consequence or strategy make sense? Specifically, why save and protect when failure makes you better and stronger?
5> Or couldit truly be an example of reinvention and rejuvenation?
6> Can the Private Equity industry even be called a truly American industry? Could we truly say "Only in America!"?
How would this trend of over a trillion dollars in Private Equity investment have worked out during the 1981-82 recessions? Are the market structures today substantially different than they were in 1981 for the comparison to be odious?
While I have an opinion and can weave a story…
What do you think?
Private Equity Firms and Large Company Acquisitions
Richard Friedman’s key factors for Private Equity funds targeting large companies- financing, downturn lag effects and compensation limits on management, listed here
http://randomjunkyramblings.blogspot.com/2009/03/6-private-equity-firms-and-large.html
- lead to a host of follow up questions.
Are the public capital markets more imperfect than perfect at corporate governance? In more cases than not, have capital markets been reduced to purely reflecting the underperformer reality of a large company as opposed to packing the bite that enforces change? Fragmented ownership is a factor. But is that it? There are numerous cases of an activist investors that have not met their primary objectives (I am not talking about activist investors whose primary objective is greenmail).
If we look at Friedman’s 3 points, and buy the fact that no team can consistently beat economic headwinds to provide massively outperforming returns, would you call private equity firms spectacular market timers? Gives you a simple screen- find a lag effect, and find a management team that’s already furiously at work to beat it, incentivize it to keep the boat steady, and voila! outperformer returns!
Consistent market timing? Really? A simple screen provides outperformer returns? Consistently?
Now, running a large enterprise that is suffering lag effects of a downturn takes some skill. At the simplest level, the private equity investor can certainly simulate an activist investor and provide senior management the backing it needs to rechannel energies from quarter to quarter window dressing into initiative that dovetail with the exit time frame. The private equity takeover can function as the step change that galvanizes the organization into focusing, even functioning as a hedgehog focused on a target.
Even these “operational improvements” count on:
existing management’s ability to direct, or shake up, existing relationships, or,
the investor’s ability to bring in people that can achieve the investor’s objectives.
Contingent upon incentives working, once the deal is struck, execution patterns and outcomes similar to Post Merger Integration efforts should dominate.
Stepping back, what are the patterns and markers that a private equity investor can use to manipulate the trade offs across financing, directed human capital (read operational improvements), and macroeconomic conditions to achieve outperformer returns?
The question’s underlying axiom is obvious; it is possible, with some consistency, to provider outperformer returns. You now also have a rudimentary structure (dare I say a quant model? :-)) to value the impact of these three components on final returns.
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
http://randomjunkyramblings.blogspot.com/2009/03/6-private-equity-firms-and-large.html
- lead to a host of follow up questions.
Are the public capital markets more imperfect than perfect at corporate governance? In more cases than not, have capital markets been reduced to purely reflecting the underperformer reality of a large company as opposed to packing the bite that enforces change? Fragmented ownership is a factor. But is that it? There are numerous cases of an activist investors that have not met their primary objectives (I am not talking about activist investors whose primary objective is greenmail).
If we look at Friedman’s 3 points, and buy the fact that no team can consistently beat economic headwinds to provide massively outperforming returns, would you call private equity firms spectacular market timers? Gives you a simple screen- find a lag effect, and find a management team that’s already furiously at work to beat it, incentivize it to keep the boat steady, and voila! outperformer returns!
Consistent market timing? Really? A simple screen provides outperformer returns? Consistently?
Now, running a large enterprise that is suffering lag effects of a downturn takes some skill. At the simplest level, the private equity investor can certainly simulate an activist investor and provide senior management the backing it needs to rechannel energies from quarter to quarter window dressing into initiative that dovetail with the exit time frame. The private equity takeover can function as the step change that galvanizes the organization into focusing, even functioning as a hedgehog focused on a target.
Even these “operational improvements” count on:
existing management’s ability to direct, or shake up, existing relationships, or,
the investor’s ability to bring in people that can achieve the investor’s objectives.
Contingent upon incentives working, once the deal is struck, execution patterns and outcomes similar to Post Merger Integration efforts should dominate.
Stepping back, what are the patterns and markers that a private equity investor can use to manipulate the trade offs across financing, directed human capital (read operational improvements), and macroeconomic conditions to achieve outperformer returns?
The question’s underlying axiom is obvious; it is possible, with some consistency, to provider outperformer returns. You now also have a rudimentary structure (dare I say a quant model? :-)) to value the impact of these three components on final returns.
