Private Equity Funding, a Global Phenomenon
- When will Jamaica be ready? - PART II
by: Andre’ Burnett
BUSINESS LOUNGE
THE GOOD, THE BAD, AND THE EQUITY The central theme of most western movies tend to surround the struggle of pioneers trying to tame the unexplored badlands of the west and finding out that while progress is an inexorable process, it is a slow one. Private Equity funding in the Caribbean could then be likened to a frontier town struggling to gain establishment in the tumbleweed littered economic badlands.
BAD NEWS FIRST Even though the picture painted in the above paragraph seems bleak it might be only the view of one set of financial experts. As reported in last week’s article Christopher Williams of NCB Capital markets stated that he did not believe that the region was ready for the concept of private equity funding. The recent premature ending of the Caribbean Investment Fund (CIF), an ICWI subsidiary, was used as an example for his argument. The CIF folded 4 years earlier than originally planned, yielding less than 50% of the initial target. Over the course of its five year life the CIF used venture capital to acquire equity in small companies and also leveraged buyouts. Only a small amount of the capital was reportedly used for venture capital pursuits: as the goal of taking acquired companies public was not realized. Patrick Williams of Caribbean Basin Investors Ltd, operators of the fund, stated that Caribbean capital markets were just too small and illiquid and most bigger companies were too small to even contemplate going public. The fund was closed in anticipation of worsening economic conditions.
GOOD NEWS? In contrast, Portland Holdings Inc Chairman, Michael Lee Chin, announced plans in 2006 for a follow up Private Equity fund to the one he established in 2002. The first fund referred to as ACFI raised $US260 million which is reported to be fully invested in 6-8 Caribbean countries with an 80% stake invested in Jamaica, Trinidad and Tobago and the Dominican Republic.
The new fund ACF II has set a target of $US350$400 million of which it has already raised $US225 million. The first investment of the fund was that of the acquisition of a 50% in Columbus Telecommunications. The enthusiasm of Mr. Lee Chin to go ahead with starting a new fund in the face of adversity might be signs that he is willing to weather the storm and be the catalyst needed to spark the transformation in the region.
CURRENT NEWS Even as the debate over the viability of venture capital in Jamaica continues, some investors have seen it fit to forge forward. Jamaican reigning designer of the year, Carlton Brown, has received Venture Capital from a group of Jamaican investors including James Moss-Solomon director of Grace Kennedy. The problem however might not stem from the top but from the bottom as alluded to by Christopher Williams. Even with funds available through private equity, many small entrepreneurs may still be reluctant to take advantage of this as they are wary of giving up stakes or controlling interest in their business. The urge to keep the family in the company or the lack of a proper business structure may be more detrimental than one would think. It would seem that ultimately the fate of Venture Capital and Private Equity funding in our country will succeed only at the whim of our businesspeople and their willingness to widen their scope.
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Inflation Management and its Consequences on Nation, Citizens and Businesses “Now abideth these three rates: interest, forex , and inflation; but the greatest of these is inflation.”
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Apostle Common Sense, Acts of the Economy, Knowledge Testament, New International Wisdom Version, Burnsil Doctrine
In true Jamaican style, we have been generating much heat, reactions and focus on the consequences of poor inflation management (interest and forex rates) but with an equally deafening silence on the causes. The focus of the business community, the policymakers, the technocrats, the workers, the citizens and the media should be on INFLATION. All things being equal; bring inflation down to single digits and the other two rates will receded. (And note that recede implies gradualism). Maintain a double digit inflation environment and we will perpetuate a high interest regime and a galloping forex rate. Let us not blame the commercial banks. Lay full blame with the institutions, systems and processes responsible for managing and driving down inflation. They are clearly doing a dismally poor job. Forget the circular argument about which came first (inflation or forex or interest); inflation drives the other rates. Further, forget about the “small, open economy” argument; Jamaica has the worst inflation record of all the “small open economies” in the entire Caribbean. In the small OECS countries, inflation runs between 1 – 3% typically; in Cuba 3 – 6%.; Barbados 0 – 5%; Trinidad 4 – 8%. In Jamaica’s case the out-turn has been, 8.5% in 2006; 9.3% in 2007 and 20.2% in 2008 (data source – IMF 2008 World Economic Outlook). We should ask ourselves why is this so ? What are we doing in Jamaica to make our inflation rate so terribly high ? Even with the same common exogenous variables, Jamaica’s outcome is much worse. Think about it if, as a lender, we know that inflation is hovering at 20.2%, would any of us lend out money at less than 20.2% ? No we would not. An interest rate of 20.2% is just maintaining the nominal value of your funds. Add operation costs and profit and one is already at 25%; at least. However, consider this, with an inflation environment at 4%, would strident calls for interest rates to be in the 9% range be an issue. Clearly not. Interest rates in double digits would be
