Friday, November 1, 2013

Curing private equity 'zombies' - The Deal Pipeline

The term "zombie fund" is used to describe funds that have lived beyond their prime, having passed their designated time frame for creating value. This group includes not only funds that are beyond their fund terms, but also those that are beyond their investment period and perceived to be warehousing assets rather than returning capital to their LPs.
The term has gained currency in recent years due to the maturation of the private equity business. If the 1980s witnessed the establishment of today's successful franchises, the 1990s saw the widespread penetration of private equity into the institutional investor world. As increasing amounts of capital were deployed to private equity funds, manager proliferation became the norm.

Curing private equity 'zombies' - The Deal Pipeline (SAMPLE CONTENT: NEED AN ID?)

Thursday, October 31, 2013

Frenzy of Deals, Once Expected, Seems to Fizzle -

The wavering and unpredictable nature of animal spirits can resemble a boar suffering from BPD. I've been struggling with the disconnect between low interest rates and lack of actual acquisitions. Sellers have begun to realize that it's no longer 2007. But PE buyers are reluctant to swing for the fences.

Frenzy of Deals, Once Expected, Seems to Fizzle -

A New View of the Corporate Income Tax -

One of the least discussed and analyzed segments within lower middle market M&A is taxes. Not necessarily income taxes derived from operations, but tax implications of negative deferred tax liabilities and net operating losses.

A good benefit of effective tax schedules is that it enables companies to better allocate their resources, particularly with capex and operating liabilities.

A New View of the Corporate Income Tax -

Monday, September 23, 2013

A Deal for BlackBerry That's Not Yet a Deal -

It is quite unusual to announce any acquisition like this, let alone without financing. Most targets would require a commitment letter from banks that make financing more certain. Absent that, the target’s board would ask for at least a letter from the banks that states that the buyers were “highly confident” that financing would be obtained. These letters, invented by Michael Milken back in the 1980s for Drexel Burnham Lambert, are the realm of bidders who are unsure about financing. But at least the banks give some level of commitment in a highly confident level even if they can later back out.

A Deal for BlackBerry That's Not Yet a Deal -

Tuesday, September 17, 2013

Leveraged buyout groups refinance record debt -

“All the businesses that lent themselves to be refinanced have been refinanced given the unprecedented market conditions driven by QE,” Matteo Canonaco, head of Financial Sponsors coverage at HSBC, said. “The market has grown addicted to QE and is watching closely the moves of the Fed as any form of exit takes us into uncharted territory.”
Private equity groups have sought to reassure investors they have put protections in place. Carlyle has about 60 per cent of its US companies’ debt and about three quarters of its European portfolio’s debt “at fixed rates or hedged”, co-founder Bill Conway said in July. New York-based rival KKR has about 87 per cent of its portfolio “either fixed or swapped to fixed” rates, Scott Nuttall, KKR’s head of capital and asset management, said that same month.

Leveraged buyout groups refinance record debt -

Wednesday, September 11, 2013

Shadow Capital

"Take, for example, the recent deal news from Canada, the Saudi Arabia of institutional direct-investment capital, which saw two public entities partner to acquire a business via their direct-investment programs. OMERS Private Equity (affiliated with the Ontario Municipal Employees’ Retirement System) and Alberta Investment Management Corp. will buy the European theater chain Vue Entertainment for C$1.5 billion. The money comes directly from the balance sheets of public pensions and endowments. If we assume that about $500 million in equity is going into this deal, it’s $500 million that in an earlier era would have gone through a fund and been counted in fundraising statistics."

Shadow Capital - Privcap

Friday, September 6, 2013

The death of private equity's fee hogs ...

For years, private equity firms have skimmed money from their portfolio companies, under the guise of "just trying to help." Now there is reason to believe this practice is coming to an end. Not because it's offensive, but because private equity firms are no longer reaping most of the rewards.
The fees I'm talking about here are "monitoring fees," in which an acquired company pays its private equity owners an annual sum for ongoing management and advisory services. You might have heard about these recently in the context of troubled casino company Caesar's Entertainment (CZR), which each year pays nearly $30 million to its private equity owners -- Apollo Global Management (APO) and TPG Capital -- despite annual losses north of $1.4 billion (Caesar's could have killed the arrangement during last year's IPO, but it would have been forced to pay $195 million the privilege).
Read more at Fortune, The death of private equity's fee hogs - The Term Sheet: Fortune's deals blogTerm Sheet

Monday, September 2, 2013

McKinsey & Co. Isn't All Roses....

Frankly, in my opinion, consultants, advisers, accountants and attorneys get a bad rap. If I hire an adviser, for what's considered a fairness opinion, I've essentially asked a third party to provide me their opinion on a particular subject. Technically, there shouldn't be a correct answer or result.

