Do private equity owned businesses perform better?

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. 

It is commonly known that businesses owned by private equity firms do better, at least for short- and intermediate-term, than their industry peers.

Private equity imposes certain disciplines and models to force companies to succeed or at least satisfy its 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 a dynamic tools for growth. One critical component of this approach is to aggressively manage down working capital.

Lessons from private equity any company can learn
Bain & Company, a consulting giant which has succeeded as a private equity investor as well, offers a list of lessons any company can learns from private equity:

• 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. 
• Develop the blueprint. The blueprint is the road map for reaching your full potential - the who, what, when, and how. 
• Accelerate performance. This involves molding the organization to the blueprint, matching talent to key initiatives, and getting people to own them. 
• 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. 
• Make equity sweat. This calls for managing working capital aggressively, disciplining capital expenditures, and working the balance sheet hard.
• 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.

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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.

In conclusion

Studies show that the PE business model drives value well beyond wealth creation for the owners. PE firms rejuvenate companies, create jobs, and open new markets that benefit customers, employees, suppliers and the communities in which they operate.

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Cash Management Best Practices for High-growth Companies

With limited resources and pressures brought upon by high growth, finance managers of smaller companies face unique challenges when it comes to cash management.

Whether a company is gearing to take on a major customer or integrating a newly acquired company, the need to collect and disburse funds can add to pressure. Managing cash flows can jeopardize company stability, hold back its growth, and put stress on its employees.

Implementing the following key strategies can help

1. Manage accounts centrally
2. Align bank accounts ownership with corporate structure
3. Optimize structures to fit credit facilities
4. Choose right payment and transfer methods
5. Plan to minimizing transfer costs such as wires, etc.
6. Evaluate options to earn more on idle cash balances
7. Centralize collection streams in to one global account
8. Institute standards for scalability and visibility

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LIBOR Traders Are Predicting Fed Rate Increase

LIBOR traders, who set the inter-bank lending rates that are tied to at least $350 trillion of financial products, are projecting a Fed rate increase. 

The chart shows that traders expect a 0.25% rate increase to take place in the next 3 to 6 month period.

The 30-day LIBOR went up 0.25% either in anticipation or shortly after Fed increased the rate by 0.25% in December 2015.

LIBOR rates are tied to floating rate mortgages, most business lines of credit, money market funds, short duration corporate bonds, etc. LIBOR influences costs of doing business and greatly impacts corporate capital expenditures.

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As Credit Tightens, Entrepreneurs and Dealmakers Turn to Non-Traditional Lenders

After what occurred in 2000 and 2008, one should have expected banks and other common lenders to become more regulated and scrutinized. Though this may have created some inconveniences for some firms, it helped open the door for others. Banks have established more rigorous qualifications for companies to be given financing, and capital constraints and shareholder activism are becoming more influential when it comes to publicly traded business development companies (BDC). For middle markets in particular, this has allowed alternative lenders to emerge and acquire more market share than would otherwise have been possible, because of the vast amount of competitors.

“Banks have established more rigorous qualifications for companies…”

With public perception of banks still relatively low and regulators keeping a close watch, it is not difficult to see why banks want to keep a low profile and not conduct any business that may raise a red flag. In 2015, 25% of middle market loan transactions featured deals of more than 6x EBITDA; an example given by regulators as a possible red flag. It is why most traditional bank lenders are currently staying away from making leveraged loans deals on private equity firm deals.

Similarly, BDC’s are also currently sourcing fewer deals. They are currently facing difficulties in raising capital, because as of March, most were trading below book value. This has prevented many from issuing new equity for funding. Without cash to fund new transactions, the only alternative would be to fund from repayment on existing loans.

Collateralized loan obligation (CLO) issuances are on the decline. About $4 billion in CLOs were priced for what was most of the first quarter, a harsh decline from almost $17 billion during the same time period just last year. During 2013-2015, the CLO market grew by more than 50%. However, the market has decreased by about 50% during the past year. Additionally, under the Volcker Rule which is set to take effect at the end of 2016, managers will be required to hold 5% of their CLOs. Though many managers are attempting to adapt and others are selling off their CLOs, it remains to be seen how the rest of the market reacts.

