Marina Zosya

Rumor Has It… Trouble Is Brewing in Private-Equity World

The other day I had a meeting with some big shots from Citibank's commercial landing. Every single person at the table felt disappointed. On my side of the negotiations, everyone was shocked that the bank came up with some really sneaky changes to the Term Sheet we have originally accepted. Citibank's covert operatives were distressed to realize that their maneuvering didn't work on us and, moreover, we are absolutely ready to walk away from the deal.

Nobody was disgusted more than me, though: I've rejected other lending candidates in Citi's favor based on the conditions of that damn Term Sheet; I've spent so much time and effort making sure that the deal comes to conclusion and closes by June 15th; I've conducted so many detailed discussions with the bank officers; I've plied the Credit Risk Group with tons of information and provided elaborate answers to every single of their drilling questions – dammit, what a waste! I started getting up from the table, determined to say a cold goodbye ("Good day, sirs… I said, 'Good day'," or something like that) and leave everyone in the conference room to their own devices.

But the bank's team leader didn't want to give up. This seasoned warrior (whose bonus depends on the number of deals she closes) quickly swallowed the bitter pill of defeat and started deliberating the possibilities of remedying the unfortunate situation. By way of explaining and excusing their underhanded tactics, she embarked on a tale of pressure and oppression all national banks suffer from the Office of the Controller of the Currency (OCC) that, empowered by the US Treasury's mandate, tightened the regulatory screws on all commercial lenders operating in small and middle markets.

Ring-ding-ding! The government is making it more difficult for small and mid-size businesses to borrow operating funds? Tell me more!

I can only attribute her sudden loquacity to the awkwardness of the impasse we have reached, to the thickness of the room's air that required some sort of easement before our dialogue completely choked. Not only that she went into details of the new pre-lending qualification requirements for private businesses such as lower leverage (i.e. debt/equity) and higher fixed-coverage (EBIT + fixed costs/fixed costs + interest) ratios, but she also divulged some information bankers almost never discuss – she told us about a specific deal just killed by the bank's risk underwriters for the sake of compliance with the government's wishes.

It was the nature of the transaction in question that surprised me at first – a typical leveraged buyout (LBO) of a privately-held manufacturer, with a well-known private equity (PE) firm and a mezzanine lender already in place. Citi was expected to step in as an institutional lender covering 55% of the contractual purchase price. I might've been wrong, since I'm not exposed to M&A on daily basis, but I was under impression that banks are usually hungry for the high-yield rewards of such deals, especially considering the prominence of the PE behind it. The fact that this case was presented to us as an example of insufferable regulatory interference kind of confirmed my suspicion that Citi's bailing out was an unexpected turn of events for the bankers themselves.

So, did they get the explanation from their Risk partners? Yes, they did: The due diligence suggested that the deal had a high probability of a quick turnaround. In other words, it was expected that the PE firm would quickly flip the acquired company's stock for a nice profit leaving the company to deal with the loan repayments. Ok, but isn't that the nature of any private equity transaction, regardless of whether the ownership is sold fast or kept in-house for years? The loan repayments always come out of the company's operational cash flows. The liability is a part of their balance sheet. Hmm…

Anyway, the talkative tactics worked and we all decided to go back to our respective drawing boards instead of walking away from a very promising relationship. Good! But the story of the killed LBO kept gnawing at me.

Ok, on the surface, it may seem that the government is working hard on protecting taxpayers from a possibility of another bailout. But

Citigroup was one of the first bailees to repay the government ($51 billion) with the highest profit on the bailout list (additional $13.5 billion).
As we know, it wasn't the commercial lending, but the sub-prime mortgages and the securitization thereof that was at the core of the financial crisis and the subsequent bailout. That is why the government-sponsored Fannie Mae and Freddie Mac top the bailout chart with $187 billion of the received support between two of them.
Of the top 20 bailout recipients the one with the largest debt still outstanding since 2008 is General Motors (as of 05/29/2014, $11.5 billion is still due)- an automaker, a public company, a NYSE's Blue Chip.

Wait a minute, wait a minute! Private business vs. public company? These Treasury moves have nothing to do with the fiscal protection of the nation. It has to do with the government's continuous prevention of the stock-market crash and massive panic that will follow. Too scared to deal with the long overdue adjustment, it has been doing everything in its power to direct both public and corporate investments into the shares gambling of mythological proportions.