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Saturday, April 04, 2009
On Private Equity: Scott Schoen, THL
Scott Schoen started off by describing a simple structure for the fundamentals of PE.
The THL Perspective of Doing the Deal
Sourcing (involves valuations and generating deal flow for inside due diligence)
-> Financing (due diligence is key)
-> Operations (improvements are key)
-> Strategic Exits (options include secondary PE markets)
Inside due diligence consists of identifying the
level of control required of the target,
leverage for the deal,
operational value add opportunities.
Financing constructs considered include PIPE structures where the private equity firm can acquire control with about 30-% to 35% of equity without paying for control. Financing sources can be broken down into existing investors, the government, and Mergers & Acquisitions. Each of these requires various strategies to be in play.
Manifestations of the Current Economic Context
Scott Schoen’s key points about the manifestations of the current economic context:
Sizing the problem: The economic contraction is a function of leverage. It impacts US Financial Sector assets totaling $60 trillion on the US balance sheet, and also impacts the leverage ratio (40:1) of financial institutions. As an example, he pointed out that the total CLO transactions in Q4 2008 were $0.
Return to basics: The contraction will lead to companies looking for cost savings; however, one company’s cost savings are another company’s lost revenue. In terms of the private equity industry, this translates to a return to the basics- better covenants and refinancing of senior loans.
Restructuring: There are two ways to deal with distress scenarios. Either negotiate amendments when faced with defaults, or go into a court process as lenders are fragmented, with banks as senior lenders.
Rates and The PE Deal: New rates at LIBOR +2.5% to 8.5% are causing value to seep through the PE deal.
The Equity Overhang: The private equity industry equity overhang of $400 billion will likely go into mid market private equity transactions
LP Asset Allocation: Limited Partners have capital allocation challenges to deal with- these can be deduced from the equity overhang. A $10 billion fund that is allocating 5% in private equity needs $1 billion in investments as money comes back at a certain pace.
It would be interesting to evaluate the strategies that GPs, LPs and lenders are considering to find returns across the process. Given the willingness to consider PIPE transactions, would PE firms begin behaving like hedge funds to manage the huge equity overhang?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
The THL Perspective of Doing the Deal
Sourcing (involves valuations and generating deal flow for inside due diligence)
-> Financing (due diligence is key)
-> Operations (improvements are key)
-> Strategic Exits (options include secondary PE markets)
Inside due diligence consists of identifying the
level of control required of the target,
leverage for the deal,
operational value add opportunities.
Financing constructs considered include PIPE structures where the private equity firm can acquire control with about 30-% to 35% of equity without paying for control. Financing sources can be broken down into existing investors, the government, and Mergers & Acquisitions. Each of these requires various strategies to be in play.
Manifestations of the Current Economic Context
Scott Schoen’s key points about the manifestations of the current economic context:
Sizing the problem: The economic contraction is a function of leverage. It impacts US Financial Sector assets totaling $60 trillion on the US balance sheet, and also impacts the leverage ratio (40:1) of financial institutions. As an example, he pointed out that the total CLO transactions in Q4 2008 were $0.
Return to basics: The contraction will lead to companies looking for cost savings; however, one company’s cost savings are another company’s lost revenue. In terms of the private equity industry, this translates to a return to the basics- better covenants and refinancing of senior loans.
Restructuring: There are two ways to deal with distress scenarios. Either negotiate amendments when faced with defaults, or go into a court process as lenders are fragmented, with banks as senior lenders.
Rates and The PE Deal: New rates at LIBOR +2.5% to 8.5% are causing value to seep through the PE deal.
The Equity Overhang: The private equity industry equity overhang of $400 billion will likely go into mid market private equity transactions
LP Asset Allocation: Limited Partners have capital allocation challenges to deal with- these can be deduced from the equity overhang. A $10 billion fund that is allocating 5% in private equity needs $1 billion in investments as money comes back at a certain pace.
It would be interesting to evaluate the strategies that GPs, LPs and lenders are considering to find returns across the process. Given the willingness to consider PIPE transactions, would PE firms begin behaving like hedge funds to manage the huge equity overhang?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Saturday, March 14, 2009
Richard Friedman’s perspective on the Private Equity industry
Richard Friedman’s address (Head of Merchant Banking at Goldman Sachs) turned out to be a whirlwind tour of what he’s seen of the private equity industry over the years, growing from a billion dollars in size in 1991 with 4 key firms to 545 billion dollars in size in 2008 with over 200 major funds. As usual, the barrage of information spawned many questions.
