New blog post: Getting over the crisis! an interview with Tom Barrack

First posted on CVCA Capital Rants blog by Chris Arsenault

Thomas J. Barrack, Jr., Founder, Chairman, and Chief Executive Officer of Colony Capital, LLC, is interviewed by Chris Arsenault (iNovia Capital Managing Partner and CVCA board member) for the CVCA Private Capital Privé magazine – Summer 2009 edition

First, you survive the crisis, then you take advantage of the opportunities afforded by the confusion, advises CVCA keynote speaker Thomas J. Barrack,Jr.

 At this year’s CVCA Annual Conference, held in Calgary in late May, we had the pleasure to have with us, as a keynote speaker, Thomas J. Barrack Jr., Founder, Chairman and CEO of Colony Capital, LLC. Barrack’s keynote speech was of utmost interest and very enjoyable, in part because he presented the audience with his views on both sides of the harsh reality of today’s private equity buyout market, outlining the key challenges as well as some great opportunities.

Like many other private equity buyout firms across North America, Barrack’s firm, Colony Capital, is having a tough time adjusting to all the changes caused by what is considered to be the worst market ever for the U.S. investment community.

Even though Colony Capital has only one transaction of importance in Canada, the 2006 acquisition of Fairmont Hotels & Resorts Inc., Barrack believes Canada will be one of the big winners coming out of this global crisis. This is being driven by the country’s stronger banking system, smaller and better performing buyout funds, and fundamentally sound assets across numerous line of business. They weren’t as badly impacted by the sub-prime crisis due to the fact that they weren’t overly leveraged with debt.

“We need to fix the trust issues between fund managers, investors, lenders and the markets. High leveraging multiples must be part of our past” Thomas J. Barrack Jr., Colony Capital, LLC

Barrack recently took the time to expand on some of his views with Private Capital in an interview with Chris Arsenault, managing partner at iNovia Capital and a member of the CVCA board.

Chris Arsenault: What are your current views on the state of the private equity industry in general?

Thomas J. Barrack: Let me summarize a few of my instinctive views into two categories, short term and long term.

Short term: debt is the new equity (rescue, restructuring and acquisition of all forms of distressed debt); alternative energy subsidized platforms will be the flavour of the year; real estate will continue to get clobbered; private equity will perform poorly for another two years.

Long term: oil is the new gold; alternative energy projects will reduce oil supply and increase cost; real estate will be the asset of choice; technology will play a bigger role in communications and will impact the real estate model and travel; private equity will outperform other asset classes and VC and technology funds will be at the top of the list.

Arsenault: Do you see more challenges or more opportunities for private equity players?

Barrack: Colony Capital has a few billion in dry powder, and we are being asked: “Don’t go to fast, don’t be too opportunistic.” The reasoning behind such comments is understandable and is being felt across the whole private equity community. The major investors in private equity funds are banks, pension funds and endowment funds, and their contributions are directly impacted by the lack of distribution by private equity funds. They need distributions in order to make their contributions but they got a double hit, first by a slowdown in distributions AND simultaneously by a 50 per cent asset value loss.

The super funds are the ones that are suffering the most though, they lost more money in the last two years then they had made over the last 10 years. The fee dilemma created by these funds also didn’t help as some firms were leveraging their fees to a point where it killed the model of sticking to finite capital for fees and infinite capital for investments.

We are seeing great opportunities, sound businesses being deleveraged, and true value that can be built through time. We are going back to more realistic growth objectives and we expect to do very well in the mid to long term. In the short term we have to focus on the challenges from an inches and feet perspective, not miles. We need to fix the trust issues between fund managers, investors, lenders and the markets. High leveraging multiples must be part of our past. 

Arsenault: How are private equity buyout funds, such as Colony Capital, reacting to the new paradigms?

Barrack: This crisis will pass like all other crises. The key is two-fold: First you need to survive; second, you need to take advantage of the opportunities created by confusion. Experience will show a lot of its value in the coming 18 to 24 months. Inflation will return exponentially within two to three years. Private equity & real estate will directly benefit from the short-term deleveraging and the long-term inflation.

Arsenault: What does your experience tell you?

Barrack: That we need to return to principled leadership by making decent and informed decisions based on true value for the long term. No short-term value creation thinking. Even though the short term will continue to be unpredictable, the medium to long term are totally predictable. We entered into an era of broken confidence, adrift in a sea of unfulfilled expectations. New equity owners will take the reins of very valuable operating companies, acquire assets on a lower cost base and start deleveraging. And with these new teams being incented with long-term value creation goals, investor returns will be restored, and with lower leverage ratios, confidence and trust will be restored. But first, you need to survive!

Arsenault: How much deleveraging needs to occur?

Barrack: $6.9 trillion. So we will still have pretty shaky grounds in the short term. In the long run, the winners will also include those able to convert debt into equity.

Arsenault: How about your views on Canada?

Barrack: Canada can be a strong beneficiary of what is happening. The U.S. is in its worst shape ever. While here in Canada, the banks are solid, we haven’t seen any hyper leveraging; no super funds were put in place. And in these times unique skills are required, different tools are needed, and Canada is better equipped to delicately take advantage of the opportunities created by the numerous short-term stimulus packages. 

Arsenault: Any other points you would like to share?