Finally, we come to the benefactors. Alternative lenders are currently taking advantage of the current state of the lending market with great vigor. A great advantage they have is being able to act quickly and with much flexibility. This is possible, because most are either non-regulated or regulated far less than traditional lenders. These alternative lenders are beginning to develop close relationships with private equity firms for these particular reasons, which helps PE firms acquire financing for deals, and as a result fund the investments in their portfolios. Small Business Investment Company (SBIC) funds are also benefiting from the current state of the financing landscape, especially considering the two new regulatory changes made at the end of last year; reduced registration requirements by advisors and the amount of capital an SBIC can control has been raised to $350 million from $225 million.

Though the availability of attaining financing has become more difficult, not all have been affected negatively. The financing landscape will improve, but in the short-term, in its current state, we should expect alternative lenders to become more prominent players in the space.

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PMI Index Signals Industrial Production Rise in 2H16

Purchasing Managers Index 1/12 rise signals industrial production rise in the 2nd half of 2016

The Purchasing Managers Index (PMI) 1/12 rate-of-change rose for the third straight month in February, confirming that a cyclical low occurred in November 2015. The upward movement in the 1/12 rate-of-change suggests that the current trend of decline in the US Industrial Production 12/12 is likely to transition to rise in the second half of 2016.

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Can Maturing CMBS Loans Wipe Out Your Equity and Wealth?

The large volume of maturing CMBS loans combined with new regulatory hurdles and widening spreads will have big impacts on the market in the coming year.

The wave of CMBS maturing loans that were created at the height of the real estate bubble will crest in 2016 and 2017. According to estimates by Trepp, nearly 20% of these maturing commercial mortgages will demand additional capital from current borrowers or new buyers when the loan is refinanced or the property is sold.

How Does the CMBS Market Work?

New risk retention rules coming into play in 2016 require that either the originating lender will have to hold a certain piece of the loan for at least 5 years and/or the B-piece buyer will have to hold the paper for that amount of time. As B-piece buyers aren't set up to comply with these regulations, they will be forced to create processes to handle, which will result in increased cost passed on to the borrower in the form of higher spreads.

Meanwhile, CMBS spreads are drifting wider with a recent 10-year AAA bond clearing at 140 basis points over swaps. This ongoing weakness has led some issuers scheduled to price this year to push off their deals until later in 2016.

CMBS Swap Spreads

What are the possible solutions for you?

Non-Bank Balance Sheet Lenders

Since 2008 a sizable contingent of non-bank balance sheet lenders have sprung up and they unencumbered by banking regulations, legal lending limits, or geographical footprint. They keep all loans in-house and rarely outsource underwriting or servicing to third parties. Permanent loans offered by non-bank lenders provide long-term financing for stabilized commercial real estate, with loan terms up to 20 years and without the hurdles of defeasance. Bridge loans by same lender are designed for un-stabilized properties or shorter term business plans and include leading-edge features such as additional future facilities for lease-up costs and loan terms up to 7 years. Most non-bank lenders make non-recourse loans 

Non-Real Estate Collateralized Lenders

Perhaps one of the oldest lending communities, non-real estate collateralized lenders offer flexible loans secured by a myriad of assets, including securities, business and real estate equity, etc. The closing processes are simplified and with lower costs. Financing may be used in combination with real estate backed loans.

To prepare for the coming wave please contact Redmount Capital Partners or learn more about our capabilities.

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Regularly Updated Estate Plans are Essential for Family Business Owners

The principal creators of wealth are family business owners. Family businesses contribute over 70 percent of global production. Estate planning plays a vital role in the perpetuation of a family business. Considering the rapid change in business dynamics, estate planning is essential these days.

The majority of family business owners don’t update their estate plan. Over 50 percent of family business owners don’t review their estate plan for over five years.

An estate plan becomes old or outdated after a few years. Adding to this, circumstances in families and relations among family members, business matters, net worth, etc., tend to change irregularly or over a period of time. This is when estate planning comes into the picture.

It doesn't matter how complex an estate plan is. It's better to get a customized estate plan as long as one's legally competent. It will also ensure safe passage of family business from one generation to another without any dispute that may further damage the prospects of growth.

When kept up-to-date, estate planning is also useful in offloading family business for a fair price. Understanding the business management philosophy is essential when preparing an estate plan, and more particularly, when the business transition is taking place.

