Opus Connect

Author:
Steve Sahara (Opus Connect Chicago Chapter Board Member)
Director, Global Financial Advisory Services at Stout
ssahara@stoutadvisory.com

The July Opus Connect Chicago event was kindly hosted by law firm Bryan Cave Leighton Paisner on the 26^th of July at their offices. Jason Berne of BCLP welcomed approximately thirty bank, private equity, and other M&A deal intermediaries and introduced the roundtable discussion topic moderated by Steve Sahara, of Stout:

“Creative Deal Structures – How to Differentiate yourself in a Competitive Market”

• An overriding theme from member conversation exchanges is that sellers value “Certainty of close / speed of close” – so nimble buyers that move quickly and have a demonstrable reputation and track record for hitting agreed milestones / deadlines may have an advantage.  Some strategic / international buyers may be perceived as having a longer / more opaque internal approval process and in such cases maybe disadvantaged in a competitive auction process.  Members seemed to also agree with comments that implied buyers who “Front Load due diligence” pre LOI stand out – the meaningful expense incurred shows commitment to deal / close.

• Chilton McKnight, from Lockton commented “It was great to hear how Opus members commented on the use of Reps & Warranties insurance and how it can facilitate getting deals done smoothly / quickly”

• Jason Berne, partner at BCLP, reasserted that he sees a lot of similarity in his deals and what was noted by some debt capital providers including how creative lending structures can be a differentiator and that including variations in collateral types, security interests and hybrid degrees of subordination in capital structures can help otherwise difficult deals get done.  Lenders who are willing to include unusual collateral pools / payment streams or partner with other lender in split collateral pools (where an ABL lender is first on some hard assets, and the enterprise lender is first on A/R and other intangible assets) can find deals that other lenders do not.  Other differentiators include being willing to accept payment streams from non-typical sources (ice machines in the south or air machines for car tires), or in high net worth financing accepting illiquid assets such as art, mineral rights or even thoroughbred horses.

• Rick Lopez from Rush Street Capital mentioned “participants discussed a wide range of alternatives and differentiation strategies reflecting the competitive market environment, including alternative like  uni-tranche structures (i.e., a single interest rate for the borrower based on a blended senior and mezz debt offering), multi-draw facilities that provided access to funds for specific capital projects, and variable rates based on debt / leverage reduction milestones”.

About the author:

Steve Sahara is a Director in the Valuation Advisory group responsible for assisting the Stout management team with the acceleration of their U.S. and international growth strategy by sourcing new relationships with law firms, accounting firms, family offices, private equity, hedge funds, financial institutions, and public/private companies from middle market to Fortune 500. Steve aligns business opportunities with Stout resources to respond to a clients’ valuation, financial opinion, investment banking, or litigation support needs. Steve has extensive experience working with client management and directors, transaction attorneys, financial sponsors, institutional investors, asset managers and administrators, regulators and accounting professionals across a broad client spectrum including industrial corporations, banks, funds, and insurance companies.

Steve focuses on valuation and dispute consulting for M&A (pre-acquisition diligence, purchase price allocation, post-acquisition disputes, fairness and solvency opinions), financial reporting, corporate and estate / gift tax valuation, business reorganizations, and expert testimony / litigation support for analyses of economic damages across the spectrum of commercial litigation and shareholder disputes.

Steve began his career in business valuation at Price Waterhouse (Chicago), was CFO/board member of a UK telecom messaging software company, and ran financial structuring/execution groups focused on debt/equity capital, funding and liability management solutions at Investment Banks: Merrill Lynch, Morgan Stanley, Lehman Brothers, ABN AMRO and Credit Agricole CIB in New York and London.

Author:
Colin Lloyd
Investment Writer/Presenter/Consultant
In the Long Run- Colin Lloyd Consulting
cdlloyd@blueyonder.co.uk

London – third event – Technology and Emerging Market valuations, ICO’s and Real Estate

‘In the more protectionist trade environment, technology deals have been domestic rather than cross-border.’ Opus Connect Member’

Firstly, our thanks to Tom Whelan – Private Equity Partner of Hogan Lovells for hosting the Third Opus Connect London event. More than 30 delegates attended the luncheon where family offices together with other private equity and venture capital investors gathered to discuss investment opportunities in what seems to be a fast-changing investment environment.

