My PE Articles

Rules for the long Road

2007-06-05T11:30:00.000-07:00

Some tips from John Morgridge on the last day of class!

1) Don’t try to do it all by 35

2) Enjoy each job – each stage of life

3) Listen but don’t always be looking – opportunity is random

4) Wait 24 hours

5) Don’t put negatives in writing

6) Learn to forgive – others and yourself – don’t carry baggage

7) Invest in friendships & a good marriage

8) It’s OK to just be a member – to start

9) The art of small check giving

10) Set annual mental and physical challenges

11) Ask questions – be curious

12) Its often more important to do the right thing – than do the thing right

13) Make sure what you want to be is what you want to do

Business Exit Strategy

2007-06-02T17:06:00.001-07:00

Five Steps for Creating
A Business-Exit Strategy

By MARSHALL LOEB
From MarketWatch

Small-business owners: Have you thought about what will happen to it when you're ready to retire? If you think that you have years to plan your exit strategy, you better check the calendar.

John Brown, president and founder of Business Enterprise Institute, a company that helps business owners successfully exit their companies, says that you need to start planning five to seven years before you plan to quit.

Brown says there are five steps business owners must take to formulate their exit plan:

1. Determine your objective. "One is timing -- how much longer do you want to work in your business before you sell it, give it away or transfer it to your employees? Two is figuring out how much money you'll need for your financial security."

2. Designate a coordinator. "You need to put an advisory team in place that can help you with the transition. The team could be made up of your lawyer, your CPA, your financial adviser. But you really need to have at least one adviser who knows the planning process, who can bring in other advisers as needed, and who can coordinate everything," says Brown.

3. Get your business appraised. Work with a professional business appraiser, or, if your business is very small, a CPA. "Owners usually do not have an idea of what their business is worth," says Brown.

4. Focus on increasing cash flow. "Most business owners will focus on increasing revenues or opening additional offices, but cash flow is used to determine the value of a business," says Brown. "If the owner can increase the cash flow by a couple hundred thousand dollars, he can increase the business value by $750,000 to $1 million."

5. Put a management team in place. After you've determined who is going to take over your business when you retire, you should have a management team -- or, in a small company, just one person -- to transition the business to the new owner. "This is critical. Third-party buyers will want someone to carry on the business. The management team should have a relationship with vendors, customers, etc."

Whatever you do, don't put off the planning. "You can't do this effectively in a few days or months. The more time you give yourself to implement a plan and figure out value, the better off you'll be."

Buyout Firms Finally Confront Fair Value

2007-05-29T17:50:00.000-07:00

Feed: PE HUB
Posted on: Friday, May 25, 2007 6:00 AM
Author: David Toll
Subject: Buyout Firms Finally Confront Fair Value

Say a recession comes, slashing the value of portfolio after portfolio. How long will it take limited partners to see blood spilt on their financial statements?

Unfortunately, it could take quite a long time. Many buyout firms still hold investments at cost for at least a year or more unless a subsequent financial transaction justifies a write-up, write-down or write-off. The approach has big flaws. One is that in a bull market, quarterly reports tend to understate the actual performance of their portfolios; in a bear market they tend to overstate performance.

A bigger problem is that holding investments at cost, even for a short period of time, fails to meet generally accepted accounting principles, or GAAP. To comply with GAAP, buyout firms must use "fair value" to assess portfolio companies. One of the principles of fair value, when applied to illiquid assets, is the requirement to regularly assess valuations and adjust them should conditions warrant. Holding investments at cost, regardless of how a company's performing, and regardless of how exit multiples are changing, doesn't cut it.

Five or 10 years ago, LBO firms and their auditors could reasonably argue that holding investments at cost approximated fair value. For one thing, the Financial Accounting Standards Board didn't provide a whole lot of guidance on how to determine fair value. But a confluence of factors has torn that argument to shreds:

• In the wake of the venture bubble, LPs upset with how long it took for firms to write down their portfolios helped launch the Private Equity Industry Guidelines Group. PEIGG released GAAP-consistent valuation guidelines in December 2003 (and revised guidelines in March). It also sounded the alarm that industry practice—holding investments at cost in the absence of a subsequent transaction—was out of step with GAAP.

• That same year, the American Institute of Certified Public Accountants issued guidance calling for auditors to take a rigorous approach to ensuring clients use true fair value to value illiquid and other assets. Last year, according to David Larsen, managing director at Duff & Phelps LLC and a member of the PEIGG board, the institute issued similar guidance for auditors of LPs.

• Last September, the Financial Accounting Standards Board issued FAS 157, providing guidance on how buyout firms and others must determine fair value, and what they need to disclose to investors about the process. Buyout firms using the calendar year as their fiscal year must follow the new rules starting with their 2007 audited statements, released in early 2008.