Several academic institutions are offering courses on estate planning. For instance, American Law Institute is offering estate planning course CLE for those who represent family business owners. It provides right from estate administration, updates on transfer planning, current income tax, trust advisors, trust protectors, dealing with intra-family rivalries in succession planning, etc.

Academics and legal experts find that many family business owners lack awareness about even charitable planning and charitable gifts. Over 50 percent of family business owners are not exploring the options involved in tax benefits.

Some family business owners do not take advantage of several options available to avoid estate tax, gift tax and other taxes, legally. This happens out of ignorance or negligence. Hence, it's wise to review and refine existing estate plans.

Many family business owners realize that they're richer than when their estate plan was drawn up. Family business owners, depending upon their state and federal laws, can have updated estate planning not only enhance value, but add protection as well.

Estate planning is essential for inheritance. It helps heirs retain control of assets and minimizes tax imposed by the State and Federal government.

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What Effects The Fed's Expected Interest Rate Increase May Have on Small-Business Lending

With the Federal Reserve set to raise interest rates for the first time in seven years, there’s been lots of talk about its impact on investors and home-buyers. But any increase will also affect entrepreneurs who are trying to finance operations or expand to new areas.

What will an increase in rates mean for business owners? 

The obvious answer is that interest rates on small-business loans should go up. But the Fed’s move to increase rates after keeping borrowing near zero since the financial crisis is expected to be slow and easy, perhaps just 25 basis points this week, meaning that any impact on business borrowing costs should be minimal at first. Then, too, banks – which pulled back from small business lending during the financial crisis – might increase their lending to small businesses if the economy improves. That would be especially welcome as bank loans are cheaper than most other sources of capital.

The Bigger Question.

The bigger question over time – and one that hasn’t been tested in previous market cycles – is what will happen to the marketplace lenders that rely on algorithms and higher rates to fill the gap left by banks for small-business loans. These marketplace lenders have relied on money from hedge funds and private-equity firms who have been searching for yield in a low interest-rate environment. Whether that liquidity remains or not as rates rise depends what happens to the spread between marketplace loans and corporate debt over time – and how much risk investors are willing to take in a credit environment that’s become increasingly concerned about risk.

Fed policy is only one factor in small-business loan rates, as anyone who’s tried to get financing the past few years and been offered a loan at 40% or higher despite historically low interest rates knows. Whether banks truly return to small-business lending, how lenders are able to use technology to improve their underwriting, and whether the economy is on better footing will all be factors going forward. In the meantime, if you’re looking to start a business or get financing now, there are other things to worry about than the Fed’s decision.

To prepare for the coming change please contact Redmount Capital Partners or learn more about our capabilities.

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Is there a recession on the horizon?

The last few days have reminded everyone how quickly markets can turn. In the space of barely a week, the VIX Index, a measure of market volatility, spiked from 13, suggesting extreme complacency, to over 50, evidencing total panic.

Are the fears overblown? Many think so. Some see more to come. What is the reality?

1. The United States is a relatively closed economy

Most U.S. economic activity, nearly 70% of it, comes from domestic consumption. While the country isn’t immune to external shocks, there needs to be a transmission mechanism, such as a spike in oil prices, to impact the domestic economy.

Though a strong dollar and weakness in China have had a negative impact on U.S. corporate earnings, neither has had a material impact on overall U.S. growth. In fact, some of the disruptions from overseas come with silver linings for U.S. consumption and growth: lower rates and cheaper oil.

2. Higher rates are unlikely to derail the recovery

Rates are falling, supporting the housing market. Given low inflation and falling inflation expectations, the Federal Reserve (Fed) is likely, at most, to execute a single rate hike this year. This is in contrast to how most recessions start, with the Fed moving too aggressively and rates rising too rapidly.

3. Cheaper oil is a positive for U.S. consumers

Though the U.S. now has a large domestic energy industry that is feeling the pain from lower oil and the U.S. consumer certainly faces many headwinds, cheaper gasoline should support U.S. consumption.

4. There is little statistical evidence that the U.S. economy is slowing

Prior to the last recession there were several red flags signifying a recession ahead. According to Bloomberg data, leading indicators had been negative for nearly two years, new manufacturing orders slipped into contraction territory in January 2008 and the Chicago Fed National Activity Index (CFNAI), my preferred metric for forecasting near-term activity, had been consistently in negative territory for most of 2007 and all of 2008.