Tom Whelan commenced the discussion with an overview of what his firm has seen in the technology arena. Credit funds continue to fill the void of bank financing, however, the rising wave of protectionism and high valuations in the technology sector have led some investors to become more cautious at this time. Cross-border activity is lower and whilst the value of deals has risen the volume is down.

Within Emerging Markets, there has been substantial interest in Africa, especially since President Zuma stepped down in South Africa. The Chinese administration has been slow to approve external investment by domestic operators which presents an opportunity for international investors to fill the gap. A member suggested, however, that this trend was not driven so much by the government as by Chinese investors examining projects domestically. He recommended sectors such as sport and entertainment, travel and tourism, financial services and, most importantly, logistics connected with the one belt one road initiative. Even without official Chinese support, these sectors should perform strongly.

Another area which members discussed was the investment environment for Oil and Gas projects: recent interest has been high. This led to a discussion of ICO’s, since many of the recent issues have included an asset backed element to the issuance of tokens. Many large corporations are looking closely at the ICO market. One member suggested that tokens are filling the gap between bank finance and venture capital for higher risk projects.

Another member asked whether ICO’s will maintain their value in the longer term? There was general consensus that more than 90% of the existing ICO’s will prove to have no real value. However, another member mentioned research suggesting that, far from disappearing, cryptocurrencies are predicted to account for 5% of all global trade transactions by 2022. Of the delegates only five out of thirty are currently actively involved in the cryptocurrency space.

One member, who recently raised Eur23mln for an ICO, cautioned about falling foul of the US SEC. He also suggested that one should identify the underlying value in any token and be comfortable with the liquidity of the secondary market, ‘Tokens need to be traded on an exchange.’ Another member commented on the deep discounts available to large buyers of ICO’s, likening the market to PIPE – Public Investment In Private Equities – investments in the US equity market.

The debate then switched to Real Estate. A member asked whether the recent weakness in Sydney and Toronto Real Estate, is a signal for investors to take a more nuanced approach. Another member countered, suggesting that, with LTV’s of 70%, bridging finance deals are still available with yields of up to 12%. One family office advisor discussed the opportunities in assisted accommodation, both in the UK and elsewhere. She pointed out that government support for such investments made them attractive, especially if an investor was prepared to engage, ‘early,’ at the project planning stage. Outside the UK, members alluded to attractive opportunities in Vietnam and Malaysia. In the US the yield on bridging finance deals has diminished from 12% towards 9% and LTVs are nearer 80%, nonetheless plentiful capital is available, even as official interest rates increase.

The discussion ended with delegates opinions as to the largest risks to the investment environment. One member suggested the unwinding of Index Tracking investment posed the greatest threat, another focussed on the reversal of institutional flows into Risk Parity strategies. Higher interest rates and a lack of bond market liquidity were regarded as further concern and, inevitably, the prospects for a fully-fledged trade war was regarded as a significant risk to the second longest bull-market in history.

Author:
Colin Lloyd
Investment Writer/Presenter/Consultant
In the Long Run- Colin Lloyd Consulting
cdlloyd@blueyonder.co.uk

Limited Partners and Trends in Private Equity

The inaugural Opus Connect London event was generously hosted, on Thursday 27th April, by Faegre Baker Daniels, at their offices near St Paul’s Cathedral. There were more than forty attendees who listened to a distinguished line-up of industry experts. Chaired by Blazo Ivanovic of recruitment specialists, Norman Alex.

