A Year In The Life Of A Container: Lessons Learned as the Box Returns
This interesting project sponsored by BBC News branded a normal 40ft shipping container (outfitted with GPS transmitter) and followed it’s travels around the world for a year. Now back in the UK after more than a year, the detailed stories and informative 90 second videos give a good snapshot of how interconnected the global economies are. Cool idea and interesting project, visit the BBC Box site to learn more about the individual voyages.
Posted via web from jeffreyjdavis’s posterous
Private Equity 2.0
 IN A NUTSHELL: The financial crisis has had important implications for Private Equity sponsors, and the funds that will be successful in the future may need to adapt their strategies to earn consistent returns. |
Disclaimer: I am an executive in a private equity sponsored company, we have a very supportive sponsor, and I truly believe in the potential of the private equity model to boost the economy, without tax-payer stimulus dollars.
Image: CCL - Brave New Films
People tend to be strongly polarized regarding the role of private equity and it’s potential for benefit or harm. Proponents cite the fact that the focus on EBITDA and free cash generation which PE groups drive is actually beneficial for many company management teams. It’s hard to argue with the fact that with some skin in the game, operating management teams typically have incentive structures which drive them to relentlessly focus on their companies’ performance. And there are many stories of firms where a strong and involved private equity backer helped a management team eliminate huge amounts of waste and unlock large amounts of shareholder value. But for every positive story, there are a number of negative value erosion exploits which can be told. Many deals were done as mere financial engineering demonstrations with little to no actual improvement in business fundamentals. The market’s addiction to leverage unfortunately frothed to a point where many respectable, longstanding franchises were driven into re-organization or receivership due to debt service loads which were incapable of being managed through even the slightest of downturns. At the deal market’s peak, a churn mentality was prevalent with hold times of less than 2 years, which clearly drove a short term focus on results and a lack of re- investment in the firms’ future capabilities.
As the global economy begins to think about trying to crawl out of the last 24 months’ meltdown, the Private Equity world reaches an interesting branch in the road. More than $500B of portfolio company debt will mature over the next 4- 5 years, and it is unclear whether there will be sufficient risk-tolerant liquidity to fund many of the recapitalizations. A number of newer or less prudent funds have tumors in their portfolios, some diagnosed, but many probably not as of yet. Experts have estimated that as many as 1 in 4 of current funds will fail or will need to be severely restructured. Although we frequently hear of the huge stashes of dry powder on the sidelines, without properly structured debt financing, this money is unlikely to get deployed any time soon. More than 20% of current vintage funds are more than three-fourths committed on their current capital raise, meaning that they will have to wait for institutional investors to regain their appetite for alternative investments before they can receive additional investment fuel.
So, will Private Equity go away? Unlikely. It has been an engine for recovery for the last several economic cycles, and it is unlikely that this one will be any different. What will be different, I believe, is the kind of Private Equity firms who will emerge as winners in the landscape of Private Equity 2.0. My fairly obvious predictions:
- There will be fewer deals and it will be quite some time before the deal market regains any level of irrational exuberance. Fewer deals means more time to do deals right. Firms will be more selective and firms that have very solid due diligence and value recognition processes will capture more of the upside than those which are impatient or inperceptive. Fewer deals also means more time to negotiate tough, and more firms will realize that money is made more from the buy and less from the sell.
- Deals will be less levered, so by definition, returns will be lower. It will not be uncommon to see deals with more equity than debt or even all equity deals. Firms will either need to raise larger funds to reduce fund concentration or will need to have the courage to make relatively large concentrated equity investments.
- Hold horizons will be longer. Deals that are held in a portfolio for 5 to 10 years will not be uncommon. Private equity groups will need to have the vision, patience and the constancy of leadership to fund and enact long term multi-year improvement strategies in their portfolio companies. Not all PE groups have this headset today. LP capital return expectations and timelines may need to be extended accordingly.
