Private Equity and The Average American: The Common in the Most Uncommon

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The 18 billion dollar tag of the country’s coffee market is just a tip of an iceberg.

Beyond the figure with nine zeros is a melting pot. In here, people from different walks of life stop by for a coffee and donut, meet for a short talk, study for an exam or plan for community programs and partnerships.

These disparate people account for the iceberg’s middle part. And the sum of this middle part connects the tip to a sturdy base, whose presence may not be as tangible as the tip, rendering the base a sense of anonymity.

This is also the case with the pharmaceutical industry. The cheaper, promising drug your parents, grandparents and extended families have been waiting for is also but a tip of another iceberg.

Beyond the promising cures of a given drug are series of clinical trials that need millions of dollar for testing, re-testing, evaluation and approval. That’s where the iceberg’s sturdy base comes in: funding.

Alpinvest_Carlyle_2011_26_01Private equity (PE) is like that sturdy base of an iceberg submerged in the North Atlantic. As much as the tip’s life relies on it, it never gets itself beneath the ocean, earning a mystery status to oncoming water vessels.

But private equity is not a mystery at all. It’s as familiar to the common American as a cup of coffee or the prescribed oral pill during flu season.

Beyond Investors’ World

To understand private equity is to understand equity securities, debts and stocks. And who average American, without any finance background, has acquired a solid understanding of these matters effortlessly? Securities classifications are teeming with complexities, debt terms can dampen one’s spirit and stocks exchange is not a football game.

Bringing PE closer to the heart and understanding of the common Americans is bringing the discussion to where the investors’ world and the consumers’ world collide – the melting pot I’ve mentioned earlier.

In 2014, Tim Hortons Inc. bagged Canada’s top PE deal at $11.8 million. Our neighbor’s well-loved café and bakeshop spent $11.3 million in advertising in the country in 2013 prior the most talked about Burger King take over last year. The coffee shop has over 800 outlets in the United States. Most outlets are in Missouri, Ohio, Indiana and North Dakota.

It is given that America’s well-loved green café will hold the baton of popularity and consumption in the coffee industry. However, as far as serving the community is concerned, the PE-funded Canadian café is not as far behind. From Timbits Minor Sports to Smile Cookie program, Tim Hortons show commitment in local initiatives.

Hostess Brands, Inc., maker of Twinkies, was yet another damsel in distress rescued by PE. After a shutdown in 2012, PE firms Apollo Global Management (APO) and Metropolous & Co. bought the company for $410 million. The buy-out brought back Twinkies, along with other famed Hostess Brands products, to store shelves nationwide. Most importantly, around 25 percent of the jobs lost in bankruptcy have been restored.

PE’s influence and impact extend to the remotest clinical trials needed to introduce a new medical breakthrough in the market. On February 22, United Kingdom-based PE firm Lloyds Development Capital Ltd. bought Synexus, a research center that manages about 200 medical trials across eight countries for £83 million.

Caution: Iceberg Shipwrecks

Who wouldn’t remember that lovely story of Jack and Rose in Titanic that ended due to an unassuming dangerous iceberg? As captivating as the love story was the movie’s lesson: however an iceberg may look harmless, it can cause shipwreck and cut off lives.

Just like an iceberg, PE and PE firms have their shares of danger.

PE investments in the country were at $443 billion in 2013, distributed among 2,368 companies. Texas and California accounted for the majority of investments at $87.4 million and $54 million respectively. While the value of the total investments was staggering, it didn’t mean all the companies were able to live happily ever after. Some companies lost ownership while others had to change their vision to accommodate the big hand that saved them.

In 2014, Canadian PE firm Waterton Global Resource Management gave life to the said possibilities in a buyout plan of Chaparral Gold. Chaparral’s main asset is the Goldfield project in Nevada. During the buyout, Chaparral was not in any financial distress and might have only needed to raise funds for projects development, but after a protracted fight, it agreed to the offered PE firm-led acquisition.

Like any investment endeavor, PE is crucial to any business, but beyond business, it’s crucial to everyone living in this planet. Always remember that what you may see or hear about PE could be but a tip of an iceberg, you should dig deeper and factor in the sturdy base for a wide-ranging picture of investment reality.

 

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Photo Credit: Rembrandt17

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