This time around, lower rates and cheaper gasoline help explain why the numbers look very different, as Bloomberg data show. The CFNAI actually hit a 7-month high in July, leading indicators are up roughly 4 percent year-over-year, and despite the slowdown in China, the new orders component of the U.S. ISM survey is 56.5, consistent with solid if uninspiring growth.

There are two caveats. 

First, in today’s slow growth world, it won’t take much to knock the U.S. economy off of its trajectory. As we’ve seen in recent years, a cold winter is enough to cause at least a temporary contraction.

Second, it’s possible to have a bear market without a recession, though I don’t expect this to occur. But if international market volatility becomes severe enough, it could drag down U.S. stocks, even as the U.S. economy continues to grow.

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5 Things Bill Gates and other mega entrepreneurs have in common

Bill Gates' net worth is around $80 billion. He owns the $12.6 billion ownership of Microsoft. He also owns a $4.5 billion ownership in Canadian National Railroads, a $3 billion ownership in Republic Services, and a $2.8 billion ownership in in Ecolab. His diversified investments, through Cascade Investments, amount to $37.6 billion. 

As such, Microsoft, the company he started and associated with the most, stands for only 16% of his family wealth. 

Bill Gates is a mega entrepreneur. 

What sets very successful entrepreneurs, like Bill Bill Gates, apart from the rest? What turns them into mega entrepreneurs running a myriad of companies, overseeing immense and complex web of capital, and forging multigenerational wealth and legacy?

Here are some interesting statistics on mega entrepreneurs:

• One third of FORTUNE 500 companies are owned or controlled by mega entrepreneurs or their families
• 67% of NYSE companies are owned or controlled by mega entrepreneurs or their families

On the other hand:

• About 30% of entrepreneur started and led business survive to the second generation
• Only 12% make it to the third generation
• Only 3% make it to the fourth generation

Many wonder what has become of the Rockefellers' ownership and clout over Exxon, Mobil, Chevron, Amoco, Standard Oil of Ohio, Atlantic Richfield, etc. We wonder as well, but its not there...anymore.

All entrepreneurs face the same challenges as they grow their start-ups in to successful companies:

1. Raising capital without losing control 
2. Recruiting and retaining top talent 
3. Business continuation and succession 
4. Converting profits and value to wealth

How mega entrepreneurs deal and keep dealing with the above challenges makes the difference. 

So, what sets mega entrepreneurs, apart from the rest? 

1. Mega entrepreneurs have the "big-picture focus".
2. They take risk and leverage financial and human capital to grow their enterprise.
3. They rely on their entrepreneur's offices to manage finances, support M&A deals, raise or repay personal capital, execute financial reorganizations or restructure debt. Employees of their core companies are not involved in these processes. 
4. Liquidity and cash management is given a high priority, managing cash efficiently and having it ready for difficult times and when great opportunities arise.
5. Risk management is paramount.

Below are some examples of mega entrepreneurs and their strategies. 

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Susanne Klatten: Dynasty Company as the Backbone of Dynasty Fortune. Wealth created though growth of a single company, BMW. Company is still a key asset of the family and its business identity. Other key assets are acquired and sold in line with “Dynasty Company” strategy

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Leonardo Del Vecchio: Multi-Generational Family Company Leading to a Dynasty Fortune. Wealth creation through growth of a single company, Luxottica. Company is the identity of business family. Strategically and selectively diversifying dynasty fortune.

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Bill Gates: Company Value Leading to a Multi-Company Family Fortune. Wealth creation though a growth of a single company, Microsoft. Diversification of holdings and assets. Establishment of strategic wealth thought.

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Wang Jianlin: Diversified Entrepreneurships Leading to Family Fortune. Wealth creation through network of holdings growth. Increased concentration of holdings in key companies and assets. Strategic diversification across asset classes and geographies.

“The difference between a business family and a business dynasty is the strategy. Everything must be in line with strategy. Selling assets, exiting ventures… followed by reinvestment of capital – in everything strategy sets the rules.” - Baron Albert Frère, Founder and Chairman of Groupe Bruxelles Lambert, one of the largest family enterprises.

Statistics & Graphics: Courtesy of Financial Strategist Board.

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Unlocking resources through better corporate cash management

Companies call on the full resources of their cash management, as they need to grow, execute CapEx or acquisitions.

But going an extra step gives financial managers a chance to help benefit their organization in a less-than-usual way.

