5 THINGS YOU MISSED: ACG’s NY Luncheon ‘Family Office Update’ event

1 Separating the Private Equity Firm and Family Office: It is very important thatthe private equity firm and the family office are separated to have better autonomy for each. A separate management team for family office can make decisions without having any conflict of interest with either the private equity firm or any of the investors. The separation also makes sure that the deal which the private equity firm is looking into is not passed on to the family offices and vice versa, thus giving each fund the independence to look into deals, make their decisions, and not be influenced by the other. If the manager of the family office is also part of the management team of the private equity fund, then it becomes difficult for such managers to make the right decision for the fund or the family office. Hence, it is better to have to separate entities in place where there is more professionalism, making it easier for anyone to give answers when asked about any conflict of interest
2 SEC Involvement in Family Offices: If there are any co-investments with an unregistered or exempt firm, then it is better to have procedures in place and make sure that the investments criteria stated by the SEC are followed. Otherwise, this can be a challenge if the SEC conducts an audit. Primarily, the SEC looks into possible conflict of interest cases in deals which involve family offices. They also look into club deals which have broken deal expenses. “It was all fees; they were focused on fees, co-invest fees. Since we are a small fund, we do a lot of co-investment,” said Andy Unanue of AUA Private Equity Partner. The SEC further would want the family office to disclose any payments made to any adviser to the family business and private equity fund. Separately, it is observed that the auditors are not as knowledgeable/aware as they should have been about the family office space.
3 Professionalizing Family Offices: It is better to register the family office before the SEC makes it compulsory for family offices to be registered and professionalized. “What we are starting to see now is a little bit more institutionalized and professionalized concept: having these family offices operate as a business and bring in good quality, professional people to manage the assets of the family,” said Jay Levy of Cohn Reznick. Currently, there is a trend for a family office to move away from investing in hedge funds and getting more involved in private equity funds; these have more procedures and complicity involved. Hence it is better for the family offices to be professionalized.
4 Cyber Security: When there is a club deal, the family offices are exposed to other co-investors regarding personal information. There is a risk of possible cyber-attacks in such deals and the information of one or more family offices’ data can become compromised. “SEC expectations are for registered investment advisors, which we see both registered and non-registered family office adopting. The SEC wants to see a risk assessment that’s being performed, initially and on-ongoing as the business changes.” said Christopher Ray of ACA Compliance Group. Headded that SEC wants to see supervisory procedures and measures in place for data loss prevention like procedures/measure relating to mobile devices and access to mobile storage; portable storage and phishing testing; and mock phishing testing done with employees. Recently, cybersecurity has become a hot topic and the regulators and investors have started paying more attention. There is regulatory compliance published by the SEC and also a best practices page published by ACG, with emphasis on cybersecurity.
5 Procedures and Documentation: Having internal control processes within the family offices which are documented and followed are of utmost importance. Procedures should be in place about the authorization, approval, and reconciliation of the transactions, thus making sure that there is accountability for the same at the end of it. “If there is one thing I would definitely pass on, it is ‘documenting.’ One of my favorite sayings is that if it is not documented, that means that it doesn’t exist or didn’t happen. I can’t overstate the importance of writing down your procedures because if a regulator or examiner comes in, it won’t do you any good until it’s written down,” said Scott Gluck of Duane Morris.