- The firms that will win will be the groups that can bring real value creation expertise to the table. The days of just betting on a solid management team, incentivizing them and amplifying their progress with a heavy dose of leverage and letting the portfolio company print equity returns on it’s own have probably passed. Although many PEG’s have solid operating partner teams today, the groups that will win will probably be the ones that develop full in house multi-functional consultancy capability (LEAN, six sigma, strategy, value selling, global expansion, change management) which can be deployed to address opportunities in the portfolio. Additionally, the tougher environment will probably drive a premium on developing true domain expertise via multiple sequential investments in a sector. This trend will allow savvy PE groups to identify value plays which may not be obvious and will also enable inter-portfolio synergies which will be accretive for both companies.
- As returns get squeezed, the often overlooked EBITDA drain of service providers on the portfolio companies may become a focal point and an opportunity for well capitalized private equity groups. We may see sponsor groups which totally centralize and/or insource service providers, including public accountants, retained executive search, legal firms, risk assessment firms, environmental management firms, IT and other back office tasks. While this would start to blur the line between financial sponsor and conglomerate, it probably could account for 2 – 3% of EBITDA margin lift across the portfolio.
- Finally, I think the firms which win will be the groups that invest most heavily in the talent management of their portfolio companies. Private equity groups will begin to have fully resourced human capital teams and will be heavily involved in recruiting into the portfolio company, and not just at the C-suite. New manager assimilations, 360 appraisals and detailed organizational leadership development plans will become the norm and will be driven by the equity sponsor if they are not already a part of the portfolio company’s DNA. Incentive structures for management will continue to be highly tied to company performance, but will probably take on a greater degree of long term value creation. Top-talent retention will become even more paramount than it is today. PE groups’ HR processes will begin to look much more like those of blue-chip Fortune 500 companies than they have historically.
Just like in nature, a changing environment requires adaptation for survival. It is difficult to predict exactly how the Private Equity industry will adapt as it comes out of this downturn, but I think it is safe to say that the industry will adapt in many ways. Only time will tell. What do you predict?
A Global View Of The Housing Bubble
This interesting graph from McKinsey highlights the tremendous run up in home prices on inflation adjusted terms over the last 40 years since 1970. This runup reversed abruptly last year, with the US shedding 10% of value and the remainder of the global economies losing in aggregate around 4%. This slide equates to nearly $3.5 trillion dollars of personal wealth evaporation. Considering the immense mortgage leverage overhang on many of these homes and the chance that any appreciation will be slow to come, this global housing bubble will certainly dampen growth in consumption and global economic recovery.
Posted via web from jeffreyjdavis’s posterous
McSaturation of The Continental United States
This map uses geolocatiion data to plot the density of the 13,000 US McDonald’s franchise locations and color to represent the distance to the nearest outlet. It is interesting to see that the Eastern US is fully saturated and that in many locales the outlets are nearly right on top of each other. The most McRemote location in the US is in South Dakota, 145 miles by car from the nearest Mickey D’s.
I’m Lovin’ It!!
Posted via web from jeffreyjdavis’s posterous
US Job Market Competition Spectrum
indeed.com
I came across an interesting infographic today on the Indeed job site comparing the relative level of competition for job postings by major metro market in the US. The graphic basically compares the number of postings (as empty blue chairs) to the number of unemployed person (as orange stick figures), with a ratio. The graphic is clean and simple, and clearly displays the spread in relative job hunter competition across the nation. They’ve also hot-linked each city entry to Indeed’s job postings for that city. What does it say about the United States that there are 6 open postings for every unemployed person in Washington DC, but 18 unemployed people for ever posting in a prior industrial base like Detroit?
Why Board Meetings Should Be Face To Face
(Following was in response to a post on Fred Wilson’s A VC blog regarding the imperative of keeping board meetings face to face, rather than telephonic.)
Fred -
Chiming in from the other side of the table here. As a portfolio company operator, I also dramatically prefer the face to face board meeting. We have a pretty nice big screen videocon setup at our offices (not a Cisco Telepresence, but pretty high end). We’ve used it a few times, when the weather was really sketchy for travel. It’s nice to be able to have all your notes spread out in front of you as you pitch to your board via videocon. But it’s unnerving if your sponsor goes on mute for 15 seconds and is chatting across the table. Additionally, I get a lot of value out of reading the body language and watching which bullets they circle or pages in the book they fold the corners over. It’s much more educational for me to continue to learn how my equity sponsor thinks about the company and about value creation.