The financial manager has an excellent opportunity to contribute strategically to a company's growth, by demonstrating how working capital can be leveraged to serve as a financing and risk management tool in conjunction with, or in addition to, traditional funding methods. This can help strengthen the capital plan and help improve the debt structure.

The benefits of freeing up cash to grow a company:

Reduced financing requirements

• Existing cash is typically the cheapest form of financing. Using it to finance growth, including for CapEx or acquisitions, can reduce the external financing expense of stock or bond issuance. 
• The cash released from
  
  working capital in this instance, should be valued at a weighted average cost of capital (WACC) or, alternatively, the cost of financing the growth should be included in the capital plan typically developed by the financial management team. 
• In the example above, established working capital standards, can guide a company to release a sizable amount of cash, which applied at a well structured WACC can generate benefit for the company.

CLICK HERE

Look out for financial ratios and credit ratings

• Credit rating agencies like D&B review company balance sheets. 
• Rating agencies usually look upon increases in free cash flow as a positive factor during this process; however, it’s important to note that agencies may penalize companies that ineffectively manage their working capital compared to their peers.

A positive impact on company strength and valuation

• When looking at a discounted cash flow valuation, the release of working capital that can be achieved by the company would translate as an increase in cash, ultimately improving the valuation of the company.
• This needs to be looked at carefully and conservatively to ensure that all improvements can indeed be achieved; the finance team is in a prime position to evaluate this.
• When using weighted average cost of capital, including working capital release in the calculation may boost a company's financials through a one-off increase in free cash flow.
• Although working capital is priced into a corporate acquisition, the full potential of the synergies often go unrealized when the treasury team, which handles working capital daily, isn’t involved early in negotiations.
• Working capital is often looked at with more detail in private equity deals, as it is the goal of financial sponsors to maximize asset allocation and drive quick shareholder returns.

More funds for growth

• Cash unlocked from working capital may help a company grow more quickly, facilitating integration and reducing the execution risk from a cash flow requirement perspective.
• Strategic events such as mergers, acquisitions, sales, reorganization, etc. provide the perfect opportunity to review the working capital position of the company. 
• Although the review of working capital and improved management of cash may require some efforts, (improve processes, deploy new banking solutions, and change policies), uncovering these funds can sometimes can release sizable cash to the company's balance sheet.

Released cash can add up quickly

Even a one-day improvement in working capital management parameters can have a profound impact and the finance management leadership plays an important role in this.

Working capital release techniques could be bank-led solutions such as factoring, supply chain finance and card solution, or internal re-engineering such as supplier and customer payment terms standardization. A centralized liquidity structure automated at an in-house bank level can also move the needle in terms of the funding mix of long-term versus short-term debt structures.

As another internal example, larger companies execute ‘payment runs’ on a weekly or fortnightly basis. As these payment files usually are designed to have all payments processed on that same day, the company often ends up paying invoices earlier than their due date (invoices due in the following

week or two) to avoid the cost of executing daily payment runs. Changing this process so that payments are ‘warehoused’ at the bank level until the invoice due date can be a quick and easy way to release working capital, often resulting in a three-day extension of Days Payables Outstanding.

The example above illustrates how the finance manager’s knowledge of the organization’s cash flow can help establish what the achievable extension of company's days payable outstanding is, and therefore, what the subsequent reduction in the cash conversion cycle would be.

Best practices to consider

• Involve finance staff as often as possible in to decision-making process.
• In M&A situations finance team can propose the use of cash from working capital as a funding option.
• Identify the focus areas for working capital release.
• Prioritize the deployment of processes and policies, which can quickly release cash from the working capital to accelerate the funding growth.
• Centralize treasury operations: consider using shared service centers to standardize payments flows and leverage funding from an in-house bank with automated cash concentration structures.
• Hand off functions to banks, such as the financing of some of the strategic suppliers through a supply chain finance program, or the management of some local processes (such as payment file translations).

Note: Calculations of Working Capital used for the examples in this document follow the bellow formulas:

Days Payable Outstanding [DPO] = (Trade Accounts Payable / Cost of Goods Sold) * 365
Days Receivable Outstanding [DSO] = (Trade Accounts Receivable / Revenue) *365
Days Inventory Outstanding [DIO] = (Inventory / Revenue) * 365
Cash Conversion Cycle [CCC] = DSO – DPO + DIO

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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.