1 Early stage market compared to the U.S.: Comparing the markets, Michelle Alphonso, Director at Transaction Advisory Services Grant Thornton  remarked, the mid-market in Canada would be the lower mid-market in the U.S. Canadian companies are smaller and more regionally-focused compared to those in the U.S, according to Valerie Scott, Principal at Swander Pace Capital. The other area of concern is the banking and financing in Canada. There are 5-6 banks and not much syndication between them.
2 The market is less sophisticated: The financial information of the companies is less sophisticated, Michelle Alphonso mentioned. Also, the business owner’s ability to talk about the financial data is less than it would be in the U.S. EBITDA as per the standard definition might mean one thing, but across most Canadian marketplaces, EBITDA might have an altogether different meaning. To mitigate this issue, it is important for the investors to have a conversation with the business owners to get such things standardized so that they both can be on same page.
3 Market for Private Equity is still in its nascent stage: Daryl Yap, Partner at American Industrial Partners says that investors will have to allay the fears of the companies as there might be a bias towards Private Equity Groups, given the market is still young.
4 Excess capital chasing fewer deals: The Canadian market is a fairly small market, according to Valerie Scott and Michelle Alphonso, and firms and pension funds have a lot of capital at their disposal, which leads to excess capital chasing fewer deals.
5 Valuations are lower: There is a growing interest by American. investors in Canadian companies, according to David Clark of Financial Sponsors Group Raymond James. The interest is primarily driven by the low valuations of the Canadian companies. The leverage tends to be lower compared to the debt markets in the U.S., leading to low valuation of the Canadian companies. Also, another reason to invest is to expand the operations of the company in the U.S.

is this the full name of the company or a department at Grant Thornton?






Middle Market Outlook: Middle Market Competition is fierce, coming from all constituents like independent sponsors, family offices with dedicated PE efforts, and also from Strategics who are participating far down below their league. The trillions of dollars in PE funds raised in the last four years now in search of deals, along with the Consumer Confidence Index reaching its peak since December 2000 positively impacts the valuation of private companies. Plenty of groups are willing to pay rich multiples for companies despite critical risk factors like product service concentration, challenging capital structures, and significant customer concentration. However, the only thing that can possibly dampen this trend will be legislative gridlocks if the Trump Administration tries to enact more economic and tax reforms. The valuations for companies in the middle market are frothy and these companies have more add-on activities, allowing them to mitigate the high value that they may have paid on their platform. Changing management quicker than talent transitions in the past is another trend to observe. PE firms are trying to capture synergies that they might be able to tackle, like Bain is creating shadow portfolios and tracking business plans for those companies that they don’t actually own but acquire once they enter the market. Middle market companies are required to complete due diligence, which is a strain on them, and as a result, PE firms are trying to get expense reimbursements on their diligence efforts.




Deal Flow – Sourcing and Funding: Though markets are consolidating, the middle market is highly fragmented, with many layers below the Strategics being almost empty, and lower middle markets, with relatively low multiples, try to add-on and reach attractive levels for Strategics. For niche industries like waste management, where the majority of deal source is direct, deal sourcing is not always executive-driven, as sales managers and operations managers in the field are the ones who take the lead. Sponsors are more concerned with preserving the vision, retaining core values and strategic plans. The relationship between PE firms and investment advisors is prudent in positioning themselves in management presentations, as to decide if the PE firm is a credible buyer.




Deal Closing: PE firms are incorporating third party resources, spending more time evaluating relationship dynamics between and among the senior management team in order to get an assessment of the capabilities and talent of the CEO in executing a vision. From a sell-side perspective, quality of earnings before the sale is the key to smoothly pass through the diligence and Quality of Voice (QoV) is always better to be performed if it balances the costs. Time to close deals from financing side is lengthy, with the volume of legal documents, inter-credit documents, and ancillary documents, which take a while. On the deal side, with second- or third-generation businesses,




emotions set in as one gets closer to closing the deal, which might not work out in their favor all times. Reps and Warranty Insurance are being used extensively to ensure the closing of deals. Right now, financing markets are attractive as ever,due to a low interest rate environment coupled with significant deal volume, as non-banks are getting more aggressive than regulated banks with have ceiling issues.