clear and obvious anomalies in that context. By a perverse logic, the BoJ is correct on this one; their rates are in the correct range, given the actual prevailing inflation rates.. You cannot have a low interest rate regime in a high inflation environment. On the matter of forex rates, think about this, if the US annual inflation is 3% and Jamaica’s is 20.2%, what is the minimum that the forex rate will slip in a year… .17.2% at least. It is as simple as gravity. If the dollar started out at 71:1 at the start of 2008 and the USAJA inflation differential is 17.2% what is the expected value at end of 2008 ……83:1. Its not rocket science. That model is generally defined as the purchasing power parity of the currency. Lower adjustments than that serves to overvalue the dollar by dynamically, and artificially, revaluing it upwards. No amount of NIR, or moral suasion, or ministerial imploring can prevent the subsequent, inevitable, corrective devaluation. As an adult country of 47 years, we should all have learned this lesson by now. What can we, therefore, justifiably blame the BoJ for ? We can blame them for trying hard, as mandated by their own Act, to maintain artificially overvalued exchange rates. The Christmas 08 debacle is proof-positive of this. We can also blame them, and the authorities, for the present long list of mis-placed priorities in the BoJ Act’s five stated objectives; none of which includes price stability.
K C I CL E TO D R OA E H NL AD N W RE T I O N D ND E A LEM PP ITS TY U E eS R I T EN
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by: Cherryl Hanson Simpson
I
recently read a book review of Malcolm Gladwell’s new best seller Outliers: The Story of Success. In it, Gladwell tackles a question that has fascinated me for years, ‘Why do some people attain tremendous success while others struggle for their entire lifetime, never achieving their dreams?’ I first noticed this puzzling phenomenon as an advisor at a leading financial institution in Jamaica. I would give the same guidance to clients in similar circumstances, but while one would take the information and diligently apply it, the other would start enthusiastically and then fizzle out into failure. Discovering the mystery of achievement has become even more important now that I’m fully committed to building a profitable business. What does it take to be successful? Do I have to have luck on my side? Should I have been born with a special gene? Can I diligently learn success by following the footsteps of successful entrepreneurs? PRACTICE MAKES PERFECT Gladwell’s premise that seeks to answer this riddle has captured my imagination. After examining sports stars, business moguls, geniuses, and scientists, Gladwell has determined that truly successful people are able to take advantage of opportunities that present themselves only if they have previously put in a required amount of time perfecting their area of expertise. According to Gladwell, ten thousand hours of practice is what every successful person has racked up in the past before success knocked on the door. Looking at the Beatles, he revealed that the musical group was forced to perform for eight hours a day in Hamburg for years before they became famous. At age 13, Bill Gates was fortunate to attend a school that bought a com-
puter in 1968, where he spent his ten thousand hours in programming practice. This ‘rule of ten thousand hours’ is therefore an essential ingredient of every success story in every field of endeavour. The old adage that success happens when preparation meets opportunity has been proven by Gladwell’s research. Ten thousand and counting With curiosity, I started to think about my own past work experience. Counting back, I realised that my time clock had racked up the required ten thousand hours of practice at my former job. Despite my best efforts to get a promotion out of one-onone financial planning, I had remained counseling clients for six years. I can now fully appreciate the time spent in customer service, as it allowed me to realise my true calling. With ten thousand hours and more under my belt helping people to achieve their financial goals, I am confident that I have what it takes to be successful in my own business doing what I love.
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Cherryl is a financial consultant and coach, and founder of Financially S.M.A.R.T. Services. See more of her work at www.financiallysmartonline. com. Email Cherryl at advice@financiallysmartonline. com. Please add this address to your email address book in order to ensure you receive a response.
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AN ENTREPRENEUR’S LIFE
The Rule of Ten Thousand Hours
Credits Publisher eZines Limited Managing Director Tyrone Wilson Your Money Reporters Shari Lyew Kenarthur Alexander Mitchell Kimberly Taffe Columnist Cherryl Hanson Simpson Design and Layout Omar Phinn
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