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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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.

Sale-Leaseback, A Hidden Treasure Chest?

American companies, including smaller, family-owned businesses and Corporate America, own an estimated $4.1 trillion of non-specialized "investable" real estate. Yet historical returns from equity investments have consistently exceeded those of real estate. As a general rule, any dollar that can be "monetized" or sourced from the sale of corporate real estate and reinvested in that company's listed or unlisted equity stock would create positive leverage.

That's why any business owner or CFO whose company owns real estate should review or consider a sale-leaseback transaction.

What is Sale-Leaseback?
Although used for more than 50 years, sale-leaseback transactions – and the benefits they can offer to corporate investors – are still not always fully understood.

In it simplest form, a sale-leaseback transaction entails the sale of corporate real estate and the simultaneous commitment to a long-term lease, generally 15 years or longer. This combination allows a company to redeploy the capital that had been invested in real estate into the core business.

Why is it worthwhile?
The biggest benefit of a sale-leaseback transaction is the ability to increase a company's financial flexibility by off-loading real estate at attractive long-term rates, while maintaining the availability of bank financing for a future date. By being both the lessee and the seller of the property, a corporation has greater bargaining power to ensure it maintains uninterrupted control of the facilities, including operations, maintenance and alterations, it negotiates the rights to assign and sublet the facilities, as well as enjoys lengthy initial and renewal terms.

What's the catch?
While sale-leaseback can be a worthwhile strategy for many companies, it is not without risk. Some of the risks to consider are:

Loss of residual property value
In most cases, the future value of any single-tenant property will be lower than today's sale price since real property generally depreciates over time. In the unlikely event that the residual value of the property increases over the primary lease term, the potential rental income from the property will increase as well. By negotiating a renewal option past the primary term at fixed rents, the seller/lessee can enjoy rental costs that are below market while still benefiting from greater potential sublease income.

Possible Relocation
At the end of a lease without any renewal options, a seller may be forced to either negotiate an extension at current market rents or relocate. To prevent such a situation in a sale-leaseback transaction, a company should consider employing a long-term (50-60 years) lease, thereby delaying the need to relocate or renegotiate until the asset will likely have become obsolete. When the term comes due, the buyer/lessor almost always would allow renewal of the lease, and on a worst case basis, at the same price the seller/lessee would pay for alternative space.

High Rental Payment
Rental payments under the lease cannot be adjusted without the consent of the lessor. As a result, if the rental market softens, a seller/lessee may be locked into a rate higher than the market rate. Yet, the company has protected itself from a decrease in property value and still enjoys the use of the capital. In addition, a decrease in rental rates represents a good opportunity to renegotiate the lease at a lower, modified rental rate for a new primary term.

Specific Accounting Principles
While the fundamental accounting principles of sale-leasebacks are relatively simple, following the generally accepted accounting principles (GAAP) provisions are critical. Failure to comply may result in the re-characterization of a sale-leaseback transaction as a mere financing vehicle, depriving the parties of the very benefits they have sought to achieve.

Can Sale-Leaseback Add Financial Value?

Will it strengthen company financials or enhance shareholder wealth? Can sale-leaseback pay down debt, reduce risks, increase working capital, or fund acquisitions by executing sale-leaseback?

Basic diagnosis can show financial impact analysis, blended cost of capital and other potential transaction terms/conditions, analysis of impacted balance sheet, efficiency, liquidity, & risk ratios,

To take further steps and diagnose your own opportunity click here

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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.

How important is the financial "Big-Picture" focus?

How important is a strategy-driven and big picture focused financial mindset for the growth of enterprise and accumulation and preservation of capital?

It seems most successful entrepreneurs have the "big-picture focus".

Successful entrepreneurs have a habit of building one business, selling it fully or in part, and then moving on to the next—building wealth through a series of "equity events“.

Roughly 80% of typical entrepreneurs’ net worth is tied up in their companies. This changes over time as successful entrepreneurs grow business interests outside of the core business.

What are some of the challenges faced by entrepreneurs and business owners, as they grow their enterprises?