Business is subjective. My opinion plus yours multiplied by some backward looking factor should equal zero. Why? Our opinions are of minuscule value. However, hiring a consultant provides a company with an arms-length set of eyes. Unfortunately, some consultants aim to please the intoxicated client, and that's where Enron can happen...

"It told AT&T in 1980 that it expected the market for cellphones in the United States in 2000 would amount to only 900,000 subscribers. It turned out to be 109 million. The list goes on..."

Read more ....

In a New Book, McKinsey & Co. Isn't All Roses -

Sunday, September 1, 2013

Linearity - There's No Such Thing As a Sure Thing

Great article about linearity.

Business plans, deal books and investment decks will not ensure success in a fund raise or acquisition. The main variables include timing and fit. Timing is due to the whims of market temperament. Fit has to do with fitting your idea with the right counter party.

The paths are always different, but the finish line is the same...

Scripting News: Linearity

Friday, August 23, 2013

Buy vs. Build Model

LBO vs Start-Up = ???

It Depends...

In 2005, I bought out an under-performing telecom company, by buying out their lease. Personal savings, friends and family contributed the necessary capital for me. It was a small retail-centric company. Two years later, I sold the business to a larger regional company. I lost a lot of money. Lesson learned? Equity is expensive.

When considering buying an existing business or launching one from scratch, there are a number of variables that entrepreneurs should consider:

1. High Margin or Low Margin: High margin businesses are more profitable, but require more capital (cash) to fuel that high margin. Low margin businesses are less profitable, but tend to sell themselves. The telecom company I acquired was immensely profitable on a per sale basis. But the volume was terrible. Fixed costs can be considered a sunk cost:  you have to pay certain expenses regardless of your sales cycle. Whereas Low margin businesses have high volume revenue streams which can carry your fixed costs, even if your company is in the red. For instance, large retailers remain in the red until after September.

High margin businesses consume a substantial amount of capital to launch from scratch. Think about most sophisticated technology and biotech companies. They require a large capital base to sustain capex, develop products, move products, hire talent, enter markets, capture market share, defend market share, absorb mistakes, develop new products, evolve business model, acquire horizontal or lateral companies, and the list goes on.

2. Working Capital : Running out of cash happens. Even worse, negative cash flow or ZERO sales can kill you. How do you fund working capital requirements? Unless your business can receive cash upfront per sale, you're better off borrowing money from a bank, vendor or alternative sources, versus using cash. Buying an existing company allows you to use cash flow from operations to sustain or even grow your business. Whereas most start-ups have a quicksand-like burn rate because they don't have tangible assets to leverage against.

There are always ways around working capital requirements. Depending on the product or service, you can revenue-split, re-package or re-sale a competitors product. You can also utilize a work-in-progress system. If you can get around this issue, then perhaps launching a company with a clean slate might make sense.

3. Don't reinvent wheel. Make a better wheel. When considering buying or building a business, I tend to consider my options by developing a "buy vs. build" model. Although similar to a replacement cost valuation, my model considers the cost of trial and error (volatility), the cost of developing a brand, probability of market acceptance, projected churn rate and the cost of technical know-how.

Your competitive advantage (and not passion, unless passion is your competitive advantage) is the most important asset you have as a business person. This could include market knowledge, financial/human/technical resources and timing. If you can afford time (long duration) and other resources, then market knowledge could be acquired.

But then again, that's why companies engage in mergers and acquisitions. Time can be lethal.

Sunday, August 18, 2013

Top Ten Reasons (Excuses) For My Hiatus (Disappearance)

Greetings. The summer is almost over. The New England weather will soon morph into bitterness, although with a spectacular fall landscape. I have been mysteriously away from my blog for many reasons. Some bizarre. Some outrageous. A few random. And definitely exhausting.

1. Deal Flow : - Beginning Christmas Eve, I've experienced an exponential growth in deal flow. I found it exhilarating yet stressful. From an outsiders perspective, acquiring a going concern might appear to be very linear. Step 1, Step 2, then Step 3. Unlike the movies, that is rarely the case. I had been targeting and negotiating with a Texas-based tech company for over a year. The deal fell apart due to a legal technicality (material averse clause). Deal size = $15M+.

2. Deal Flow (post February) - As a fundless sponsor, an efficient way to acquire a company is by advising the principals of the company. By advising a company, you can quickly gauge if it's worth you acquiring the company. It also lets you get acquainted with the seller, and he/she might feel that you have a vested interest in buying and building his/her company. Privately-held companies tend to have quirky and unusual challenges. These companies usually benefit from an outsider, plugged into the wacky world of finance/investment banking. I came across an unusual number of investment/merchant banking and consulting engagements. Usually with companies too small for a series A round and companies lacking scale (i.e. negative cash flow or unpredictable revenue). Some of these engagements affected my ability to pursue acquisitions and also robbed me of a personal life. Deal size = It depends...