Barrack: The private equity model is changing and the focus will be going back to slower, more realistic growth and building stronger companies. A clearer understanding of the fundamentals – honesty, integrity and force of character – will show. I think many older fund managers will take this opportunity to retire, giving more room to younger more energetic managers to step in. And hopefully they will do things right and slow and understand they need to bring the confidence back, the circle of trust.

This global crisis is a savior for some, as it basically gave all fund managers a free “Get out of Jail” pass for returns!

“In these times unique skills are required, different tools are needed, and Canada is better equipped to delicately take advantage of the opportunities created by the numerous short-term stimulus packages” Thomas J. Barrack Jr., Colony Capital, LLC

Download your full copy of the CVCA Private Capital Privé magazine – Summer 2009 edition

Posted via email from Chris's posterous

New blog post: Now it's our time baby! an interview with Tim Draper

By Chris Arsenault, Interview with Timothy C. Draper, Founder and Managing Director, Draper Fisher Jurvetson, for the CVCA Private Capital Privé magazine – Summer 2009 edition

The outspoken and energetic Silicon Valley investor icon Tim Draper storms the stage at the 2009 CVCA Annual Conference.

The theme of this year’s CVCA Annual Conference was “Embrace our Energy.” Well, keynote speaker Tim Draper did just that. He had more energy than any other venture capitalist in the room that evening – his eyes were sparkling and he saw opportunity everywhere.

When asked about the current state of the venture capital industry, Draper, who is Founder and Managing Director at Draper Fisher Jurvetson, focused on two core issues. First: we need to break down the borders and enable free trade, he said, and second, we need a new private stock market. While Draper offered no solutions on achieving free trade, he continues to actively advocate for borderless markets. He regularly takes time out of his busy schedule to speak with government officials, the private equity industry, politicians and industry leaders to convince them the world will be a better place if we dropped our commercial borders.

On the second issue, Draper expects to be able to launch a new private equity exchange market. Oh yeah, and Draper also sings! He not only sings, he wrote the lyrics to the “The Riskmaster” and gave CVCA attendees a taste of his singing skills right there and then. Good thing we had the lyrics on the screen to sing along!

“While some people are panicking, or even worse clinging to the past, I think that crisis creates opportunity. And that’s a VC’s job, to identify the opportunities” Tim Draper, DFJ

Chris Arsenault: What makes these times so exiting for you?

Tim Draper: Timing is now! The current crisis is creating huge liquidity problems. The venture backed IPO market is inexistent and it’s tough for entrepreneurs, venture capitalists, limited partners and future entrepreneurs. While some people are panicking, or even worse clinging to the past, I think that crisis creates opportunity. And that’s a VC’s job to identify the opportunities. 

Arsenault: You said earlier that our time was now, why is that?

Draper: I’m talking about the cycle of high returns for venture capital funds versus private equity funds. It’s a cycle. One goes up while the other goes down. The last cycle was owned by the private equity guys, from 2000 to 2008, and they had an amazing run. Until last year that is. We just now embarked on the venture capital cycle and will be coming out of the recession. That means good business for us. It’s the best time ever to invest venture capital money: we are going through a recession/depression, there are low company valuations, liquidity solutions are near, there’s less competition for VCs and entrepreneurs, and new technologies will be game changers.

Arsenault: How does your experience guide you through these times?

Draper: My father and my grandfather pioneered venture capital in Silicon Valley and I’ve been in the business for over 25 years. Some of the greatest companies in the world have started in recessions or depressions, such as GE, IBM, HP, Adobe, Skype and Johnson & Johnson. And now is the best time to invest in start-ups because existing companies are reeling, smart people are out of a job, new technologies are going to change the way we work and play, and there are fewer start-up competitors.

Entrepreneurs are now more enabled by technology than ever before. Entrepreneurs don’t require as much cash either. So we need to support these entrepreneurs, but we now get a larger stake in the company because of the more reasonable valuations. I do fear that there will be less VCs out there though. I also think that the markets will come back. They are slowly creeping back, but we need a new platform for liquidity.

Arsenault: So tell us more about XChange.

Draper: Awesome. This is the greatest thing to happen in the liquidity markets in a long time. XChange is a new springboard to an IPO. Companies can post their profile, raise money, control access and communicate with shareholders. Investors can peruse, connect with companies, buy and sell shares. The technology behind the platform answers today’s communications needs. 

My company Draper Fisher Jurvetson is a substantial investor behind XChange. We need more liquidity. Liquidity is what drives deals. The current markets don’t offer solutions for companies under $250 million. This platform will enable companies to remain private while providing liquidity to investors. It will allow entrepreneurs to raise cash for their ventures while enabling investors to get their money out short of an IPO. Investors will need to be qualified trading institutions. Big names will be backing this new platform. We expect to launch in September.

Arsenault: What do you see in Canada?

Draper: Well first, the XChange platform won’t be available in Canada, at least not at initially, but it would be great to find a partner to do so. The Canadian government should drop the borders and have real free trade with the U.S. Lower friction to do business is needed. Aren’t we are both socialist countries now?

We want to bring our DFJ network to Canada and do more deals here. Canada has a history of great technologies – RIM, Sierra Wireless, OpenText, Sharepoint – great universities, a strong entrepreneurial community and a better perspective from outside Silicon Valley, more creative.

This is our time now!

“There are no better times to be a VC. It’s our time now, PE is down and VC is up!” Tim Draper, DFJ

Posted via email from Chris's posterous