In person is definitely the way to go. It’s why we fly from rural South Carolina up to our sponsor’s office in New York every quarter. Worth the time and $$$ for us.
Originally posted as a comment by JeffreyJDavis on A VC using Disqus.
Who Is John Galt?
"Who Is John Galt Billboard On I95 South"
On a recent driving trip down the East Coast of Florida, I was surprised and awakened to see the above billboard. Sure, I’ve seen the occasional “Who Is John Galt?” bumper sticker, and given the driver a knowing nod upon passing them, but I’ve never seen the perennial objectivist question committed to in such a big way. In a world where daily news of ongoing government encroachment on free market principles and increasing dis-incentives for individuals to work hard and create something of value, it’s easy to feel like we are living in the first few chapters of Atlas Shrugged.
Seeing this billboard filled me with curiosity and mystery, but somehow gave me hope. Who funded it? Is he a successful small business owner, entrepreneur, inventor? Why isn’t there a contact number or website for more info? Who was he hoping to influence, and to do what? These thoughts stayed with me throughout our trip and on the way back up, I made a point of pulling over to take a photo. Those who know, know – and will hopefully help to effect a change of course in our current trajectory. Those who don’t yet know, will hopefully be curious enough to investigate and draw their own conclusions using the power of their free mind.
Postscript: Just this morning while doing a little bit of Googling I learned that the gentleman who funded this sign, Craig Root, is indeed a successful small business owner. Turns out he founded and owns “Vista Outdoor Advertising” the outdoor advertising firm placing and operating this billboard. Per Root: “I’ve received only positive comments. Of course, only those of us who know the book and Ayn Rand would get the reference but it’s been great to rekindle the notion in our current atmosphere. I’ve also convinced some people to read the book just based on the sign. If 50 people read the book because of the billboard, that will meet my primary objective.” I hope his business booms and that current and oncoming tax structures don’t cause him to redirect his initiative.
I also hope some of our elected officials take a driving vacation down I-95 to Florida this summer, it’s beautiful this time of year.
How The Average US Consumer Spends Their Paycheck
There’s a great infographic posted recently on the Visual Economics Blog.
Distribution of Spending For The Average US Consumer
The infographic design itself is good, because it’s clean, colorful without tooo much information. I think the segmentation of the spending categories is about right, not too coarse but not too fine. I also like the way some of the major categories (food, housing) have been further segmented with sub-detail inside the ring.
Regarding the content and the data, a couple of things struck me. It’s interesting to me to see how much the “average” consumer spends on vices such as tobacco and alcohol, especially considering that large portions of the economy are non users and spend zero on these categories. The fact that people on average spend almost as much on food away from home as they do at home surprised me. Finally, all of us who are homeowners know it, but seeing it graphically reinforces the major component of income devoted to housing and reinforces how it has such a major impact on our current economic situation.
So how do you spend compared to Joe Normal, are you “Average”? What’s the impact of your spending patterns on the economic recovery, and vice versa?
Freemium and Freeconomics: Nothing is “FREE”
As I tell my kids frequently, “NOTHING is free”. (Apparently Chris Anderson’s new book “FREE” is one exception.) Freemium and Freeconomics are very cool buzzwordy concepts, but at their core, the two concepts of “Free” and “Revenue Model” are mutually exclusive.
I think the real play is the segregation of which constituency is the “User” and which is the “Customer”. The “User” supplies the eyeballs, the traffic, and hopefully the Ad Clickthroughs. In this model, The “Customer” supplies the (Ad Placement) Revenue. In a true for-profit enterprise, there is no Free Lunch from the Customer’s perspective.
If you get something “for FREE”, chances are somebody’s paying. Chances are that somebody may be you, directly or indirectly. Just make sure you’re comfortable with that.