3. Burn out : This thing of ours, requires tenacity, drive, discipline and the ability to be scrappy. Finding a potential deal is never easy. If you come across a company being marketed by a banker or broker, chances are that there might be a reason why it hasn't been sold. It becomes tiring coming across complicated deals, working the deals and then having an owner change his/her mind or realizing post-LOI that there isn't any rational way of financing the acquisition. Couple that with going close to three years without a vacation, and that might leave one a tad bit grumpy. And lazy. Deal size = $200 million.

4. Tired : Help?

5. Valuation : I came across a company with $15M in EBITDA; cyclical industry; 30 years in operating history; one feisty 80+ year old owner and one 60+ owner; the elder statesman wanted $110M at closing (unreasonable); the younger owner was open to $70M (fair); the deal collapse after months of haggling, arm twisting, flirting, etc. Rinse and repeat approximately nine times. Deal size : :/

6. Austin : Austin can be addictive in the summer. I've spent 80% of it here and find it to be an amazing place to do business. People are laid back and there's less of an opportunity to be affected by groupthink, which is rampant in Boston. There are also interesting companies within fragment industries, if you exclude technology. The downside can be the awesome weather, which can make you less "focused". Deal size = $5M.

7. Austin : He he he...

8. Bad luck : In a one week span I lost five deals. Five. After working on them on and off for roughly six months. This happens in the shark infested business of buying a business. Deals fall apart. Like New England leaves in the fall. Sometimes the disintegration process is random. Sometimes downright brutal. Coincidentally, I just received an email last night from a CEO stating that a previous potential acquirer promised to buy his company on September 16th at twice the price that he offered me two weeks ago. The company is worth 2x my offer if one were a strategic buyer. I am definitely more a financial buyer, so 2x at closing wouldn't make sense to me. However, at 2am, I sent him a sweetened offer of $1.5M at closing and $1.5M in seller financing over three years (reasonable). I also mentioned that I could close before the end of the month (true - I already secured the financing). Deal size = $3M.

9. Repairing personal life : I have not been on a date for over a year. A year and half to be precise. Why? I wanted to focus more on my business and I was exhausted after my last go-round. What I learned is that being single can be an asset when you're ambitious. It also brings clarity and allows you to focus on short/mid-term, time and capital sensitive initiatives. Unfortunately, it can also make you appear to be creepy when you're at an interesting bar in Austin, at 1:30am, with your laptop open. Deal size = -$1M.

10. Thinking : I spent a good chunk of 2013 thinking about everything. Thinking without asking questions. Thinking more alongside understanding. Understanding comes from assuming an external position when analyzing an abstract object or concept. For instance, if a company is for sale, it is more productive to think about the multiple reasons why an owner would sell their business. Some reasons why are positive, some, if not most, are negative. But either reason could be turned into a positive, and the price would reflect either position. $2M.

Lesson learned : The greatest skill that one can learn is constant motion...Mental and physical.

Sunday, February 17, 2013

A Behavioral Approach to Asset Pricing (1)

The recent onslaught of M&A announcements has tilted the economic conversation towards "positive" animal spirits. Corporations and investors have decided to listen to Ben Bernanke and engage in risk taking. As a sponsor, this is kind of good news for me. Why isn't it VERY good news for me? Well, fundamentally speaking, nothing quantitative has changed.

1. Rates have been low for 2+ years now. So what's changed? I think companies have decided that the political dysfunction is the new normal. Congress will say no to everything Obama proposes, which doesn't matter because Obama will be in office for the next four years.

2. Equity risk premiums (spell check doesn't recognize "premia") have been low. Which is counter-intuitive because you would assume that a lack of equity interest would drive up the cost of equity, but that hasn't been the case. In my opinion, I think the increase in investor sentiment has hurt Apple's stock price. Why? Risk aversion let most institutional investors out of the equity markets, however they kept one foot in equities (fake high beta) via Apple. Once they became more aggressive in the general equity market, they dumped a chunk of their Apple holdings.

3. Fair market value. Assets have been slightly overpriced due to low interest rates, but does it really matter? Assuming 0% growth and fairly constant FCF, you would assume that a back of the envelope equity payback of ~3 years would encourage sponsors. But this isn't the case. Why is that? In my opinion, "smart money" knows that assets are overpriced, and the only exit strategy they have is via a strategic acquirer or an IPO.

I've had a number of deals clogging up the pipeline because of equity investors waiting for other investors to pull the trigger first. Interesting times we live in. I think this is the last year for solid LBO's in the middle market space, as rates continue to quietly increase. Or decrease. Or remain flat. Meh.

