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How to do private equity U.S. style
Canada's deal culture will change with competition
Published By: National Post
Date: Thursday, December 22, 2005
By: Keith Kalawsky
Trivest Partners LP, a private-equity firm in Miami, Fla.,
was looking for a hook, a clever way of bringing more deals to
its doorstep. So it offered an enticing incentive beyond the
normal finder's fee for ideas and leads: a three-year lease on
a S-Class Mercedes.
As it turned out, dangling a luxury sedan in front of
brokers and other capital introduction intermediaries was not
a runaway success for Trivest, but it did raise the firm's
profile.
"We got a lot of interest and a lot of fun
conversations out of it, said managing director Peter (Chip)
Vandenberg, Jr. "It really did raise some eyebrows."
Incentives like this one reveal the lengths to which U.S.
private-equity players will go to drum up new business.
It also exposes the deep personality differences between
some U.S. and Canadian firms when battling for deal flow, the
lifeblood of any private-equity shop.
In the United States, it is usually a dogfight. In Canada,
it can be more like a pillow fight.
Let's be clear: The Canadian private equity market is
growing up and attracting more capital and attention. However,
domestic private-equity firms are going to have to start
acting more American in the way they compete for deals.
Canada is a relatively small and tight-knit business
community, with ideas tending to flow among old friends,
associates and boardroom buddies. In the United States,
however, the sheer volume of cash chasing transactions has
moved deal-making from behind the scenes toward the
frontlines, where all ideas, from any source, are given due
consideration.
In the United States, there seems to be a greater focus on
sourcing prospective deals from intermediaries, whether
bankers, brokers, accountants, lawyers or other specialists
with links to attractive investments.
"The U.S. private-equity shops are far, far more
aggressive than the Canadian private-equity shops," said
Jason Sparaga, president of Spara Capital Partners Inc. in
Oakville, Ont. He specializes in bringing smaller industrial
companies in Southern Ontario -- those producing maybe
$30-million to $50-million in revenue -- to the attention of
Bay Street and U.S. investors.
"Canadian private-equity shops tend to work the
backroom or boardroom type of relationships a lot. They tend
to rely on local connections and relationships. For the U.S.
guys, because there's so much competition there, those days
are gone. The deals are won by those who work the hardest and
put the best deals on the table," he said.
In the United States, some private-equity firms will go as
far as to offer a contract on their Web sites that spells out
the finder's fee for ideas. That fee is usually 5% on the
first $1-million of the investment, 4% on the second million,
3% on the third, 2% on the fourth million, and 1% thereafter.
"You would not see this from the Canadian
private-equity guys. They might tell you if you're meeting
with them that they'd be willing to pay you a finder's fee,
but there's no formal process or marketing," Sparaga
says.
Robert Landis, a principal at the The Riverside Company, a
private-equity firm with offices in several U.S. cities, says
getting tight with dependable intermediaries is vital.
"Without them, we don't see deals," he says.
Unlike some of the smaller private-equity shops in Canada
and the United States, Riverside dedicates a separate
origination team to digging up potential deals. This is
different from the "eat what you kill" approach,
where one person handles a deal from start to finish. The
problem with this latter system is that too much time is spent
on a single transaction and efforts to find other deals fall
by the wayside. "If your deal closes, great, but if if
doesn't after six months you've got nothing to show for
it," Landis says.
Trivest has also launched a bonus program for non-partner
employees who generate a transaction by calling their
contacts, family, business brokers or others. This bonus is an
addition to their normal bonuses and compensation. Over the
past three years, Trivest has paid about US$300,000 internally
for successful leads on investments.
Chief executives of companies acquired by Trivest are also
eligible for bonuses by offering leads. Furthermore, Trivest
sets aside one or two days a month when it stops everything
for four or five hours so that executives can do nothing but
make calls to prospects.
Since Sparaga is an intermediary who works with clients
looking for investments or to be sold, it is in his interest
to encourage as much competition as possible.
"As an intermediary, I need the competition because my
clients demand choice and they demand competitive pricing. If
there's only three players and they are all buddies from high
school, they are going to dictate [the process] with a 'You
take that deal, I'll take this deal' kind of attitude,"
Sparaga says.
More competition in Canada will eventually breed a change
in attitude. Already, some of the larger private-equity firms
run by Canadian pension funds have picked up their game. Next
to change will be the mid-market firms in Toronto, some of
which are raising money. They won't be able to sit back and
let deals come to them any more. Increased competition, from
domestic and foreign players, will force them to change the
way they do business, as well as lower their expectations of
returns as prices increase.
"If the dozen or so mid-market private-equity funds in
Toronto think they're going to have it as good as they did
three or four years ago," Sparaga says, "I think
they've got another thing coming."
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