Value Creation: Firms are laying out very detailed acquisition-integration plans that cover all functional areas–HR, Operations, Risk, and Environmental– and depending on size and complexity of the deal, continue to ensure all synergy assumptions are in place, and run through integration. Portfolio companies need to fully understand the marketplace and document the management team’s philosophy that is differing with the market trends and determine the ideal amount of leverage required to achieve desired results. The management team has a tremendous relationship with PE partners, with support in understanding market dynamics through financial modelling/engineering and help through their strategic view. Portfolio companies figure out ways to cut costs and support the growth of small companies by rebranding, upgrading websites,and acquiring PEs investments. Focus is on IT spending, work with outside consultants on supply chain optimization, and ensuring that their platform is scalable, following the kaizen (“continuous improvement”) process by improving their processes, adding line of businesses, and increasing geographical presence.






Exit: Holding periods are shortening from 6.1 years in 2014 to 5.3 – 5.1 years right now, and salaries are taking advantage of the frothy multiples. But that trend is expected to reverse, as during boom, the PEs with portfolio companies paid up with multiples and now probably need those assets to mature a little longer. Holding periods depend on the position of a company in the business cycle, as every deal is different depending on the industry, and when inevitable decline comes, holding periods will lengthen . Growth is the frontrunner leading to potential exit opportunities as compared to EBITDA optimization, and showing stronger organic growth and a clear roadmap goes a long way in the sale, which also helps the future buyers. Despite positive comments on markets since the election, the IPO market has been depressed. YTD, there’s been 25 IPOs, which is down by 200% as compared to this time last year, with a lot of IPOs happening in the energy and infrastructure space. Private markets are becoming more developed, in order to get liquidity to investors or capital for growth, who don’t have to necessarily access public markets and can instead go through private rounds. M&A outlook is expected to increase for the current year as compared to last year.

President Trump and Tax Cuts

By David Acharya, Partner at AGI Partners LLC and EVP of ACG New York

On April 26, 2017, President Donald Trump made his proposal for what is known as the “biggest tax cut” in U.S. history — with cuts that would benefit businesses and all income earners. This proposal will rival President Ronald Reagan and President John Kennedy tax cuts enacted in their respective administrations.

While the proposal affects all earners both individuals and businesses, I will focus on the effects of ACG NY’s community – middle market businesses.

Key Proposals affecting Middle Market businesses:

Reduction of Corporate Income Taxes

President Donald Trump’s plan to cut the tax rate to 15% for so-called pass-through businesses would be a significant change to the tax code (as opposed to current pass-through income taxed at an individual tax rate which can be as high as 39.6%).

This is aimed at small businesses, but pass-through treatment also applies to a lot of private equity funds as well as other funds (e.g., ones structured as LLC’s). Moreover, funds organized as limited partnerships likely would restructure to qualify as pass-through entities for tax purposes (or at least firms would be sure to raise the next one that way). In short, such fund managers could pay a flat 15% tax on all their income, including annual management fees on which they currently pay individual rates. This basically makes the carried interest debate irrelevant. The clear majority of middle market firms use pass-through structures.

I believe that lowering the tax rate for the business income of partnerships, S Corporations and limited-liability companies would spur U.S. business growth and job creation.

Reduction of Personal Income and Income Tax Brackets

President Donald Trump has proposed cutting Income Taxes from 7 brackets to 3 brackets. As part of the simplified brackets, Mr. Trump has also proposed doubling the standard deduction for individuals. That change would increase the deduction from the 2016 levels of $6,300 for single filers and $12,600 for married couples filing jointly. Doubling the deduction would greatly increase the number of people who take the standard deduction thus further simplifying tax returns going forward. Under the plan, deductions for mortgage interest and charitable contributions would be protected. The two deductions are among the most popular for individual U.S. taxpayers, making them two of the costliest for the federal government. Under current law, for 2017, the estate and gift-tax exemption is $5.49 million per individual. President Trump would repeal the estate tax entirely under his plan.

This will simplify tax planning for individuals and increased individual after-tax income which will then be used for spending on products/services and investments including retirements.

In addition, I believe that these breaks and estate tax exemptions will further increase the supply of middle market companies that are brought to market for sale. This will further increase the pipeline of investment opportunities for private equity funds.