Some things he touched upon:
1> Anticyclical behavior of the industry
The 2001-2003 period had modest activity due to the economic conditions, however, the returns from the investments then varied from 25% to a 100%.
2> Trends in valuations
Alluding to the valuations being optimistic, almost driven by multiples of peak earnings instead of multiples of earnings.
3> Targeting large companies
Specifically points included financing, the 2001-2003 downturn’s lag effects, and compensation limits on management.
Evaluating (read critically questioning) these 3 trends is an interesting exercise, and got me thinking about corporate governance and leadership. More about it in my post on “Private Equity Firms and Large Company Acquisitions”.
The period from 1989 to 1999 saw investments totaling $250 billion, while the 18 month period from 2005 to July 2007 saw 1.2 Trillion dollars worth of investments.
Encouraging an idea out of left field, at the risk of sounding flippant, could you call this the biggest bailout (read takeover, or turnaround, or even protection) of American Enterprise in history? More about it in my blog on “Is Private Equity The American Industry that protects American Enterprise?”
Think About The Future
Equally interesting were thoughts about the future. Where do we go from here?
Bargain Hunting for Investments
Just like the 2001-2003 period, there are bargain purchase opportunities. However, any change of direction from the fund’s stated strategy would concern the LPs.
This leads to a set of follow up thoughts:
What more can GPs do to account for bankruptcy risk?
Does the answer lie in more robust valuation scenarios (akin to the bank stress tests) and due diligence?
Given the increased riskiness of investments, would PE funds start looking like VC funds?
How can GPs and CFOs of the funds work more closely with LPs?
What kind of downside protection can a GP provide an LP?
How do funds deal with liquidity challenges?
Does the senior loan market now resemble that in the 60s and the 70s?
If necessary, how would GPs buy senior debt in their portfolio companies and still ensure incentives are aligned correctly?
How would CFOs of funds categorize their LPs to get buy in on any style drift, assuming that’s a risk they are willing to take, and that there are funds available?
How would your approach be different when it comes to large institutional investors?
Managing Organizations
Given the economic environment, management teams may begin to think that they don’t have the incentives anymore for change. Persistent communication to align the investment perspective and the managers on the ground is a quick start- however; would it make sense to explore other initiatives like team building?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Some things he touched upon:
1> Anticyclical behavior of the industry
The 2001-2003 period had modest activity due to the economic conditions, however, the returns from the investments then varied from 25% to a 100%.
2> Trends in valuations
Alluding to the valuations being optimistic, almost driven by multiples of peak earnings instead of multiples of earnings.
3> Targeting large companies
Specifically points included financing, the 2001-2003 downturn’s lag effects, and compensation limits on management.
Evaluating (read critically questioning) these 3 trends is an interesting exercise, and got me thinking about corporate governance and leadership. More about it in my post on “Private Equity Firms and Large Company Acquisitions”.
The period from 1989 to 1999 saw investments totaling $250 billion, while the 18 month period from 2005 to July 2007 saw 1.2 Trillion dollars worth of investments.
Encouraging an idea out of left field, at the risk of sounding flippant, could you call this the biggest bailout (read takeover, or turnaround, or even protection) of American Enterprise in history? More about it in my blog on “Is Private Equity The American Industry that protects American Enterprise?”
Think About The Future
Equally interesting were thoughts about the future. Where do we go from here?
Bargain Hunting for Investments
Just like the 2001-2003 period, there are bargain purchase opportunities. However, any change of direction from the fund’s stated strategy would concern the LPs.
This leads to a set of follow up thoughts:
What more can GPs do to account for bankruptcy risk?
Does the answer lie in more robust valuation scenarios (akin to the bank stress tests) and due diligence?
Given the increased riskiness of investments, would PE funds start looking like VC funds?
How can GPs and CFOs of the funds work more closely with LPs?
What kind of downside protection can a GP provide an LP?
How do funds deal with liquidity challenges?
Does the senior loan market now resemble that in the 60s and the 70s?
If necessary, how would GPs buy senior debt in their portfolio companies and still ensure incentives are aligned correctly?
How would CFOs of funds categorize their LPs to get buy in on any style drift, assuming that’s a risk they are willing to take, and that there are funds available?
How would your approach be different when it comes to large institutional investors?
