Private equity is here to help you: opinion piece

Those unable to attend Printing Industries' CEO Forum last week missed some valuable insights into the operations of private equity in the printing industry. James Cryer of JDA Print Recruitment was there, and has a lot to say about the event.

The PIAA's CEO Forum might have been a languid affair, but our critical faculties were tuned like violins to a topic which has fascinated, aroused, intrigued and perplexed us for some time, as we've watched with a mixture of fear and envy our brother companies being willingly devoured by the great PE monster.

There were many insights given into just what drives this insatiable beast. The first shock was to discover how young those PE-ers are these days. Tariq Osman is not some old, cigar-chomping banker in a pin-stripe Emilio Zegna suit, but a tousle-haired Gen X-er, casually dressed in shirt-sleeves, in stark contrast to the conservatively suit  and ties audience. To his credit, the delivery was fast and fluent as he initially adopted an almost apologetic tone in explaining what PE would not do.

According to Osman, they were not "uninvited barbarians"; they were not "asset strippers"; they were not "quick-flip" artists, and they were not "debt junkies".

He said that they instead preferred to work with existing management, operate in a stable environment and provide resources for growth wherever possible. He referred to their commitment to build businesses, to increase revenue by increasing earnings not cost cutting – and that employment would actually increase over time. There was also some suggestion that benefits can flow to employees through profit-share or similar schemes.

Pictured: Robert McMillan, former managing director of McMillan Print Group with guest speaker, Tariq Osman, associate director of CHAMP.

While it is easy to be cynical about these claims, there is some evidence that PE, when well conducted, can add value by providing extra financial support and resources not readily available to small businesses. There are claims that returns are higher to those firms under PE regimes than the general average, although - "the evidence is mixed, however, on the extent to which a PE structure improves risk-adjusted returns ..."

Anecdotally, there is a strong case that it is better to have the barbarians on your side of the fence, rather than the alternative, on the basis that they have "skin" in the game (another descriptive Tariq-ism).

I think the reason for our industry's collective apprehension is that this sort of wholesale invasion has never happened before. We've also possibly undervalued our industry's potential worth. It often takes an outsider to see with greater vision the true opportunities. Maybe we look good by comparison to some other industries?

My concern is not at the possible destruction of our industry by the invasion of PE – it may even help. What Tariq may not have addressed is how they intend to extract sufficient value to satisfy the high performance hurdles they require. Particularly, as one of the points Tariq made, was that PE groups constantly search for bargains and buy low, so there's lots of upside. (My recollection of Geon's purchase of Promentum does not support that thesis. I recall the share price was actually bid up, from just over $1 to just over $2 during the six months preceding the sale.

Furthermore, all the companies recently purchased (by both Geon and Tariq's CHAMP), such as Graphic World, NCP, Dynamic Press are all run by tough, hard negotiators who would not have sold the family jewels lightly (believe me, they all belt me up regularly). These were not fire sales, so much as simple transfers of assets. Where's the bargain?

And I don't believe there is too much "fat" in most companies, so there's not much scope for the axe-wielders (plus it's not "company policy," say the PE-ers).

Moving away from an accounting perspective, most printing companies still possess a whiff of their craft-based heritage; they prefer to remain clustered in small, tribal groupings. They don't like enforced amalgamations, such as we've seen from the ill-fated Teldon experiment. I would guess that between 50 and 150 is the optimal size for a printing business, any bigger than that and you risk alienating staff and creating dis-economies of scale.

 

 

 

 

 

 

 

 

 

Pictured: (L-R) Printing Industries NSW general manager, Robert Fuller, Tariq Osman, outgoing Printing Industries NSW President Peter Goodwin and incoming NSW President Neil Bown.

Tariq's opening remarks included reference to the other "elephant in the room" – Stream (although Andrew Price wasn't there). Print management is the thing we love to hate, but ironically, if anyone is going to keep the barbarians honest it's going to be the PMC's of this world. This is because, for the PE-backed organisations to generate adequate returns, they must go direct to the end user. They'll wish to present themselves to the big financial institutions as the modern one-stop wonderland and thus usurp the PMC as we know it. It'll be like a modern day version of a fight between a woolly mammoth and a sabre-tooth tiger.

In a convoluted sense, these two forces – PE funds and PMC's – while mortal enemies at one level, are unwitting and probably unwilling bed-fellows in bringing about long overdue, if painful, changes to our industry. The print management companies have wrought "allocative efficiency" in terms of directing work to the most appropriate producer. The PE phenomenon now holds the promise of implementing greater "productive efficiency", ie, lowering the general cost-base – something that may make print more competitive, in relation to other media.

We live in fluid times, impossible to accurately predict outcomes, however I do have two final questions for Tariq -

1) Our industry is increasingly a "service" one, that happens to use manufacturing as the means to the end. Manufacturing things is considered "old model" – surely the trend is towards service-based industries where you have greater scope for value-adding (including logistics, distribution, etc). But you've chosen to focus on the manufacturing end not the service-based end, ie, print management, which has seen a phenomenal growth, far out-stripping the growth of actual printing companies. Why invest in more manufacturing (wholesale) capacity, when the real profits are in the customer-focused (retail) end of the supply-chain?

2) Our industry now comprises both the older, offset as well as the newer digital technology. Sure, you've invested in a spread of both, but the greater margins and growth opportunities are occurring in the hyper active digital end of the market, which appears to be under-weighted in your portfolio. I know of one digital printing company which has grown to over 100 employees within 10 years – that potential is just not possible in offset, so why invest so heavily in the "old growth" sector?

These and many other questions float upon the breeze, as we await the next knock on the door from our friends the Barbarians.