The Panellists

Silvi Wompa Sinclair, who heads up the Private Equity (PE) practice at Willis Towers Watson, provided an institutional perspective on the current trends in PE. Ted Cominos, of Faegre Baker Daniels, who has more than 20 years’ experience, in the PE business, both as a lawyer and practitioner, described the place PE has within an investment portfolio alongside Real Estate and Fixed Income. Completing the panel, Francois Aguerre, Co-Head of Origination at Coller Capital, a leading player in the PE “secondaries” market, articulated the case for PE in the current environment, but cautioned investors to expect low double digit returns given the low interest rate environment prevalent in developed markets.

The Debate

The panellists covered a number of key issues including the change in investor return expectations, which have fallen as interest rates have declined, but, according to Sinclair, so too has their risk appetite. Sinclair went on to allude to a bifurcation of institutional investors approach; either choosing to invest with the largest players in the industry or focussing on specialists within a specific industry, sector or geography.

Aguerre noted the increased appetite for private debt in response to the collapse in government bond yields, whilst Cominos opined that within the equity space almost all the deals he had encountered were focussed on the technology sector.

The panellists all agreed that LPs are no longer passive investors. They have grown more demanding, especially in relation to the management fees charged on un-invested capital. Aguerre estimated that $1.4trln of PE assets are held in cash, which could amount to $20bln in management fees if fully loaded.

With equity markets entering the ninth year of a bull market, the question of what investors should expect from PE over the near term was inevitable. Sinclair noted that a number of larger investors were bringing PE investment in-house, but at the same time smaller PE specialist managers were winning mandates, whilst larger managers were taking on specialist consultants and industry experts to bridge to gap between scale and specialization. Cominos reminded the audience that, given the fiduciary obligations of many large institutional investors, larger PE managers were still garnering a larger proportion of the new capital which continues to flow into the sector. Aguerre countered that LP’s are still focussed on hiring “talent”. Cominos, concurred, stating that his own analysis showed that newer, smaller managers tended to outperform the behemoths of the industry. Sinclair suggested that, first and foremost, investors were interested in a manager’s track record. Looking ahead, at this late stage in the cycle, Sinclair urged investors to look for managers who had experience in restructuring in order to avoid a disappointingly long wait to glean acceptable returns.

The panellists’ went on to discuss the issues with the large, established General Partners (GP). Sinclair highlighted the importance of succession planning, Aguerre alluded to the importance of deal-flow, pointing out that the average GP would be expected to spend 60% of their time travelling in search of investment opportunities: a punishing schedule for someone in their forties, even more so for a manager in their sixties. Cominos picked up on the question of deal flow, pointing out that pipeline management was the key to delivering sustainable returns over the long-term.

In terms of geographic demand the panel saw growth in the US, a stable environment in Europe and a decline in interest in Asia. Sinclair mentioned that Willis Towers Watson’s clients were focussed on sectors including sustainability, cyber-security and technology.

When asked what they thought would be a significant PE trend over the next five years, Aguerre stated that he was positive about the growth of the industry given the steady pace of global economic growth. Cominos saw the trend towards manager specialization as gathering momentum, whilst Sinclair, noting that the industry was in the process on maturing, compared PE to a “teenager” with the potential to develop good or bad habits as it reaches maturity.

Author:

Steve Sahara
Director
Stout Risius Ross
ssahara@srr.com

Growth through mergers and acquisitions remains a key growth strategy given slow single digit growth in GDP and other headwinds to organic growth and/or perceived risks of new product/new market development. This growth motivation, coupled with ample sources of low cost debt capital, have led to very high transaction multiples and deals that some say are “priced to perfection.” Sellers and intermediaries that represent them are driven to reduce execution risk, seek certainty of close, and minimize time in market through a well-orchestrated auction process. Many academics and consultants warn that as much as 50% to 80% of M&A transactions fail to add shareholder value, and media headlines have covered numerous high profile multi-billion dollar mergers that have failed to deliver the intended shareholder benefits, often due to factors that due diligence is designed to uncover.

Commonly cited high risk areas for transaction due diligence include: Intellectual Property, R&D, competitive analysis, accounting policy (historical and forecast results, revenue recognition, working capital), integration issues versus assumed synergies and other key business value drivers.