The private businesses and the private equity investors act against this insane agenda by laboring hard under the natural commercial formula of growing capital through realized profits generated by functional enterprises. To undercut these efforts, the proverbial "they" are willing to sabotage private businesses, which hoi poloi knows nothing about, in order to continue ballooning the stock market cancer, so that the general public with their Ameritrade accounts and 401(k) plans invested into "emerging" markets is kept at bay.

Well, I will not fold! I will get that Citi line! As hopeless as it may be in the long run, I take a great satisfaction in the fact that my daily work is essentially a part of the Fiscal Resistance.

CFO Folklore: Delusional Self-Involvement of Business Owners

As my readers know, years ago I've made a career choice of avoiding large corporations and their tall organizational structures. I prefer small and mid-size companies allowing opportunities of direct interactions with business owners – the very people responsible for recognizing one's efforts and allotting rewards. It's not for sissies, of course, because in this environment you cannot hide your incompetence or laziness in a mass of indistinguishable drones – you and your work are on the spot and in full view all the time.

Even for a highly skilled professional with a strong work ethic it's not easy to be constantly exposed to this very special breed of people - the entrepreneurial bosses, who, God bless them, unwittingly provide me with endless writing material. I guess it will be several years into my retirement (assuming I will live that long) before the urges to highlight this or that aspect of their psychology and behavior will ceise.

It's uncanny how many common characteristics are shared by private business owners. For example, all of them operate under the same delusion that employees care (or should care) about their companies just as much and exactly in the same way as they themselves do. It's especially amazing to me because most of them are pretty levelheaded and highly functional people, yet they insist on this deranged assumption that doesn't fit into any rational frame of thought.

For a business owner his company is his life's endeavor, his singular purpose, his channel of expression and fulfillment, his source of pride and wealth, his outlet of personal freedom. The owner/CEO's opinion overrides everybody else's; he is the only one with a full authority to direct the company's development in any direction (to a success or to a downfall); ultimately he holds all employment strings in his hands; he can say or do whatever he wants (within the limits of the law, of course); nobody watches his time, assesses his performance, addresses his shortcomings.

On the other hand, for an employee, no matter how dedicated, loyal, hard-working, conscientious, and highly positioned, a job is just a job – a line on a resume. It cannot possibly be anything else, because there is no such a thing as a job security anymore, no matter where you work. If the current employment ends, there most likely will be another one after. Nowadays, probably shifting down, but maybe shifting up - who knows? There must be something, or there will be oblivion. For many of us, a job is just a source of sustenance, not the means of self-satisfaction. And when it comes to personal freedom… I already wrote about it four years ago (Bill of Rights in Small-Business Environment ).

Clearly owners and their employees are conditioned to look at the business from different platforms. It is preposterous to assume equal attitudes from unequal parties. Yet, the faulty presumption persists and is manifested by various business owners quite frequently. I'm sure many of you have experienced it first-hand.

On the rare occasions, when opportunities to be frank present themselves, I try to explain to CEOs that their employees have their own individual life agendas: what's good for you, your business, and your pocket, Mr. Boss, is not necessarily all that important to them. Sometimes I even draw Maslow's Hierarchy of Needs: you see, I say, you cannot expect them to be proud of working in your wonderful growing company if they cannot make ends meet and feel overworked.

Agh, it's no use! Just the other week I was discussing (via email) with one of my clients, whose company made the 2013 Inc. 5000 list of the fastest growing companies in the nation, whether I should enter them into consideration this year as well. It's my assessment that the negative outcome (everyone was complaining about the endless solicitation calls from various service companies) outweighed the pleasurable, yet hard to measure, positive impact of the resulted publicity. He had no rebuttal to that particular argument. Instead, he replied to me with the following:

"The ranking is something about which we can all be proud, and which thereby directly affects the morale of our staff, who both see results of their hard work translated into an accolade and have the pleasure of working for a company that has been honored. I know I bathed in the warm glow of the company's recognition."

Of course he did! It's his company. He is rightfully entitled to tell about it every single person he meets. But can you believe the gall? They "have the pleasure…"! Seriously? Even the ones with $40K salaries and one-week-a-year vacations? Uh-uh, Mr. Boss, the pleasure is all yours.

