US Leading Indicator

RATE-OF-CHANGE TICKS UP, CONFIRMING MARCH 2015 LOW

The US Leading Indicator for June is up 5.5% from one year ago, with the 1/12 rate-of-change holding steady from its upward revised May value. Several successive months of strengthening building permits and a steepening yield curve have pushed the Index higher. The March 1/12 low confirms our expectation for a cyclical low for US Industrial Production in early 2016.

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2Q2015 Market Observations

Below is a summary of what took place in the second quarter:

US Equities end flat for the quarter 

• The S&P 500 returned (0.3%) for the quarter. Small cap outperformed mid and large cap. Mid cap was the weakest performing market cap segment with a negative return of -1.5%. 
• The growth style outperformed the value style across the market cap spectrum. 
• The health care and consumer discretionary sectors continue to outpace all other sectors. 
• Utilities, energy, and industrials continue their negative streak with consumer staples joining the pack. 
• Momentum and growth continue to be top performing factors while value and quality were weak performers. 

International and emerging market equities manager marginal gains 

• MSCI EAFE returned 0.6% while MSCI EM returned 0.7% in the quarter. 
• Small cap stocks outperformed in both international and emerging markets. 
• In international developed markets, the Far East was the best performing region due to strong performance from Japan. The Pacific was the worst performing region due to Australia and weak commodity prices.
• Emerging market performance was driven by the BRIC countries ex India. Brazil and Russia bounced off lows while China finished with strong gains despite a reversal late in the quarter.
• Top and bottom performing sectors in international markets were telecom and financials at the top and health care and information technology at the bottom.
• In emerging markets the top performing sectors were energy and health care with the bottom performing sectors being information technology and consumer discretionary. 
• As in the US, momentum and growth were top performing factors in both developed and emerging markets. Beta and value were weaker factors in both developed and emerging markets. 

Global bonds sell off in the quarter 

• Worries over rising US rates and a Greek default brought about volatility in bond markets. 
• Long-dated Treasury bonds were the best performing segment of the bond markets as the yield curve steepened during the quarter. 
• Short-term Treasuries and bank loans were the only positive performing segments during the quarter. 
• Spreads widened for investment grade and high yield credit, negatively impacting returns. 
• Non-US bonds posted negative returns except for dollar-denominated emerging market credit. Sovereign debt yields rose while currencies had a mix impact.

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2Q 2015 Private Equity Environment

Market Overview
Global equity markets were rattled late in the second quarter with the prospect of a Greek debt default

and exit from Europe’s Economic and Monetary Union (EMU). On the second-to-last trading day of the quarter, following Greece’s decision to hold a referendum on the terms of a new debt bailout deal, the MSCI Europe index declined by 2.7%—its largest daily decline since October 2014. In the United States, the S&P 500 declined by more than 2%, which erased the index’s gains for the year. Asian
equity markets also sold off on the news, although most of the region’s equity indices finished the quarter with gains. Fixed income markets performed poorly overall in the second quarter. In particular, despite the commencement of the European Central Bank’s (ECB’s) quantitative easing program that drove much of the eurozone’s sovereign debt market into negative yield territory early in the quarter, euro-area government bonds experienced their largest-ever

quarterly loss, driven by concerns that yields had fallen too low in light of an improving economic outlook for the region.

Highlights

• M&A exit transaction value for PE-backed companies totaled $174 billion in 1H15—a decline of 34.8% from the record-setting 1H14 total but still one of the largest first-half totals ever recorded.
• High-yield default rates remain below historical averages in both the U.S. and Europe. However, sales of nonperforming loans reached a record high of €91 billion in 2014 and are expected to increase further in 2015.
  
• PE firms worldwide raised $92.1 billion in 2Q15, a 9% increase over the prior quarter and a 17% increase over the year-ago quarter. The increase was driven by buyout- and U.S.-focused fundraising activity.

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Investment strategy - Asset Management, 2nd quarter 2015

Deflationary pressures – and the associated risks to growth – are the common enemy faced by most economies across the globe.