1. Raising capital without losing control 
2. Recruiting and retaining top talent 
3. Business continuation and succession 
4. Converting profits and value to wealth

How entrepreneurs and business owners deal with the above challenges makes a difference for their business enterprises,

“The difference between a business family and a business dynasty is the strategy. Everything must be in line with strategy. Selling assets, exiting ventures… followed by reinvestment of capital – in everything strategy sets the rules.” - Baron Albert Frère, Founder and Chairman of Groupe Bruxelles Lambert, one of the largest family enterprises,

Here are some interesting statistics on family-owned businesses:

• One third of FORTUNE 500 companies are owned or controlled by entrepreneurs or their families
• 67% of NYSE companies are owned or controlled by entrepreneurs or their families
• Only about 30% of family businesses survive to the second generation
• Only 12% make it to the third generation
• Only 3% make it to the fourth generation
• 1 in 4 family businesses have a continuation plan
• 37% have written a strategic plan

“The difference between a business family and a business dynasty is the ability to withstand the shocks of intergenerational transfer, combined with each generation’s ability to adapt”. - Rolland B. Hills, Chairman of Hill van Breen Continuity and Chair of Redmount Capital Partners advisory board.

Our observations identified that most successful entrepreneurs have a formal approach to managing their "big picture" - strategy setting and implementation, and financial and risk management.

• Noticeably, for these, successful entrepreneurs rely on people outside of their core companies. 
• They structure formal entrepreneur's offices or family offices for these purposes. Initially they may rely on shared Entrepreneur's Offices or family offices.
• Strategic events, such as selling or buying companies, increasing or decreasing ownership in companies are handled by these structures
• Raising or repaying personal capital, financial reorganizations, debt restructuring activities, etc. are evaluated and executed at these levels.
• Cash management is given a high priority, striving to manage cash balances efficiently, See more on Cash Management 
• Risk and liquidity management is paramount.
• Employees or officers of their core companies are rarely involved in these processes.

Below are some examples of very successful entrepreneurs and family-owned company leaders, in our opinion, commanding a "Big-Picture" focus. 

Click the graphic to enlarge
Susanne Klatten: Dynasty Company as the Backbone of Dynasty Fortune. Wealth created though growth of a single company, BMW. Company is still a key asset of the family and its business identity. Other key assets are acquired and sold in line with “Dynasty Company” strategy

Click the graphic to enlarge
Leonardo Del Vecchio: Multi-Generational Family Company Leading to a Dynasty Fortune. Wealth creation through growth of a single company, Luxottica. Company is the identity of business family. Strategically and selectively diversifying dynasty fortune.

Click the graphic to enlarge
Bill Gates: Company Value Leading to a Multi-Company Family Fortune. Wealth creation though a growth of a single company, Microsoft. Diversification of holdings and assets. Establishment of strategic wealth thought.


Statistics: Courtesy of Financial Strategist Board.

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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.

1Q15 Private Equity Environment Review

The first quarter of 2015 saw a separation in trends across industry metrics. Global fundraising, IPO issuance, and U.S. venture capital investment activity all fell from the prior quarter. In contrast, U.S. and European buyout investment activity increased from the fourth quarter of 2014. Looking forward, the decline in energy commodity prices will have an impact existing energy-related private equity portfolio companies, as well as possibly provide attractive opportunities for private equity firms to deploy capital in the sector.

Some additional notable observations from the report include the following:

• Average leverage multiples for U.S. buyout transactions declined from 5.7x to 5.4x in the first quarter of 2015 from the prior year’s average 
• 32 companies completed their IPOs on U.S. exchanges—a 50% decrease from both the prior quarter and the year-ago quarter. 
• The average equity contribution rate for a U.S. buyout transaction completed in 1Q15 was 39.4%, compared with 37.3% for all of 2014 
• Venture capital–focused funds experienced an upsurge in fundraising, raising $13.5 billion during the quarter
• PE firms raised $72.7 billion in 1Q2015, 19% decline from the prior quarter and 10% decline from the year ago quarter,

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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.

The effects of bulging corporate purses.

High cash levels, accumulated by S&P 500 corporations, are being put to work. Above charts are showing growing levels of capital expenditures, M&A activities, dividends, and stock buybacks by the nation's largest corporations.

If sustainable, this will benefit the economy. Capital expenditures can add to the industrial growth. Dividends and stock buybacks will probably add to consumer spending and housing sector strength. Corporate mergers and acquisition activities may strengthen equity markets.

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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.

Are property valuations chasing future rent increases?

First, let pictures (charts in this case) speak their 1,000 words. 