Managing Organizations
Given the economic environment, management teams may begin to think that they don’t have the incentives anymore for change. Persistent communication to align the investment perspective and the managers on the ground is a quick start- however; would it make sense to explore other initiatives like team building?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Panel: Fundraising and Capital Flows
A diverse panel, consisting of
1> the head of treasury managing a large pension fund,
2> a managing director for alternative investments at a large fund,
3> a managing director for fund raising at a fund with investments as diverse as late stage VC to middle market companies, and,
4> a managing partner at a fund investing in industrials,
can definitely get you to “stress test” your thought processes on investment decision making in a downturn.
Some quick thoughts and questions that came up thanks to the panel:
1> How do GPs prioritize their investments, across investment decisions and portfolio companies?
2> Switching perspectives, how would LPs recategorize their top decile funds in the changed economic environment?
3> Have GPs and their LPs considered restructuring funds (changing terms, size, etc.)? At what point does restructuring a fund become in everyone’s best interests?
4> How are funds, whether buyers or sellers, over forced sales and bargain prices of investments, resetting their expectations, as well as the expectations of their stakeholders?
Note: Bargain prices of investments for buyers mean that to drawdown the fund fully, you may have to make more deals.
5> How do you deal with strategy creep when a fund is investing in earlier vintages? A fund of funds perspective may help, however, how do you build the processes to manage conflicts with style drifts?
6> Are we seeing many buyers in the secondary market for new fund turnover? How does that impact the secondary market discount?
One panelist, from a treasury department, talked about challenges in allocations to meet $800 million worth unfunded commitments with $300 million in payments to retirees. He boldly ventured that Modern Portfolio Theory may be dead. Given the volatility seen in the market, and pension obligations to manage, he stated that long only strategies do not work and pointed out the need to deploy derivatives strategies in the context. My take on this was that this perspective only underscores the complexities of managing risk with derivative instruments.
Another panelist talked about investing in long lived, low technology assets and managing macroeconomic and counter party risks. The fund raiser panelist talked about a 15 billion dollar 2008 fund, that was initially expected to invest about 4-5 billion a year, which was considering cross fund investments (say a fund WP10 looking at existing funds WP9 and WP8), with advisory board approval.
A panelist from a Germany based fund ventured that some of the winners in the downturn were global macro, and long short hedge funds. His take was that specialized funds were doing well. However, he was concerned about the liquidity of the hedge funds as drawdowns were being discouraged.
The panelist was also actively looking at the secondary market, besides private markets for capital. His assessment was that new fund turnover was at 3-5%. Some of the factors in the decision making:
1> Bottom up analysis on investments
2> Asset covenants
3> Secondary market discounts
4> Structured finance solutions to relieve or defer capital call responsibility and future unfunded obligations.
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
1> the head of treasury managing a large pension fund,
2> a managing director for alternative investments at a large fund,
3> a managing director for fund raising at a fund with investments as diverse as late stage VC to middle market companies, and,
4> a managing partner at a fund investing in industrials,
can definitely get you to “stress test” your thought processes on investment decision making in a downturn.
Some quick thoughts and questions that came up thanks to the panel:
1> How do GPs prioritize their investments, across investment decisions and portfolio companies?
2> Switching perspectives, how would LPs recategorize their top decile funds in the changed economic environment?
3> Have GPs and their LPs considered restructuring funds (changing terms, size, etc.)? At what point does restructuring a fund become in everyone’s best interests?
4> How are funds, whether buyers or sellers, over forced sales and bargain prices of investments, resetting their expectations, as well as the expectations of their stakeholders?
Note: Bargain prices of investments for buyers mean that to drawdown the fund fully, you may have to make more deals.
5> How do you deal with strategy creep when a fund is investing in earlier vintages? A fund of funds perspective may help, however, how do you build the processes to manage conflicts with style drifts?
6> Are we seeing many buyers in the secondary market for new fund turnover? How does that impact the secondary market discount?
One panelist, from a treasury department, talked about challenges in allocations to meet $800 million worth unfunded commitments with $300 million in payments to retirees. He boldly ventured that Modern Portfolio Theory may be dead. Given the volatility seen in the market, and pension obligations to manage, he stated that long only strategies do not work and pointed out the need to deploy derivatives strategies in the context. My take on this was that this perspective only underscores the complexities of managing risk with derivative instruments.
Another panelist talked about investing in long lived, low technology assets and managing macroeconomic and counter party risks. The fund raiser panelist talked about a 15 billion dollar 2008 fund, that was initially expected to invest about 4-5 billion a year, which was considering cross fund investments (say a fund WP10 looking at existing funds WP9 and WP8), with advisory board approval.
