I returned a few days ago from Silicon Valley. It was like a breath of fresh air. I talked to people who were involved in creating companies with hundreds of millions of dollars of value, within a few years after incorporation. There is a constant stream of new start-ups and projects, an excitement in the air. A recently incorporated economy was sold to Google for a billion dollars. And it got me thinking about how entrepreneurship is viewed so differently in Central Europe compared to the United States.
My last syndicated column was entitled “Can the European crisis be solved without improving competitiveness?” That was a discussion at the European or national level; in this column I’d like to take the discussion from a macro to micro level, and deal with competitiveness at the enterprise level.
The crisis around Greece and the Euro seems to have subsided--for the moment. The European Central Bank has flooded the European financial system with liquidity using the Long-Term Refinancing Operation (LTRO), yet another form of monetary easing. Financial markets seem to be recovering nicely.
A private equity investment has the obvious advantage of bringing money to a company. Most company owners are not aware of all the implications—beyond the money-- of bringing on board a private equity investor, which is the subject of this article:
In the current environment, what are Private Equity Firms doing about exiting investments in Central Europe?
I moderated at a private equity conference in London last week on the subject of what private equity firms are doing with respect to exiting in the current business environment. Even if the reader is not from the private equity industry, I believe the subject is still of general interest, as it provides trends on what sophisticated market participants are doing in an often difficult market.
The following chart gives an overview of exits for the European private equity industry:
Private Equity Exits in Europe, 2007 to 2011 Q3
Just think: if more people were financially literate, there might never have been a mortgage crisis in the US, or a Swiss Franc lending crisis in Hungary and other CEE countries. While everyone certainly has their fair share of blame with respect to the recent crisis—Governments could have regulated better and financial institutions may have done better risk management—ultimate responsibility for financial decisions still rests with the individuals that make financial decisions at the micro level.
Running a small or medium enterprise (SME) may be compared to piloting an aircraft. In the achievement of your objectives, you keep your eye on certain controls. As velocity and altitude are typically the two most important gauges for a pilot, for the owner of an SME, it is usually profitability and cash flow. Too often, SME owners will neglect cash flow. This may result in the business equivalent of crashing an aircraft into a mountainside.
So why is cash flow so important?
The chart below represents one of the most important charts for European financial markets in 2011, perhaps even for global financial markets: *
* Attributon of comment Lou Basenese, and his use of the above chart, on Seeking Alpha
This chart may be broken into three phases:
Albert Einstein said that the greatest force in the universe is the power of compound interest. What we have seen over the past decades in US credit markets is compound, even exponential growth. In the chart below, the blue curve shows a perfect exponential curve, the red curve shows the actual level of US debt (in trillions of dollars).
The cover of the Economist portrays a Euro coin falling from the sky in flames. The Telegraph newspaper recently reported that the UK Treasury is already making contingency plans for the demise of the euro, and British embassies in Eurozone countries are making contingency plans for saving British nationals, given the expected riots: “A senior minister has now revealed the extent of the Government’s concern, saying that Britain is now planning on the basis that a euro collapse is now just a matter of time.”