Business Breaks and Interest Deductibility

President Trump has continued to express his support for writing off capital investments and to an extent, business interest deductibility. This will continue to encourage investing in businesses and infrastructure.  While there has been discussion on eliminating business interest deductibility, I believe this will not pass due to many industries having a powerful interest in seeing the business interest deductibility continuing.

The continuation of these breaks and deductibility is meant to create greater incentives for middle market firms to invest capital to grow their businesses.

Lower Capital Gains Tax

Under the plan, the top federal capital gains rate is cut from 23.8 percent to 20 percent. This is achieved by eliminating a 3.8 percent tax that is used to fund the Affordable Care Act.

The reduction is meant to create greater incentives for people to invest as well as improve the after-tax return of the sale of their businesses.

Implementing a Territorial Tax System

This area has not gotten as much press as other areas but I believe that global industrial and technology companies are among the companies pressing for President Trump’s proposal to implement a territorial tax system, in which the U.S. only taxes profits generated in the country, leaving overseas profits untouched except by those countries. Currently, the U.S. is unusual in taxing firms’ overseas profits if the proceeds are brought to the U.S., a system that has encouraged U.S. companies to book profits in low-tax foreign jurisdictions and leave them there. (Companies typically must pay the difference between what they already paid in foreign tax jurisdictions and the full U.S. tax bill for the repatriated profits.) In addition, it has introduced odd ways to manage cash such as leaving cash overseas and borrowing domestically (e.g. Apple Inc.).

About one in five companies in the Russell 1000 index (public companies including middle market) generate much of their sales outside the U.S., and more than half receive at least some revenue from abroad. U.S. firms hold about $2.6 trillion overseas, the nonpartisan congressional Joint Committee on Taxation estimates. A movement towards territorial system will eliminate a need for inversions or trapped cash.

The implementation has greater incentives for returning the capital to the US thus benefitting the US tax system and simplifying tax returns for middle market companies. The longer-term benefit for middle market companies is that the US system will have more capital to invest in smaller but growing business in a stronger US economy.

I believe that middle market businesses should continue to be bullish on President Trump’s tax proposal.

Spear Pharmaceuticals on the block through Moelis – sources

Provided exclusively by Mergermarket

Spear Pharmaceuticals, a privately held generic dermatology drug maker, has mandated Moelis to explore strategic options including a sale, according to two sources briefed on the matter.

Randolph, New Jersey-based Spear manufactures and sells prescription topical skin treatments for conditions including acne and actinic keratosis that are bioequivalent to branded products.

The company generated approximately USD 250m in revenue in 2016, one of the sources said. Its EBITDA could not be learned.

The sale process is at an early stage, having kicked off last month, one of the sources said.

Because anti-aging and skin rejuvenation treatments are popular in developed countries, Spear could command a high valuation, perhaps as much as 4x revenue, one sector advisor said.

Another sector advisor said a platform such as Spear’s would typically sell for an EBITDA multiple of between 10x-14x, a relatively rich multiple reflecting demand for such products. For high-growth companies, the EBITDA multiple could be higher, the advisor said.

Among Spear’s products are Fluorouracil Cream for keratoses, or lesions that develop from sun exposure over years, which it says is the generic equivalent to Valeant Pharmaceuticals [NYSE:VRX] Efudex Cream.

It also sells Tretinoin gel, a retinoid derived from Vitamin A to treat acne, which is the generic equivalent to Retin-A Micro, a widely used skin treatment sold by Ortho-McNeil Pharmaceuticals, a unit of Johnson & Johnson [NYSE:JNJ].

Spear representatives could not be reached for comment. A Moelis representative declined to comment.

by Yiqin Shen, Deborah Balshem and Dane Hamilton

As seen in the mergermarket newsletter on 02/04/2017

Rent The Runway talking to advisors about potential IPO, sources say

Provided exclusively by Mergermarket

Rent the Runway has held preliminary discussions with bankers about a potential initial public offering, said two sources briefed on the New York City-based apparel rental firm’s plans.