At a glance

• Deflationary pressures – and the associated risks to growth – are the common enemy faced by most economies across the globe. They are the motive behind the ongoing global easing cycle.
• A stronger US dollar and the resulting foreign exchange market volatility argue for greater differentiation amongst portfolios, in accordance with their reference currency. Hedging has become a must.
• Euro area investors will benefit from both liquidity injections and the materializing economic recovery – a positive outlook that supports our preference for risky assets over cash.
• A more balanced approach is required when it comes to US dollar- and Non-US dollar- based portfolios, given the more limited equity market upside.
• External debt levels and commodity intensity are dividing the emerging economies into two camps: those who can afford to loosen monetary policy (Asia) and those who are forced to keep rates high (Russia, Brazil).

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

6 Lessons from private equity any company can learn (especially before selling)

Too Faced Cosmetics in Irvine, CA was sold in November 2016 to Estee Lauder Companies for $1.45 billion, almost for $1 billion more than acquired one year earlier by the seller, General Atlantic. 

General Atlantic, a New York private equity firm, acquired the business in 2015 from another private equity firm, Weston Presidio. 

Too Faced was co-founded in 1998 by Southern California entrepreneurs Jarod Blandino and Jeremy Johnson.

The founders sold Too Faced to Weston Presidio in 2012, for only $71 million.

How did Too Faced Cosmetics' value go from $71 million to $1.45 billion during the 2012 to 2016 period? 

There may be several explanations, but the key answer is in the way how private equity owned businesses are owned, managed, perform, and grow in value. 

Can we identify key factors why private equity owned businesses seemingly do better, at least for short- and intermediate-term, than their industry peers?

Consulting giants, led by Bain & Company, a successful private equity investor in its own right, offer a list of lessons any company can learn from private equity.

1. Define the full potential. The target is to increase equity value - how to turn $1 of equity value today into $3, $4, or $5 tomorrow.

2, Develop the blueprint. The blueprint is the road map for reaching your full potential - the who, what, when, and how.

3. Accelerate performance. This involves molding the organization to the blueprint, matching talent to key initiatives, and getting people to own them. 

4. Harness the talent. This requires creating the right incentives to recruit, retain, and motivate your best talent - and get them to think and act like owners. 

5. Make equity sweat. This calls for managing working capital aggressively, disciplining capital expenditures, and working the balance sheet hard.

6. Foster result-oriented mind-set. The goal is inculcate disciplines so that they become part of the company's culture and create a repeatable formula for achieving results.

Are the above 6 keys the reason why private equity owned businesses perform better than their peers over short and intermediate term intervals?

Private equity firms impose certain disciplines and models to force companies to succeed or at least satisfy their highly driven and monetary-oriented ownership. Companies are forced to immediately improve financial efficiency, performance, and continuity.

Well-placed partners of private equity firms serve as company ambassadors, acting as connectors to valuable contacts and strategic opportunities.

A study by A.T. Kearney (leading global consultancy) revealed the following:

1. Private equity owned companies generally outperform their industry peers, primarily in slow-growth industries, such as chemicals, large consumer goods and retail, manufacturing and business services.
2. Contrary to popular belief, PE firms that take on a supervisory role—giving the deal partner
   responsibility from acquisition through exit— deliver more value by balancing growth and profitability.
3. Success factors of PE firm models are transferable for those willing to learn.

Why private equity firms love cash?
PE players look at their balance sheet not as static indicators of performance, but as dynamic tools for growth. One critical component of this approach is to aggressively manage down working capital.

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"We love to discover companies with hidden gems like owned real estate which we can later sell and lease back, extracting our equity and reducing our base investment costs. It happens often and sellers could easily take advantage of these if they only reviewed their assets before selling to us." -  Mid-size private equity executive.

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.

Long U.S. election campaigns

It is well known that the periods of U.S. presidential elections add to economic uncertainties, market volatilities, and consumer inconfidence.

What also transpires, more and more, longer cycles of elections.

This chart shows the days before elections, when presidential candidates announced their intent to run for the president's office. 2016 looks to be a relatively shorter election cycle.

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Clicking the Like button on various social media platforms, such as LinkedIn, Facebook, etc. does not constitute a testimonial for or endorsement of Redmount Capital Partners LLC or any Investment Advisor Representative. “Like” is not meant in the traditional sense. Posts must refrain from recommending investment advisory services or providing testimonials for our firm, since they are strictly prohibited. Please understand that we are required to delete such posts, since this is a regulatory requirement.