Does Private Equity Care About Public Relations?

While most of us private equity types can not jet over to Switzerland for the world’s top economic conference at Davos, we can now get a view into many of the panels with their “celebrity business people” thanks to You Tube postings. Here is one of my favourites featuring David Rubenstein of Carlyle, a top private equity firm in the USA. He explains why his company investments into private companies have done so well. Despite the charm offensive, the first questioner, a Spanish journalist still wants to know how private equity will affect unions. Rubenstein manages to show that private equity has a heart and a sense of humour.

It does raise the issue that private equity needs to do a better job with public relations and, as Rubenstein says, "talking about what private equity does and how it works." My book Money Magnet certainly recognizes that family businesses do not know enough about it and the broader options it offers. Rubenstein does go on to emphasis that the name private equity is a bad one as when they bought Hertz from Ford there was far more disclosure required as it was no longer buried in a large company's financial statements. The same laws and legislation applies to privately owned business as to the public ones. Just because a company partners with private equity does not mean it is spirited away to a deep, dark cave.

Link:Watch Davos.

Such Shocking Performance!

I chatted to a fund manager about the fact that 90% of Businesses in the USA are Still "All in the Family" or family owned. In Canada the figure is given as 75% to 80%. This is still very high. When I made a call to a my friend, Mr. Fund Manager, he had his worthwhile version of why this is the case:
Me: So why are 90% of all business in America held by families and are private?

Mr. Fund Manager: Because the returns are generally too low to cover a true imputed cost of capital (currently some 9% - 3.5% risk free rate plus 5.5% equity risk premium - for an ungeared company) - markets would not stomach such underperformance....
Me: I think it's more about not wanting anyone else to hold the steering wheel - power and control. Still...I am stunned by this figure.
Mr. Fund Manager : Perhaps that too. But I am always amazed at how most private companies ignore the true cost of capital (because then can get away with it!) and as such produce little positive EVA...
Me: Yes - VERY true. I hate to be sweeping with generalizations but what you say is valid. Private business owners generally do not look at cost of capital or EVA. Only one CEO has even mentioned that on a first meeting when we discuss how to access capital.

Mr. Fund Manager: Interesting point. So what’s new at your end?

Me: We are getting a flood of new private equity funds hitting the market and calling us for companies.

Mr. Fund Manager: So much for the slow down. Are you free for lunch next week?

What's Wrong with Canadian Private Equity?

Another one bites the dust - one of my favourite Canadian success stories is Ace Bakeries which just sold to an American private equity fund. Caroline Alphonso tells the story in her article in The Globe & Mail. Linda Haynes is the partner (wife) of Martin Connell and they are at retirement age so, understandably, want to sell.
At the risk of sounding xenophobic - OK, I'll spit it out. For crying out loud, why not give Canadian private equity a chance? IMAX, another beloved Canadian icon, was sold to American private equity partners and it was a rocky ride and we are all watching Lululemon. In comparison, private equity companies here in the Canada do a great deal for their companies. If there is a bump in the road with Ace Bakeries, it's a plane flight from Chicago to sort out the hassle and is there the same emotional commitment? Adam Smith, my favourite Scottish writer of The Wealth of Nations, was actually a professor of philanthropy. Yes, he was and it taught him pay a great deal of attention about this emotional side of humans and how it drives our work.
This emotional underlay, is the foundation of his book which is still a definitive text on how companies grow and how they get extinguished. Linda and Martin talk about their philanthropy in the Globe & Mail interview, but I would ask how much they thought about their employees and the Canadian economy by selling to American investors when there are so many fine Canadian private equity companies? Did they even try?
OK - I spoke to Linda and she tells me that one of their Board members had a relationship with a company in Chicago and they found a private equity buyer. There were 40 companies bidding on ACE. The private equity firm that bought ACE from this auction is not in the food business. I guess if you are selling, Linda tells me it's like an old affair - it's over, move on, no looking back. I get that - fair enough.

The Delecate Art of Delegating

Throwing that ball up and passing it to your people to catch is tough. Delegation is a thorny issue for many bosses who prefer to do the job themselves. But a good leader gets more satisfaction when able to get others to do tasks at expected high standards.The worst thing a boss can say is "It's going to take me two hours longer to explain this to my employee than if I just do it myself." Then you justify this to yourself: The quality and standard is better, plus the job is done.

But what about the employee? Where is their challenge, their opportunity to grow?The owner of a teen computer camp shared with me his frustration over his staff and their botched efforts at doing the job. How could he motivate his team to work at, or close to, his level? If the boss had used a little bit of emotional savvy, he would have seen the employee physically deflate, her spirits sinking faster than when the judge told Paris Hilton she had to do time, again.

What this approach to delegating misses is that a few hours of rigorous coaching will save hundreds of hours over the next year, freeing up time for revenue- generating tasks and for taking more responsibility yourself. A reputation for teaching is gold. Star performers gravitate toward companies that train skills and push them to embrace scary tasks that challenge. Bill Gates, despite his questionable haircuts, set an outstanding performance level for programmers; this itself attracted talent. But Gates was able to balance the creative tension of setting the standard by encouraging the programmers to meet – and overshoot – expectations.