A panelist from a Germany based fund ventured that some of the winners in the downturn were global macro, and long short hedge funds. His take was that specialized funds were doing well. However, he was concerned about the liquidity of the hedge funds as drawdowns were being discouraged.
The panelist was also actively looking at the secondary market, besides private markets for capital. His assessment was that new fund turnover was at 3-5%. Some of the factors in the decision making:
1> Bottom up analysis on investments
2> Asset covenants
3> Secondary market discounts
4> Structured finance solutions to relieve or defer capital call responsibility and future unfunded obligations.
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Sunday, February 01, 2009
On Investing in Financial Services: J. Christopher Flowers, J. C. Flowers & Co.
Some thoughts from a J. C. Flowers’ talk below, even though a little dated. He has been in the middle of events that have defined this decade, and could possibly impact this century.
Investment Strategy
J. C. Flowers has frequently executed a strategy of investing in financial services companies where the government is an important player. His theme was that government assisted deals seem to have no downside, even if there may be a capped upside, like the Shinsei Bank deal.
Investment Structure
He create a silo structure that can take 100% control of banks and that separates the acquired bank from the investing firm’s other investments. Flowers executed this by acquiring 9th smallest national bank. He has utilized this strategy to take 24% control in a German commercial real estate property lender.
Central Banks Around the World
His take on central banks- BOJ was moving slowly, Ireland may well go the way of the UK, and that the ECB has been hammered by national interest. These thoughts, seen in light of calls for a concerted global action by economists, as well as in light of efforts by Bank of Ireland to avoid directly bailing out the banks, caught your attention.
The Usual Suspects… Err… Questions.
Some questions arise:
1. How do both the investing strategy and structure account for the regulatory risk of investing in financial services companies? Could the market/ industry of the acquired player disappear? Say CDOs are regulated away? A more operational question is how do you deal with a government that is trying to force you out? That’s something that Flowers may be experiencing in Germany.
2. Given the governments may not want to continue their assistance of financial services for long, what kind of strategies would he need in place to exit with returns?
3. Regulatory capture is a separate line of thought- is that relevant here?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Investment Strategy
J. C. Flowers has frequently executed a strategy of investing in financial services companies where the government is an important player. His theme was that government assisted deals seem to have no downside, even if there may be a capped upside, like the Shinsei Bank deal.
Investment Structure
He create a silo structure that can take 100% control of banks and that separates the acquired bank from the investing firm’s other investments. Flowers executed this by acquiring 9th smallest national bank. He has utilized this strategy to take 24% control in a German commercial real estate property lender.
Central Banks Around the World
His take on central banks- BOJ was moving slowly, Ireland may well go the way of the UK, and that the ECB has been hammered by national interest. These thoughts, seen in light of calls for a concerted global action by economists, as well as in light of efforts by Bank of Ireland to avoid directly bailing out the banks, caught your attention.
The Usual Suspects… Err… Questions.
Some questions arise:
1. How do both the investing strategy and structure account for the regulatory risk of investing in financial services companies? Could the market/ industry of the acquired player disappear? Say CDOs are regulated away? A more operational question is how do you deal with a government that is trying to force you out? That’s something that Flowers may be experiencing in Germany.
2. Given the governments may not want to continue their assistance of financial services for long, what kind of strategies would he need in place to exit with returns?
3. Regulatory capture is a separate line of thought- is that relevant here?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
On Private Equity: G.M.C. Fisher, KKR & Company
G.M.C. Fisher talked about his experience within the Private Equity industry at KKR & Co. His opening theme was that Cash Is King- the cornerstone of the Private Equity industry. It also dovetails with my own experience of dealing with and highlighting strategic risks with a supplier with cash issues that filed for chapter 11 bankruptcy.
KKR & Co.’s Integrated Model
He then focused on the firm’s integrated model of value creation. As a senior advisor, he believes advisors had a great deal of flexibility at KKR. The portfolio committee focuses on operational improvements and the investment committee focused on deal making. There is also an independent audit committee in place. The Capstone team at KKR performs the strategy function.
The key component of the operations strategy is the 100 day plan. Quarterly reviews serve as reality checks against overcommittment by an eager management team. Business transformation is quicker and easier in this context. Similar to conglomerates, the role of a Chief Talent or HR office is critical in a private equity company.
Fisher talked about the PanAmSat deal where Carlyle and KKR formed a consortium. In a portfolio company, the focus is on the assets of the company, and planning debt maturities (requires modeling at the tranche level).