Interestingly, some of the most frequent items that are said to be disputed (or submitted as claims against reps and warranties insurance) include: taxes, financial statement presentation, legal & regulatory compliance, undisclosed liabilities, IP, customer contracts, and employee related issues.

Transactions with an international / cross-border component may increase risks geometrically (regulations, laws, customs) and at the most basic level foreign currency exposure in cost and/or revenue line items should be considered.

So the risks surrounding proper selection, execution, and integration of M&A targets are clear and may be equally or more challenging to address in middle market companies where, despite smaller size and often lower business complexity, there may be offsetting risks because of fewer professional resources and perhaps less developed reporting systems.

Participants commented on the increased use of sell side due diligence by PE firms to speed the process, increase perceived certainty of close, and reduce “re-trade” potential when portfolio companies are being sold.

The roundtable was moderated by Steve Sahara, SRR, hosted by Bryan Cave and sponsored by NFP, Victory Park Capital, and Baker Tilly.

Lou Sokolovskiy
Founder & CEO
Opus Connect
lou@opusconnect.com

BECOME A BUSINESS OF ONE (Bof1): BREAK AWAY FROM THE PACK.

Meet Dave and Bob. Dave went to Harvard Law, graduated in the top 10% of his class and served as a law review editor. Bob went to Yale Law, graduated in the top 10% of his class and served as a law review editor. Both went on to work at AmLaw 100 firms. Fast-forward 7 years: Dave makes partner before any of the other associates on the partner track while Bob remains an associate for several more years. Fast-forward another 7 years: both are now partners, but Dave makes 5 times as much as Bob because Dave is the designated Rainmaker at his firm while Bob is a “service partner.”

What accounts for this gap? Both lawyers appeared equal at the start line and both had the same opportunities ahead of them. So how did Dave make partner after just 7 years at his firm, and why did he earn so much more than Bob even after Bob also made partner?

Business development.
“Business development” is a loaded term in today’s day and age, and can mean different things depending on who you ask. To me, as a business development professional with over 10 years of experience helping executives create exclusive professional networks, business development is more than just selling yourself or a product to potential customers. It is (i) the creation of long-term value for an organization, individual or brand (ii) by establishing and maintaining mutually beneficial relationships with other people (peers, clients, suppliers, etc.), (iii) used in conjunction with other marketing techniques. Some people are naturally good at business development while others are not. People with inherent business development acumens always have room for improvement. But like many skills, even those who are not innately blessed with this talent can learn this valuable skill set by implementing techniques to help them maximize their potential, giving them the highest possible chance of success.

When people seek my advice on how to expand their network and improve their business development techniques, the first and most important thing I always tell them is that they need to view themselves as a Business of One, or Bof1. You need to perceive yourself not just as an individual person with a job, hobby or certain type of personality, but as an actual business entity. And like any other business, you can take certain actions to strategically plan and organize in order to optimize your profitability, brand recognition and other potential advantages.

Let’s visit Dave and Bob again. Both seemed to have started out in equal positions with equal opportunities. How did Dave break away from the pack and end up as a Rainmaker, while Bob simply became a service partner? The answer is that Dave became a Bof1: For example, Dave spent time, money and effort developing his network throughout his career – even before graduating from law school. He joined boards, attended industry events, kept in touch with former classmates and sent them periodic updates of his professional successes. Dave helped colleagues and friends succeed in their own businesses by matching them with other contacts in order to create mutually beneficial relationships. Eventually, Dave’s networking paid off and he started to develop his own book of business, adding monetary value to the firm. Bob, on the other hand, came to work every day, sat in his office and did his work, billed more hours than Dave but then went home afterwards instead of networking at industry events, catching up with former classmates or becoming involved in local organizations. Bob did a very good job as a lawyer, but never managed to bring in any clients of his own. There is nothing wrong with being like Bob; he’s smart, diligent and hardworking and makes a decent living. But, if you want to reach for the stars and be a Rainmaker, you need to start acting like Dave and become a Bof1.