How rapidly the buyout market is making the shift to fair value remains a mystery. James Clarke, investment manager-private equity and energy at the Ewing Marion Kauffman Foundation, said that fewer than half of the dozen or so U.S. buyout firms in his portfolio have switched from holding investments at cost to using fair value. Those that have made the switch, he said, still hold investments at cost for at least a year, suggesting they are in transition. "This is a real problem because LPs have few good options to systematically and independently value hundreds or even thousands of underlying portfolio companies," said Clarke. "Everyone's got to get there," he added. "The accountants are all over LPs to do something in this area."

The accountants are also all over the buyout firms. Howard Weiss, chief financial and administrative officer at Castle Harlan Inc. and a member of the PEIGG board, said his firm went through a far more rigorous examination of valuations in its latest audit than ever before. What used to take two hours now took three to four weeks, he said. Part of the push came from the firm's auditor, Deloitte. "It was the first time they literally did a full audit on our valuations," Weiss said. "They wanted fair value. That was their goal." (In the past, Castle Harlan would typically hold investments at cost for a year before beginning regular assessments.) In addition, two corporate pension funds on Castle Harlan's review board asked for more documentation than usual to support their own valuation audits. "That's a whole new dimension that we've never heard before," Weiss said.

One of the most shameful episodes in the venture capital market took place in the early 2000s when firms failed to write down their investments in a timely fashion after the Internet bubble burst. It took years for the full impact of that debacle to flow through to the quarterly and annual financial statements of limited partners.

Buyout firms have a chance to avoid repeating history when the next downturn hits. It's time to move to fair value.

Reach Larsen of Duff & Phelps at 415-693-5330.

For more great insights on the buyout market subscribe to Buyouts Magazine at www.buyoutsnews.com.

View article...

End of PE here?

2007-05-29T17:42:00.001-07:00

Private Equity:
Is Deal Frenzy
Nearing End?

Big Firms Split in Views
Over Pace of Buying;
Stock Prices May Suffer

By HENNY SENDER

It would be a fool's game to predict the end of the private-equity buying frenzy, but certainly some signals are there.

Over much of the past two years, the prevailing private-equity mantra has been to buy as many companies as possible and then sell as much debt as possible to help pay for them. Now, the biggest private-equity firms are beginning to diverge in their views.

Henry Kravis, the co-founder of Kohlberg Kravis Roberts & Co., recently has described current conditions as a golden age for private equity. But Ripplewood Holdings LLC Chief Executive Timothy Collins, at a conference in Tokyo earlier this month, called current conditions a bubble that would end badly.

Carlyle Group co-founder David Rubenstein at the same conference also was bearishly looking ahead. "There hasn't been a failure for five years. We need to prepare people for the reality that some deals will fail," he said. He added: "Greed has taken over. Nobody fears failure."

Caution on the part of even some of the players could be bearish for stocks, coming at a time when one of the biggest supports for the stock market is the assumption that private equity will buy bad companies because they are inexpensive and good companies because they are good. Should private-equity firms pull back, that support could vanish.

Some analysts say that without a widespread belief in the appetite of LBO firms for publicly traded companies, stock prices would be far lower.

Not long ago, a buoyant stock market would hardly have paid heed to the views of private-equity firms. No longer. At $281 billion, U.S. private-equity deals have more than tripled from a year ago, accounting for 35% of all mergers and acquisitions, up from about 16% last year, and most of them involve publicly traded targets, according to data from Thomson Financial.

For its part, Carlyle has been the Cassandra of the industry for several months now. The year opened with "state of the industry" letter from Carlyle co-founder Bill Conway that warned his firm's investment professionals about froth in the buyout market and instructed them to be careful in their deal-making.

They have heeded that warning. Carlyle has been mostly on the sidelines this year and hasn't been involved in any of the year's 10 biggest U.S.-targeted deals. Meantime, private-equity titan Blackstone Group has notched just one of the 10 biggest U.S. deals. That contrasts with KKR, which has been a part of $120 billion of buyouts in 2007, including five of the biggest eight in the U.S., according to Dealogic.

Then there's TPG (formerly Texas Pacific Group), which accounts for two of this year's largest U.S. deals, including the pending $32 billion buyout of Texas utility TXU Corp., where it is partnered with the bullish KKR. This past week it teamed up with the private-equity arm of Goldman Sachs Group Inc. to buy wireless provider Alltel Corp. for $25.7 billion, the third-biggest U.S. leveraged buyout in history, Dealogic notes.

TPG, though, is also showing signs of caution about the markets. This month, for example, TPG has taken advantage of others' optimism to sell large chunks of the remaining shares it holds in ON Semiconductor Corp. and MEMC Electronic Materials Inc., companies it has owned since 1999 and 2001, respectively.