The company has been sounding out advisors about market conditions in anticipation of a listing, the two sources said. Ever since Snap’s [NYSE:SNAP] listing on 2 March, the frequency in which Rent the Runway and other consumer-facing tech companies have engaged bankers has increased, they said.

Rent the Runway has not yet picked bankers but if it were to bake off in the next couple of months, an IPO in the second half of the year would be possible or it could elect to wait until 2018, the sources said.

The company generated more than USD 100m in revenue in 2016 and it is profitable on an EBITDA basis, said the first source, echoing what CEO Jennifer Hyman told Recode in a 27 December report.

Rent The Runway allows women to rent designer apparel and accessories online. In addition to one-time rentals, the company rolled out an “unlimited” service a year ago in which customers pay USD 139 a month to rent out top fashions on an ongoing basis. It also operates brick-and-mortar stores in six major US cities and it has partnered with luxury retailer Neiman Marcus to open “stores within a store.”

In December, the fashion technology startup raised USD 60m in equity financing led by Fidelity with participation from investors such as Bain Capital, Technology Crossover Ventures, Highland Capital, and Advance Publications. It has raised approximately USD 190m in private capital since it was founded in 2009.

Co-founders Jennifer Fleiss and Jennifer Hyman reportedly each own 13% stakes in the company.

Rent The Runway competes with other online apparel startups such as Le Tote and Stitch Fix.

The company did not return a message seeking comment.

by Troy Hooper in San Francisco

As seen in the mergermarket newsletter on 06/04/2017

The Real Cost of Fast Fashion

Provided exclusively by The Street

With traditional retail prices dropping, you’re better off with an elevated brand.

Unless you’ve been living under a rock, you’ve inevitably noticed that retail prices are dropping faster than you can say “highly flammable polyester blend.”   Oversaturation in the retail market, Millennials spending more on experiences than material possessions and a steep decrease of in-store traffic all snowballed into the winter of retail discontent. TheStreet‘s Lindsay Rittenhouse also noted that heightened competition from e-commerce players such as Amazon ( AMZN) , elevated rent costs and rising interest rates are expected to tack on an additional headache for retailers.  The disconnect between fast fashion and traditional brands has also created a rift, with retail trying to catch up to fast fashion with Sisyphean results. No matter how hard they try, the traditional retail structure can’t keep up with fast fashion’s culture, cost of goods and supply chain noted Adheer Bahulkar, a partner in the consumer goods and retail practice at management consulting firm A.T. Kearney during a phone call to TheStreet. Bahulkar also noted that traditional brands need to go back to creating stories that resonate with their community rather than trying to keep up with the latest de rigueur look, because they end up alienating their current customer and eschewing better quality in favor of quicker output.   With that being said, traditional retail has had to cut the price of clothing to such a degree to remain competitive that you’re better off purchasing from such retailers anyway. The item (usually) won’t self-destruct after a few washes, you’ll probably keep the item longer because you respect the brand more and the piece may have a longer life because you’re more likely to donate rather than toss it.


“Fast fashion is dependent on high volume,” said Nanette Heide, ACG New York board member and partner at Duane Morris. ” As the consumer becomes more conscious, they may be moving away from impulse purchases of garments that are made to be off trend the moment they are placed in a shopping bag.”

To prove this point that traditional retail is the incontestable better value, let’s look at the prices of a “control top” (not Spanx) of a popular women’s style currently available from essentially every brand.

Off-the-shoulder or “cold shoulder tops” (as a former fashion copywriter, I can attest to the fact that this is a cop out) are having a moment, no matter how impractical they are for undergarments and ill-suited for a corporate environment. Because they’ve been around for several seasons more conventional retailers in addition to fast fashion have embraced them and bare shoulders have become a core seasonal style statement for spring collections. What really differs by brand is the price and construction, and if it’s machine washable.   Let’s see how the prices stack up against one another in order of most to least expensive at the time of publication. The lack of disparity between pricing/more expensive brands versus quality may surprise you.

As seen in The Street on 03/30/2017