Aside from getting promoted faster or making a higher salary, a good sign that someone is correctly employing the Bof1 concept is how versatile s/he is, i.e., does s/he have applicability and relevance in other roles or professions. For instance, a lawyer who has a great network could easily move into a career as a legal recruiter; or an investment banker at a large institutional firm could go on to start his/her own private equity firm.

While he may not be the most popular person, a great real-life example of this is Donald Trump. Trump certainly isn’t the wealthiest man in America, nor is he the smartest or most talented—nor does he have the best hair. While he initially made his money in real estate, the name “Trump” is now recognized nationwide. Trump made himself into more than just a guy who does real estate—he became a personality, a brand, an entity – a Bof1. For instance, after gaining a reputation for being a successful, tough and hard-headed business man (the kind of thing that makes for good TV), he went on to host the successful prime-time television show, The Apprentice, for 14 seasons. He has also licensed the name “Trump” to dozens of businesses, (ex: Trump Financial, a mortgage firm) and receives millions of dollars in compensation for speaking engagements. In 2011, Forbes’ financial experts estimated the value of the Trump brand at $200 million. (Trump claims that his brand is worth about $3 billion.) Being a Bof1 clearly pays off.

Now that we can appreciate the value of being a Bof1 and how it can help you maximize your success, the next question is how do you become a Bof1? What specific techniques can you use to implement this concept and continuously enhance your Bof1?

When I advise people on becoming a Bof1, the first step is always to create a personal business plan. A solid Bof1 Plan includes the following key components:
(1) A Personal Mission Statement: draft a written mission statement for yourself, including your personal goals.
(2) A description of your Personal Brand: showcase your unique expertise in something that is relevant to your audience.
(3) A SWOT Analysis: Make a list of your strengths, weaknesses, opportunities and threats. This list will help you focus on where you should direct your efforts to come up with specific action items.
(4) Action Items: Come up with specific action items (short and long-term goals for yourself) based on your SWOT analysis.
(5) Set a Time Budget: Break your Bof1 Plan into bite-sized weekly and monthly deliverables and goals.
(6) Track your Goals/Create Accountability: Establish and maintain a system for tracking your accomplishments so that you can assess your performance relative to your Bof1 Plan. Utilize peers in order to create accountability for accomplishing your goals.

Together, these tools can help each of us maximize our business development potential and become a Bof1. These techniques will be further elaborated upon in future articles, as well as concrete ways in which to establish and maintain meaningful relationships with quality contacts and the types of marketing techniques a Bof1 can employ.

Stay tuned!

Guest Blogger:

Denise Nix
Marketing and Business Development Manager
Glaser Weil
dnix@glaserweil.com

Opus Connect Event Recap: Real Influence: How to Persuade Without Pushing and Gain Without Giving In

Was there a time recently when you were talking to a colleague (or a friend or family member) and he was looking at his phone? His eyes cast down, thumb flying furiously across the tiny keyboard as he nods vacantly along to what you were saying? Was there a time recently when you were the one with the phone in your hand as someone was speaking to you?

While we all, hopefully, know that this is rude behavior and counter to positive communication … the lure of the device and other modern-day distractions can be hard to resist. Dr. John Ullmen, an author, executive coach and motivational speaker who gave a lunch talk hosted by Glaser Weil last month, calls this “bad listening.”

Ullmen, who appeared as part of a lunch speaker series by Opus Connect Event’s Real Estate Chapter, said positive communication — especially active listening — can be a powerful tool in the quest to persuade and influence people. A few small changes in communication style, the UCLA Anderson School of Management faculty member said, can make a big impact. Some techniques he suggested:

• 3:1 — That ratio represents the number of positive communication interactions that should be given to every single negative one. That’s really just a starting point, Ullmen said. Some experts, he added, suggest a 5:1 or 6:1 ratio. Just think about the fly choosing between the proverbial honey and vinegar.
• “Yes…” — What follows after that “yes” can mean the difference between a positive or negative communication experience, Ullmen said. “Yes, and…” acknowledges what the speaker said and builds on it. “Yes, but…” sends the message that what the speaker said was wrong, and what is about to be said is right.
• The Power Thank You — “Notice when something good happened and be in a position to point it out and articulate it,” Ullmen said. There are three ways to make a “thank you” powerful: 1.) Be specific about why you are thanking the person; 2.) Acknowledge the effort it took to do that specific task and 3.) Note the impact the deed had on you.