The Questions
This leads to some questions about the investing process:
1. What would be the criteria for dropping a deal after the screening process indicates that the target would make an effective standalone investment? What would make KKR walk away from an opportunity where the numbers from the screening and the models indicate a strong investment opportunity?
2. Do PE companies increase employment?
The talk made me wonder how my company’s supplier, who I believed needed to be dropped from the supplier list, would flow through this organization structure as an investment. Are there companies out there you believe will gain from a private equity acquisition?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
KKR & Co.’s Integrated Model
He then focused on the firm’s integrated model of value creation. As a senior advisor, he believes advisors had a great deal of flexibility at KKR. The portfolio committee focuses on operational improvements and the investment committee focused on deal making. There is also an independent audit committee in place. The Capstone team at KKR performs the strategy function.
The key component of the operations strategy is the 100 day plan. Quarterly reviews serve as reality checks against overcommittment by an eager management team. Business transformation is quicker and easier in this context. Similar to conglomerates, the role of a Chief Talent or HR office is critical in a private equity company.
Fisher talked about the PanAmSat deal where Carlyle and KKR formed a consortium. In a portfolio company, the focus is on the assets of the company, and planning debt maturities (requires modeling at the tranche level).
The Questions
This leads to some questions about the investing process:
1. What would be the criteria for dropping a deal after the screening process indicates that the target would make an effective standalone investment? What would make KKR walk away from an opportunity where the numbers from the screening and the models indicate a strong investment opportunity?
2. Do PE companies increase employment?
The talk made me wonder how my company’s supplier, who I believed needed to be dropped from the supplier list, would flow through this organization structure as an investment. Are there companies out there you believe will gain from a private equity acquisition?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Saturday, November 22, 2008
Interesting Times and Investing in Large Cap Companies- Part 1
Is equity investing in large cap companies during uncertain times similar to venture capital investing if the 3 conditions below are true?
1> Your offer of capital makes you a large shareholder in the company.
E.g. Warren Buffet's investment in Goldman Sachs, with the terms he could bargain for.
2> The capital markets enter a period of volatility that begins to approach uncertainty that venture capital investors face in their investment decisions.
E.g. The VIX crossing 85 in October'08, in the context of applying the Black Scholes model to investing decisions.
3> The capital markets face a liquidity crisis/ credit crunch.
Talking points:
1> Are these three conditions enough?
2> Does the "maturity" of the company mean anything beyond the ability to effect change within the organization, and the time required to effect this change?
3> Is looking at this question purely from the financial investing term sheet perspective inherently flawed?
Now that you have been anchored to the 3 follow up questions above, here are a couple more:
1. Is there a category of distressed company investing that is similar to venture capital investing?
2. Irrespective of how you categorize your investments or investing style, would you consider ending up looking at term sheets as an indicator of the end-of-the-road for that particular investment?
What do you think?
1> Your offer of capital makes you a large shareholder in the company.
E.g. Warren Buffet's investment in Goldman Sachs, with the terms he could bargain for.
2> The capital markets enter a period of volatility that begins to approach uncertainty that venture capital investors face in their investment decisions.
E.g. The VIX crossing 85 in October'08, in the context of applying the Black Scholes model to investing decisions.
3> The capital markets face a liquidity crisis/ credit crunch.
Talking points:
1> Are these three conditions enough?
2> Does the "maturity" of the company mean anything beyond the ability to effect change within the organization, and the time required to effect this change?
3> Is looking at this question purely from the financial investing term sheet perspective inherently flawed?
Now that you have been anchored to the 3 follow up questions above, here are a couple more:
1. Is there a category of distressed company investing that is similar to venture capital investing?
2. Irrespective of how you categorize your investments or investing style, would you consider ending up looking at term sheets as an indicator of the end-of-the-road for that particular investment?
What do you think?
Sunday, April 06, 2008
Conference Panel: Asset Allocation and Changing Times, the Limited Partner Perspective
I decided to check with a Limited Partner (LP) on the questions on deal size and frequency that I had thought about at this conference:
http://randomjunkyramblings.blogspot.com/2008/03/conference-panel-investing-in-india.html
Of course, the context was different, but my take was that the issues encountered were the same. The LP smiled and said they had a great CFO. Going back to the Gary Loveman post below, you can't argue with talent:
http://randomjunkyramblings.blogspot.com/2008/04/conference-panel-portfolio-value.html
A General Partner (GP) at another panel said that an LP had mentioned that a lesser return in the depressed economic environment would still validate their investment/ asset allocation. It would be interesting to get insights into the aggregated decisions made by GPs across PE firms and the outcomes down the line.