As the boss, your role is to instill the highest standards of performance and adherence to a shared vision of excellence. Only then can you up the ante and really let go. If you are having problems delegating, mull over these three questions:

1. Am I recruiting in the same old places, in the same old way? I read a business plan for a nail manicure franchise and was astounded by the suggestion to hire university students part time. That's when it hit me that many more people are going to university and ending up in low end jobs. To help their graduates, universities have terrific job posting internet services. The teen tech camp owner hired students from Waterloo's co-op program who were thrilled to work in a tech environment rather than flip burgers (or paint nails).Make it a rule to hire people who are smarter than you. In the interview, talk about the high level of work expected until their eyes pop. The stars will be excited by the expectations, and you don't want the ones who say "no" anyway.

2. Have I really defined my standards?The process of delegating is as fragile and complex as weaving a spider's web. How are you going to teach your skills and level of expectations? How can you illustrate how the end result should look? How can you make sure employees get the job done – building a web to catch the flies – even if it's not quite how you would have done it yourself?With an early-stage business, such as the teen tech camp, there may not be enough in place to show how to do the job. Asking employees to come up with their role and the end result that they think is expected is one way to build up a training culture. Another tactic: Don't underestimate the role of storytelling and myths in building the results you expect. For centuries, little children have been told fairytales to prepare them for "real" life. It works. Business magazines are full of tales of how an employee ran through a burning building for their client. Get one of these stories in your culture too.

3. Am I prepared to let go?Ask yourself this: Do I really step away when I delegate? Once I've set the standards, do I really let go? Alarm bells should go off if you hear your employees saying, "We know you are just going to change everything we do anyway."

Working with managers and being one myself, my experience is that disasters happen when I have not been clear about the end result and I keep popping my head in randomly, interfering with the process.

Green Does Not Make It At The Till

Were you to count the copies of Naomi Klein’s book No Logo that sold globally, you would think that millions of consumers would be switching to green’s top values – curb your consumerism and if you have to buy, shop green. It’s easy to paint business as the only anti-green boogieman but surely the government (municipal, provincial, and federal) also plays a role. Must government only set rules, impose carbon taxes, freak out oil investors, and make doing business generally more difficult?
"Part of being green," says John Loewen, CEO of Loewen Partners, "is caring for the environment and for indigenous people." Tsonga Shoes became “green” and manufactures in an 80%-unemployment-riddled area of South Africa. On-site childcare and educational facilities were established in order to encourage the mostly female workers to create micro businesses and sell their shoes to Tsonga for a living wage. It was working well until, as all manufacturers around the world are discovering, consumers started responding to cheaper goods from China.Tsonga management visited China to look into combining manufacturing locations and were astounded by their discoveries.
The massive, half-empty shoe factory they visited had marble floors. Stunned, they asked the manager how he had raised the capital to build such a place. He told them the Chinese government had paid for the factory. Workers came from hundreds of miles away and stayed in dormitories for stretches of up to a year.
“How can we compete?” asks Russell Lindsey, CEO of Tsonga. “We can put a story about our Zulu shoemaker and her child in each shoebox, but ultimately, the consumer won’t buy Tsonga if cheaper shoes are available.”Indeed. Are those No Logo readers in fact rejecting Wal-Mart’s cheap goods for Bono’s sustainable (but pricier) line EDUN.
We seem to have ADHD consumers this side of the world who, once they enter a store, ignore Naomi’s advice and stampede for the latest lead-painted Barbies from WTO members, such as China. How does our government help our businesses compete and how do we reconcile the fact that green is difficult to achieve when competing with China’s support of their own manufacturers?
Our government talks of Toronto following London’s traffic access restrictions. A good idea for London, but Toronto has much fewer travel options in its infrastructure and few trains to link our cities. Indeed, our transportation seems to be planned by Monty Python with Hamilton’s train track from Toronto stopping 16km away from the city, while other trains pass through without stopping. A functional train for passengers between Hamilton and Toronto would reduce a wretched two-hour trek to 30 minutes. Attractive enough to leave the car behind – you bet!
Instead, our government’s priority is the bun fight about inter-provincial transfers. It’s hard to believe that Canada is one country. And who suffers? Entrepreneurs. With so much inter-provincial paperwork, it’s death by a thousand cuts. Take a lesson from business: Centralized IT departments charged each division service fees so as to share costs. In reality, however, division heads ended up arguing so much about the fairness of the system they eventually turned to outside IT companies to get the job done. Outsourcing became the norm and boomed. Perhaps we could outsource government action for basic transportation services because there is more argument about payment for services than green action. Indeed, it’s time for the government to create joint public-private partnerships with green as the goal.
Canadians balk at these sorts of private-public partnerships despite their success in other countries. Mike Harris’ Superbuild project demonstrated how business backs a project if the government provides initial financial support. When ROM received a $30M commitment from Superbuild, Frank Potter, chairman of ROM’s fundraising arm, said, "This lead investment from the Ontario government will be leveraged many times over by the private sector.”
Potter’s words were prophetic as the private sector followed the government, contributing the bulk of cash and project stamina.Let’s go beyond idealism and get down to action.