Learn more about Ullmen and his work at MotivationRules.com.

Guest Blogger:

Eric Desai
Robin Lane Capital
eric@robinlane.com

Opus Connect Event Recap: The Consumer Sector: Winning in Low Growth Times, M&A Activity, & Overall Trends and Condition

In case you were unable to attend the recent Opus Connect San Francisco panel on the Consumer sector, we had a great turnout and some valuable insights into the current deal market and industry trends. A big thanks to our moderator, Ted Kuh (Lecturer at Haas School of Business, University of California, Berkeley and formerly Managing Director and Global Head of Retail Industry Investment Banking at Citigroup Global Markets), and panel members: Julie Bell (Partner – San Francisco Equity Partners), Robert Brown (Co-founder and MD – Encore Consumer Capital), Joe Rainero (CEO – Kinder’s Meats & BBQ), Kevin Sherman (VP Marketing – BJ’s Restaurants) and Brian Sullivan (MD – The McLean Group).

The conversation kicked off with a brief macro perspective and highlighted that high-end, club and low-end retailers are doing well, while middle market retailers are underperforming. Consumer confidence is improving due to a recovery in jobs and income, but remains volatile as consumers are maintaining their frugal habits developed during the past years. Global CPG brands are having difficulty growing in the U.S. while new, exciting companies with innovative business models and targeted product offerings are rapidly growing as they gain small market share in the huge consumer sector. This presents interesting opportunities for lower middle market investors

Our investor panelists noted that valuations in the consumer space are high, especially for quality targets when competition among bidders is likely to be strong. In such an environment, bidders can position themselves more favorably by convincing targets that their relationship will lead to a better medium-to long-term outcome with greater certainty. Companies should substantiate exactly where and how they will grow and bidders must set expectations with target management that not every company will be the next “Annie’s”. Earlier stage deals are also seeing high valuations, especially for companies that raise investment through crowdsourcing. Such a model can attract investors whose motivation is more than just returns, but also a desire to be involved in an exciting new company. While a high valuation might please an entrepreneur in the short-term, he/she could face a crunch later and find it difficult to raise subsequent rounds of funding.

B2B remains important as companies increasingly focus on multi-channel retailing, where it is imperative to understand the purpose of each channel, how they interact with one another and how to prevent conflict amongst them. Companies also need to closely manage retail relationships. Kinder’s Meats & BBQ believes in developing strong relationships with its retail buyers to garner early support for new products and thus accelerate the brand with lower levels of trade spend.

B2C is becoming a top priority as emerging technologies and ever increasing amounts of consumer data enable companies to better segment, communicate and listen to their consumers. The strongest brands codify their mission and tell it through a compelling story. Gone are the days when a company had a singular message to target a singular audience. Instead, companies are targeting multiple segments with tailored yet consistent messaging. Furthermore, a democratization of influencers, facilitated by a surge in blogs and social media, has enabled these messages to be communicated more cost effectively. The future of B2C will go beyond social messaging and evolve into social listening. For example, imagine how advantageous it would be to know when your consumers are sending pictures of your products to their friends? And, even better, what specific products and from which location (store, home). Better segmentation can also enable companies to develop more customized products and useful experiences for its users. Millennials are demanding that products serve their individual needs and immigrant populations are poised to invest more in durable goods should immigration reform give them more assurance of their presence in the U.S. Despite these opportunities, many companies are not poised to seize them. This presents opportunities for savvy investors to help their companies’ transition to the new way of building brands and realizing greater value.