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
http://randomjunkyramblings.blogspot.com/2008/03/conference-panel-investing-in-india.html
Of course, the context was different, but my take was that the issues encountered were the same. The LP smiled and said they had a great CFO. Going back to the Gary Loveman post below, you can't argue with talent:
http://randomjunkyramblings.blogspot.com/2008/04/conference-panel-portfolio-value.html
A General Partner (GP) at another panel said that an LP had mentioned that a lesser return in the depressed economic environment would still validate their investment/ asset allocation. It would be interesting to get insights into the aggregated decisions made by GPs across PE firms and the outcomes down the line.
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Conference Panel: Portfolio Value Creation by Improving Business
Gary Loveman, Harrah's Entertainment, was asked about how he would act if slowing economic conditions impact business despite his assertion that economic conditions would not really impact his business.
He said he had the leeway to adjust his planned capital spending (approx. $4BN) to meet debt commitments.
It was interesting to note that he would rather kill/ delay Capex than sell assets to meet commitments.
I did a quick mental check of this insight against his assessment that growth in the industry came from M&A for assets, and that the WACC was currently pretty high within the firm. It fit.
Later, I asked a panel of General Partners (GPs) how frequently, in their substantial experience of dealmaking and investing, did the GPs have such contingency planning (operations risk management, really) conversations with the portfolio company senior management? Did such conversations impact the outcomes of their investments?
The response, as I am beginning to expect from superb panelists, provided insights into GP operations.
On a tangent, a panelist was of the opinion that folks like Gary Loveman operate at a different level. As the one who raised the question, I was inclined to agree. What an insight into talent- all from a simple question put to a CEO!
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
He said he had the leeway to adjust his planned capital spending (approx. $4BN) to meet debt commitments.
It was interesting to note that he would rather kill/ delay Capex than sell assets to meet commitments.
I did a quick mental check of this insight against his assessment that growth in the industry came from M&A for assets, and that the WACC was currently pretty high within the firm. It fit.
Later, I asked a panel of General Partners (GPs) how frequently, in their substantial experience of dealmaking and investing, did the GPs have such contingency planning (operations risk management, really) conversations with the portfolio company senior management? Did such conversations impact the outcomes of their investments?
The response, as I am beginning to expect from superb panelists, provided insights into GP operations.
On a tangent, a panelist was of the opinion that folks like Gary Loveman operate at a different level. As the one who raised the question, I was inclined to agree. What an insight into talent- all from a simple question put to a CEO!
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Monday, March 24, 2008
Conference Panel: Investing in India- The Maturation Process, whats next?
The amazing panel, drawing from PE, management consulting and IB firms emphasized that they are taking a long term view of the Indian market and are doing well thought out due diligence on deals to make the best decisions for the funds. Deals have been quite competitive and negotiated.
This approach raises a line of thought regarding the non-core (?) activities of a PE fund. Why am I calling them non-core? Well, most folks would say that the only core activity for GPs is to find good investments and fund them, the rest can go for a toss. Performance is the cornerstone of success. The "official" lore is that the high performing GPs do not really have to bother much about non-core activities.
This query on capital deployment and how much GPs think about it is still worth considering as it seems to be closely tied with fund raising. The response to the query by the GPs can be that they do not really care about capital deployment as they tap into their funds on an deal by deal basis. However, I am inclined to think the GPs have a sense of what the LPs are thinking of when LPs make investments in the PE funds. Sounds like business development, doesn't it?
Anyhow, non-core or otherwise, lets dig into some aspects of the PE business. How do the GPs:
1> Handle uneven deal flow?
2> Manage different relative risk levels across deals?
3> Manage different rates of returns on their deals?
4> Set LP expectations on deal flow and deal sizes, across business environments, while still keeping LPs on board?
What do you think?
From the LP point of view, How do LPs:
1> Manage cash (e.g. lack of predictability in drawdowns)?
2> Allocate capital, from the asset allocation policy and portfolio management point of view, between drawdowns, and for drawdowns?
What do you think?
This approach raises a line of thought regarding the non-core (?) activities of a PE fund. Why am I calling them non-core? Well, most folks would say that the only core activity for GPs is to find good investments and fund them, the rest can go for a toss. Performance is the cornerstone of success. The "official" lore is that the high performing GPs do not really have to bother much about non-core activities.