Business-Lunch Scene Today: Cipriani Wall St.

For many years Cipriani restaurant at 55 Wall St. (aka Cipriani Club 55) has been a staple location for Financial District's lunchers with company-paid expense accounts: classy, convenient, prestigious, comfortable, and moderately tasty (not enough to distract you from a business conversation, yet sufficiently to leave you and your guests satisfied). And, of course, the drinkers can tease themselves here with famous Bellinis, that pre-war invention of Giuseppe Cipriani - a mix of Prosecco (the Italian answer to Champagne) and peach puree; the only coral-pink drink in a flute I've ever seen straight men drink.

Being tied up in Midtown offices for years and always insistent on people coming to my turf, I have not been at this Cipriani location for a while. Now, firmly based on Broad St., I am basically around the corner from the place. So, it was only natural that an institutional investor picked it for a lunch meeting with me.

I arrived first and had a chance to observe the scenery for several minutes without any distractions. So, this is what it's like here now? For a hot second I thought I was in a wrong restaurant. I remember the place being abuzz, full of men and a few women in Italian suits, their conversations merging into one low-volume background sound. Now, at 1 pm (the busiest of the lunch-time hours) the restaurant's occupancy is about 40%, which is not enough to blend the voices – you can clearly make out dialogues at different tables.

The most remarkable change, though, is in the contingent of patrons. While all suits in attendance were of the familiar ilk (well, maybe not all of Italian make anymore – my observation is that Brooks Brothers' off-the-rack outfits, now predominately made in China, are gaining more and more ground here), there were several tables occupied by new fixtures.

There were two (!) Russian tables. The largest round table in the middle of the restaurant was occupied by a mixed-gender group of New Russians: Rolexes, Cartier tchotchkes, Zegna (men) and Chanel (women) suits, skirts too tight and too short, hills too high, voices too loud, full bottles of drinks on the table. Several tables away from them, in a much quieter corner, were two Russian models: 6-feet tall with legs growing out of their armpits, long dirty-blond hair, indistinguishable faces with unnoticeable makeup, Roberto Cavalli jeans and blouses, marinated salmon and water on the table. Well, nowadays, these people are everywhere.

It was really another couple that surprised me: A young (at least by the contemporary standards - about 38) stay-at-home Dad with his 4-year-old daughter on his lap. Both of them were wearing high quality, expensive, but tastefully understated and casual clothes. Except that the girl's outfit and hair were somewhat disheveled, apparently from unyielding resistance to Dad's feeding attempts (hence the lap position – to prevent spontaneous running).

The truth is, though, I shouldn't have been surprised. This pair was here probably for the same reason the Russian models were: most likely they live nearby, in one of many Financial District's ex-office buildings, now converted by their owners into condos to increase occupancy and profits. They belong to the previously unimaginable in this area dog-walking crowd I try to get through every evening on my way home from the office.

Don't get me wrong, this is not about Cipriani's shrinking revenues. Who the fuck cares? I don't. These people have hotels and restaurants all over the world; they've soldered through tax evasion suits and who knows what else. Both Club 55 and Cipriani Grand Central are still prime choices for many non-profit, political, and commercial organizations hosting fundraisers and galas. And I hear that the wedding business is going strong.

But I view all these shifts and changes, largely unnoticed by others, as evidence supporting my strong opinion that we live in a new economic stage – the one that doesn't fit into Nobel-prize-winning formulas; the one that leads rational thinkers to pessimistic predictions of the future that's coming both to Main Street and Wall Street. Of course, we can pacify ourselves by saying that Cipriani is too outdated and stuffy; that the younger high-rollers prefer hipper places at nearby Peck Slip and other tiny waterfront streets. But surely that alone wouldn't account for the dramatically reduced attendance in this brand-name establishment.

A sober eye cannot help but track the obvious trend: the empty tables; the unoccupied offices; the converted buildings; the diminishing number of Italian suits on display. It illustrates only too well a poignant number recently featured in New York Magainzine's Approval Matrix: 46% of New Yorkers are barely making more than the poverty threshold. And it is pretty clear to me that, contrary to the popular opinion, 53.99% of the City's population don't make quite as much as they used to either. The remaining 0.01% (not 1%, you fools!) are in a position to never get affected by any economic changes. They can have Bellinis (and everything else) any time they want.

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