Commercial property market valuations, in almost all categories, have eclipsed 2006-2007 picks. 

Valuations are even higher in key markets like Tri-State, Boston, Washington DC, Southern California and San Francisco.

" Capitalization rates have dropped to historical lows of 3% to 4% for industrial and multifamily deals in particular." Orange County Business Journal wrote on March 16, 2015.

Yet the largest and most sophisticated investors, led by pension funds, private equity funds, and insurance companies, are in the midst of buying spree.

The rational on the part of buyers? Potential rent increases in the near future. It seems the largest aggregators of capital believe in the continuing economic growth.

The Secrets to Valuing Hot Tech Companies.

This week Bloomberg Business shed some light on on this.

The opinion was built around a photo-messaging app raising cash at a $15 billion valuation. Bloomberg Business doubts that this company is actually worth more than Clorox or Campbell Soup and was curious where did investors come up with that enormous headline number?

Here's the secret, Bloomberg thinks, to how Silicon Valley calculates the value of its hottest companies: The numbers are sort of made-up. For the most mature startups, investors agree to grant higher valuations, which help the companies with recruitment and building credibility, in exchange for guarantees that they'll get their money back first if the company goes public or sells. They can also negotiate to receive additional free shares if a subsequent round's valuation is less favorable. Interviews with more than a dozen founders, venture capitalists, and the attorneys who draw up investment contracts reveal the most common financial provisions used in private-market technology deals today.

The backroom agreements are becoming more common as tech companies stay private longer, according to the interviews and financial documents obtained by Bloomberg Business. The practice obfuscates the meaning of a valuation, which can become dangerous down the road because private investors aren't taking the same risks a public-market shareholder would. By the time a company does go public, the valuation it got from VCs may not align with its balance sheet. 

Our own opinion? The above is not exactly a great confidence builder.

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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.

The Magic in selling a business interest.

Recently the partners of Redmount Capital were at a luncheon with Earvin Magic Johnson delivering a keynote speech.

We were hoping for some insight from Magic, in our mind the most successful pro-athlete entrepreneur, turning his athletic power into business empire. He built best-in-kind connections to propel his business juggernaut. His business visions are not only contrary to the consensus but also ahead of times.

Right away we were made aware that Magic is a genuinely fun person. He is charming yet highly opinionated.  We knew he was competitive but as he spoke we also learned how fond he is of a good competition. It seems he is not only in it to win it but also to get better. All along he was affectionate to the listeners, truly appreciating their interest and presence.

"So should I sell Lakers?"

As he spoke we kept looking for details in his entrepreneurial ways. He let us as he brought up the

sale of his ownership in LA Lakers. Magic acquired interest in to the team in 1994. In 2010 the news

of his LA Lakers sale took many by surprise, Most people thought that he was making a mistake and that he will come to regret it. 

At the luncheon Magic explained why he decided on the sale. LA Lakers were doing as good as they have ever done...or could have ever done. Kobe was getting older. Magic had another plan in the works. He was just looking for the right offer. 

What was his plan? His purchase, in partnership with Guggenheim, of LA Dodgers.

Magic knew Dodgers presented a similar opportunity as Lakers in 1994, only larger. He realized that he needed capital. which he could obtain, if he sold something. He also knew that he needed his focused attention on Dodgers.

Several well-known billionaire investors were ready to partner with him in the Dodgers deal. Choosing the right one seemed easy but he wanted himself to be a large investor in the deal. He wanted to call the shots and make good money.

Prior to that, several offers were received by Magic to consider selling Lakers, but he was looking for the "right offer". He did not elaborate what he thought the "right offer" was. We suspect he knew what it would look like - at a right price and timed to let him get the Dodgers' deal done.

"So should I sell Lakers?" Magic asked us all in the room, extending the microphone towards us. "You guys are smart enough, you have clients like me". "Yes", spoke the group. Magic nodded in satisfaction, with his smile getting brighter.

To register or learn more please click here 

In 2010 Earvin Magic Johnson effectively exchanged his ownership in LA Lakers for the one in LA Dodgers. A classic replacement of a business interest in a stage of diminishing returns for a one with remaining opportunities. Another plus, the business was bigger with higher RIE (Return on Invested Effort). 

This may just be the Magic approach to selling a business interest.

Photo by Curtis E. Hollowell, Redmount Capital Partners.