This query on capital deployment and how much GPs think about it is still worth considering as it seems to be closely tied with fund raising. The response to the query by the GPs can be that they do not really care about capital deployment as they tap into their funds on an deal by deal basis. However, I am inclined to think the GPs have a sense of what the LPs are thinking of when LPs make investments in the PE funds. Sounds like business development, doesn't it?
Anyhow, non-core or otherwise, lets dig into some aspects of the PE business. How do the GPs:
1> Handle uneven deal flow?
2> Manage different relative risk levels across deals?
3> Manage different rates of returns on their deals?
4> Set LP expectations on deal flow and deal sizes, across business environments, while still keeping LPs on board?
What do you think?
From the LP point of view, How do LPs:
1> Manage cash (e.g. lack of predictability in drawdowns)?
2> Allocate capital, from the asset allocation policy and portfolio management point of view, between drawdowns, and for drawdowns?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Conference Panel: Trends in Private Equity and Venture Capital Sectors in India
Given a trio of PE, VC and IB players in India, the panel met high expectations. Some facets talked about:
1. Debt market in India
2. Constraints in structuring transactions
3. Regulatory environment and red tape
4. Nature of targets (family driven enterprises), time horizons and deal flow networks
Given these factors, I wondered how the firms managed risks- not just financial risks. I queried the panel about their experience with a deal that did not meet experience.
What do you think?
The VC investor, who had significant experience in investing in India provided an interesting insight, that emphasized the efficiencies that the PE/ VC firms can find across funds and investments/ deals.
The response also threw light on the "transaction costs" that mutual fund like SPAC aggregators would face that would make them replicas of publicly traded PE firms.
The panel echoed some of the points made by Alan Patricof, Managing Director, Greycroft, at a conference keynote, with respect to his experience in Venture Capital in Africa.
The Usual Disclaimer: This is purely a knowledge sharing resource. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
1. Debt market in India
2. Constraints in structuring transactions
3. Regulatory environment and red tape
4. Nature of targets (family driven enterprises), time horizons and deal flow networks
Given these factors, I wondered how the firms managed risks- not just financial risks. I queried the panel about their experience with a deal that did not meet experience.
What do you think?
The VC investor, who had significant experience in investing in India provided an interesting insight, that emphasized the efficiencies that the PE/ VC firms can find across funds and investments/ deals.
The response also threw light on the "transaction costs" that mutual fund like SPAC aggregators would face that would make them replicas of publicly traded PE firms.
The panel echoed some of the points made by Alan Patricof, Managing Director, Greycroft, at a conference keynote, with respect to his experience in Venture Capital in Africa.
The Usual Disclaimer: This is purely a knowledge sharing resource. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Conference Panel: Fundraising Darwinism- Evolution of PE fundraising
Bruce Rosenblum, Managing Director, The Carlyle Group, tore into the re-emergence of SPACs (Special Purpose Acquisition Companies) in the context of Private and Public PE companies. He pointed to two advantages PE firms would have over SPACs: diversification and GP incentives.
Given that there are many similarities between VC and PE fundraising, I was inclined to think that there was more to the comparison that what met the eye.
1> Was the PE firm structure an advantage?
2> Were the PE networks an advantage?
3> Were the PE firms able to gain efficiencies across investments that would not be possible in a different setting?
I queried Bruce for a comparison between Public PE firms and hypothetical mutual fund like SPAC aggregators (something I came up with to gain a better insight into his perspective). He had an interesting response.
What do you think?
Also, Francesco Guerrera, Financial Times, highlighted the paradox of PE firms going public. Bruce talked about KKR rasing $5 BN in public equity through Euronext at Amsterdam.
How do you think PE firms would deal with the q-on-q public market pressures?
Given that there are many similarities between VC and PE fundraising, I was inclined to think that there was more to the comparison that what met the eye.
1> Was the PE firm structure an advantage?
2> Were the PE networks an advantage?
3> Were the PE firms able to gain efficiencies across investments that would not be possible in a different setting?
I queried Bruce for a comparison between Public PE firms and hypothetical mutual fund like SPAC aggregators (something I came up with to gain a better insight into his perspective). He had an interesting response.
What do you think?
Also, Francesco Guerrera, Financial Times, highlighted the paradox of PE firms going public. Bruce talked about KKR rasing $5 BN in public equity through Euronext at Amsterdam.
How do you think PE firms would deal with the q-on-q public market pressures?
The Usual Disclaimer: This is purely a knowledge sharing resource. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Subscribe to:
Posts (Atom)