Other signs of TPG's caution include its quitting the group that included Bain Capital and Thomas H. Lee Partners during the bidding for radio-station operator Clear Channel Communications Inc. Bain and Lee subsequently sweetened their offer twice, to $39.20 a share from $37.60 -- significantly improving their chance of securing shareholder support. It would have been better for the two to have let the deal die, walk away and show that they have discipline, says the head of a unit that focuses on private-equity firms at one big investment bank.

"We increased the price by about $700 million on a $27.5 billion deal, all from debt," says a spokesman for Thomas H. Lee. "That's the smallest percentage increase in cash of any public deal we've seen. The crucial change is the 30% [that will remain listed] for the public on a completely heads-up basis. That's a lot of value for the public without increasing our downside risk."

TPG also dropped out early in the bidding for Dollar General Corp., which ultimately went to KKR in a $6.9 billion deal. By the end of the process, no competing bid came close to the amount KKR was willing to pay, according to bankers.

Some middle-market firms also say this is a better time to sell than to buy. "This economy is not going to get better, especially for manufacturing and industrial companies," says Michael Psaros, managing partner at KPS Capital Partners. "We are selling everything that isn't nailed to the floor at prices that are between stunning and inconceivable."

Indeed, KKR has been winning auctions by paying far more than any of its rivals, opponents say, leading to fears that industry-wide returns will drop as a result of paying such high prices.

A person close to KKR says rivals who question why KKR is buying so much or paying so much may be jealous and frequently lose by only trivial amounts rather than the large amounts they claim.

Being bold has worked out well for KKR before. Johannes Huth, head of KKR's operations in Europe, bought a series of companies in Germany when those firms were out of favor early in the new millennium.

Today, many of those investments have done so well that Mr. Huth sits on the six-person management committee at KKR and is widely regarded as one of the likely successors to Mr. Kravis and his cousin George Roberts to lead the firm.

And deals KKR did earlier in this deal-making cycle in which the firm was believed to have overpaid have been quite successful, such as PanAmSat.

The industry has seen this divide before. Some private-equity firms pulled back in the second half of 2005, only to regret the decision as the debt markets threw money at their braver counterparts.

Steve Schwarzman, founding partner of Blackstone, has told investor conferences that while one of his bigger mistakes was not bidding more aggressively for Hertz, which Ford Motor Co. in 2005 sold to Clayton Dubilier & Rice Inc., Carlyle and a unit of Merrill Lynch & Co., "today the biggest risk is high prices."

"Almost everything can go wrong now," said David Bonderman, one of the founders of TPG, at a recent conference. "Two years ago, we slowed down. Last year we got unskeptical. This year we are more cautious again."

Buying into PE-Backed IPOs

2007-05-19T13:13:00.001-07:00

From: Dan Primack
Posted At: Thursday, May 17, 2007 7:35 AM
Posted To: PE HUB
Conversation: Buying into PE-Backed IPOs
Subject: Buying into PE-Backed IPOs

Last night I appeared on CNBC’s Fast Money program to discuss what public investors should look for in buyout-backed IPOs. I can’t yet find the video, but that’s OK because watching me prattle on is almost worse than reading me prattle on…

Anyway, the umbrella answer is that there is no perfect formula for such things, from judging past buyout-backed IPO performance. Moreover, there is some serious discrepancy between aftermarket performance of such offerings over the past two decades and a more recent sampling. Specifically, the historical data since 1980 shows that buyout-backed IPOs have outperformed the non-LBO-backed IPO market. But if you only look at buyout-backed IPOs since the beginning of 2006, they’ve underperformed the non-LBO-backed IPO market by a margin of 23.2% to 27.4 percent (through market close Tuesday). I’ve posted the relevant data here for your downloading pleasure.

If you look a bit deeper at the recent aftermarket performance, a few things jump out. First, companies seem to perform better if they’ve been held longer by their private equity sponsor. This isn’t to say that quick-flips can’t work (think Hertz), but four of the five best-performing offerings received their initial PE funding in 2000 or before. Each of the five worst-performing offerings got funded in 2003 or later.

Other key issues:

Debt doesn’t seem to matter very much. Folks like me pay a lot of attention to dividend recaps, etc. — but public shareholders apparently view it more as future upside than risk. Moreover, Josh Lerner is currently working on a paper that reviews reverse LBOs (take-privates taken back public) up until 2002, which shows that highly-leveraged companies actually perform slightly better in the IPO aftermarket.
Be careful if the LBO firm is selling lots of stock in the IPO (shows a lack of faith). Conversely, be careful if the firm continues to hold a significant majority position (could be hard to bleed out without shocking the company).
Don’t worry too much about the specific LBO firm backing the company. Rock stars are great, but some of the best LBO-backed IPOs come from small firms.