Saturday, February 9, 2013

How Dell Tried to Avoid Potential Buyout Pitfalls -

I find this buyout compelling. Compelling in the sense that I applaud Michael Dell for taking his company private. In my opinion, not enough companies, especially large and mature techie companies, go private. Why?

1. Lazy management : There isn't any fanfare once you go private, and for some CEO's, they can't function without the attention. Some leaders/managers need to be in the spotlight, and the spotlight becomes part of the actual part of running the company. The constant bickering or cowering to Wall Street analysts, the Bloomberg and CNBC coverage and the addictive mega buyouts. Another issue is what's the point jumping off the cliff for a company? If you can meet or slight beat earnings estimates, why go the extra mile? And that's the reason why more companies should go private. Private companies have higher costs of capital, less scrutiny and less protection for investors and management.

2. Expensive : It's expensive going private. I mean more on the collateral damage side. Unless management is in good graces with institutional investors, there will always be some sort of disgruntled or pesky person or situation that could make a buyout impossible or bloody. Why go through the bs. Most CEO's would prefer to keep the status quo, make everyone happy and secure a nice golden parachute in the event of some scandal or consistent malaise.

3. Pressure : It's much harder succeeding as private company versus a public firm because of the brand value that being public comes with. I find this counter-intuitive because companies go public for various reasons, not always because they need the money; which would actually be the worst reason to go public. Being private means most people haven't heard of you, and most CEO's hate this. No more analysts fawning over your free cash flow and P/E multiple ( a really ridiculous metric in my opinion). Higher capital costs, perhaps a contraction in market share, talent exit (some employees like working for "big" companies) and other reasons can make it tough on a private company.

How Dell Tried to Avoid Potential Buyout Pitfalls -

Friday, February 1, 2013


Happy New Year!!! Greetings and salutations!!!!...and all of the et ceteras. My new years resolution resolution. My goal is to continue my path towards 100% clarity and good mental health.

So, here's a list of goals that I will attempt to achieve in the glorious new year -

1. Less News -
American news is terrible. It can be downright atrocious, resembling a sitcom. Try watching Fox News, CNBC or MSNBC, and compare it with Bloomberg, France 24 or Al Jazeera. With news and the ubiquitous data that accompanies news segments, there's an influx of noise, i.e., information that has no bearing on your day to day living. Case in point, the Bernanke spawned "fiscal cliff". As a businessman, I only care for clean information. Clean information is data that could bring me closer to making a binary decision. Decision making becomes precarious when there's an abundance of insignificant variables. Insignificant variables? Such as "taxes", regulation, budget deficits and monetary policy. The media and their "allegedly seriously smart pundits" use random data and doomsday theatrics to bombard viewers with useless information. Leave me alone...

2. Less Corporate Spending - 
I've learned during the last three years that living BELOW your means is better than living WITHIN your means. Why? It allows me to adapt quickly and take MORE risk in my business and life. After all, risk taking is the only way to achieve returns. Trying earning market returns from US treasuries or stabilized real estate...Good luck.

3. Lower Tolerance for Ignorance - 
There's nothing scarier than someone who believes his/her own ignorance. Like the i/banker who wanted me to offer his client an earnout for revenue from a non-existing line of business that the CEO had no plans for generating. My response to ignorant people will be either, "I believe you believe that", or, "You're right". Meh.

4. More Mixing Business + Pleasure -
Why not? Kill two birds with one stone...preferably one drink. More business (and even better, information) is taken care of during "non-working" hours, than the typical government agency office hours.

5. Buy when the Market Is Selling - 
Very simple thesis, but hard to sustain due to behavioral reactions, typical of human beings. We all want to blend in and feel among a peer group or even worse, make significant others approve of our decisions. However, such is never the case. When everyone is buying an asset, prices go up. So the person making money is the seller. At least theoretically.

6. Low Volatility - 
Hedge funds had a horrible 2012 thanks to the evaporation of volatility. We can thank the Federal Reserve, but more directly, market participants. Low volatility means lack of price differentials for hedge funds, i.e. less arbitrage opportunities. Hedge funds typically need wider price differentials to take advantage of volume and speculative short-term trading. Value investors, including investors of distressed assets have made a fortune since 2009-ish. The VIX (as of today) remains at ~14, and this is bad news for traders. So who is this good for? Good old fundamental investors smart enough to take advantage of interest rates-induced asset pricing. With rates so low, the artful investor should be able to take advantage of interest rate arbitrage - borrow money and buy an income-producing asset. For the deep-pocketed investor, distressed assets is where to make  pretty penny. One can borrow, for example, $10M at 12% (vulture money ;) ), buy a distressed asset, use equity to service the debt in the short term (let's assume 9 months), and divest the asset. Depending on the haircut at time 0, the astute investor should make a pretty penny...However, illiquid assets are enemies of investors with high costs of capital, and fear of being trapped without a favorable exit. Caveat...