The capabilities-driven approach by the PE firms

Public companies, for ages, have looked up to the PE (private Equity) sector and their amazing ability to crack deals, hoping to take lessons in improving the success rates they have in carrying out M&A (Mergers and Acquisitions). Today, however, around 6000 PE companies having about US$1.2 trillion in cash reserve at hand for investment (showing a hike of 200% in over the last decade) are looking in vain for deals. The competition is influencing the increase of prices and it might prove tougher for the PE sector to enjoy profit, especially if the bull market slows down in the long run.

In this highly competitive environment, the PE companies can take a leaf out of the books of the public ones which have succeeded thoroughly in M&A. It has been discovered that companies like Abbott laboratories, Danaher and Disney have seen success having mastered something called the capabilities-driven approach which would lead to inorganic growth. They take into account the distinct strong points of their businesses in terms of optimum capacities, the basic pillars which include knowledge, process, skills, tolls, organisation, etc.

This comprehensive perception leads them towards astounding returns in terms of finance and successful deals. Analyses of over 500 cases from nine industries over a decade (2001-2012) showed that around 14 percentage points in average are added to shareholder returns of two years by such deals, beating those of other public companies following different methods. The same approach may work for PE firms as well if they use it while looking for and filtering targets for acquisition and for performance driving after the completion of deals at portfolio companies.

Value creation by PE firms happen in the follow four main ways which if dipped in a capabilities driven approach bucket can maximise its value creation, while accelerating the rate of growth at the same time:

Operational improvements made on the top-line and the bottom-line: Value created by the PE companies, often involve the optimisation of cost; it focuses on acquiring resources, and realignment of the workforce. The capabilities – driven approach can boost value by identifying the exact capability the cost program is affecting and by making sure its most important strengths are not watered down just to suit cost optimisation.

Simultaneously firms can accelerate growth at the top line, by focusing on particular capabilities, bringing about improvements in innovation, R&D (research and development), and sales force effectiveness. The Blackstone Group’s investment in the Hilton group of hotels and the eventual hike in returns in 2013 after the crisis in 2009, is an excellent example of application of the capabilities driven approach.

Investment in high growth rate industries: Value creation is done by PE firms by investing in companies which are growing fast and well in the industry, or in situations in which growth opportunities are created even if there are disruptions in the market. In these cases, the possibility of all assets rising; however, even here the companies trying to fortify their capabilities systems are likely to create greater values.

This smart approach assists in driving better performance by pinpointing and strengthening the particular capabilities or assets. Just like Apex Partners collaborated with the TriZetto Group which provides integrated healthcare management software in 2008, in face of the intensifying debate about healthcare reform and managed to make a separate place in the market for themselves by the distinctive capabilities.

Rolling up and consolidation of assets and creation of synergies: Value is created by PE firms by compiling assets that are related so that more scale can be gained, creating alliances, and building up market share to facilitate better pricing. What the capabilities driven approach does is, value creation by concentrating on the unique capabilities and manoeuvring or leveraging them all across a massive base. As an example the investment made by Apollo Global Management in 2007 by buying and combining Oceania Cruises and Regent Seven seas Cruises, can be sited.

Restructuring the financial element: PE companies create value by coaxing those who lend to them to rethink and negotiate interest rates, and/ or by exercising perseverance to set up the application of operational improvements. By utilising the capabilities approach, value can be enhanced by creating the restructuring of debt in accordance with the firm’s capabilities system, while emphasising at the same time, how the company’s distinctive capabilities will help its case in the market. Apollo did this kind of thing with Lyndellbasell.

Taking into account the dry powder available in the Private Equity sector, and its highly competitive nature, that prices will rise is a given possibility. PE firms have to keep in mind that in such a scenario, irrespective of the price they pay, they will have to find a way to use acquisitions as a major source of creating value to gain success in the long run. And to attain this target, they have to learn from the methodology that the best public sector companies have used to maximize returns from M&A, and that is the capabilities driven approach.…

14 biggest financial mistakes I’ve made and how to avoid them

At its most fundamental, finance is the simplest thing to understand and the easiest to manage: you need to earn more than you spend in order to live a modern life and to provide you and your family with the security.

So why is that so many people get into trouble when it comes to money. Leaving aside those who are out of work or disabled, hundreds of thousands of people struggle with the finances – running up debts, spending more than they earn and mortgaging their futures. Millions more have not put enough aside for retirement and while they may be enjoying the good times now, will inevitably face a reckoning when the wage slips stop rolling in.

I made all of the most common mistakes and kept making them over and over again. Through forums and online financial advice sites, I found that I was in good company with people from all walks of life and earning vastly more money than me all doing the same things:

Taking on debt too early & Not saving for retirement

The pressure on young people today is immense: peers, advertising and social media all glorify lifestyles that are unattainable before you start earning a reasonable amount of money. Credit was easy to come by when I started work and I thought I could have everything. It was ruinous eventually. Until you’ve started earning a reasonable wage and have money left over each month, it’s unwise to start borrowing too soon.

When I was 40, old age still seemed like something that happened to other people. But now I’m 55 and have not saved a penny for my retirement which could be just a decade away. Your prime working years race by and, before you know it, you’re facing retirement through age or ill health. Not having enough money in a pension can impoverish you so start planning for your retirement as early as possible.

Not maintaining a decent credit record

Being reckless with money didn’t just affect my ability to borrow more – it stopped me getting a mobile phone contract, a mortgage, a tenancy agreement, even an electricity or landline connection. Always pay your bills on time.

Not setting a household budget

Watch the pennies and the pounds will look after themselves. Sounds trite but it is an age-old wisdom. Keeping track of your family’s outgoings, setting boundaries and sticking to them will ensure that you never spend more than you earn.

Not applying the brakes

When the warnings are flashing red, I needed to take a fundamental look at my financial affairs. I was behind on repayments and had defaults registered against me but just kept taking on more debt. I should have talked to a debt charity or the Citizens Advice Bureau.

Not consolidating

If you’ve got a lot of credit cards and loan accounts and the interest is threatening to send you over the edge, you should seriously consider rolling them all into a single debt consolidation loan and pay a single monthly repayment and interest rate. It will allow you to budget more accurately and with greater confidence.

Sticking my head in the sand

I’m a great one for pretending all is well when it patently isn’t. I spent years ignoring warning letters and not opening mail in windowed brown envelopes. Always be realistic about your situation and open and respond to letters from your creditors.

Not having a contingency fund

I used to be paid on the 15th of the month. By the 30th, my bank account was empty and I would eke out an existence for the next fortnight until payday. Then, one day, the cam belt went on my car, meaning an engine rebuild and a bill for £2,000. I had no contingency for this and had to scrap the car. Always ensure you’ve got some money put aside for the emergencies which inevitably will happen.

Maxing out my credit cards

I behaved as if my credit card limits were additions to my wage using them to buy new televisions, the latest consumer gadgets, smartphones and so on. Then, they were maxed out and I had bills rolling in which I couldn’t afford.

Only ever making minimum payments

Those credit card bills mounted up because I only ever made the minimum monthly repayment and so the balances went down by minute amounts while the interest kept rolling in. Always try to make more than the minimum payments on your cards to reduce the actual capital amounts and, thus, interest.

Focusing on months, not years

Just living payday to payday was fine in the short term but disastrous over a longer timescale. It meant that I never put money aside as savings or simply for a rainy day and had nothing left over when I lost my job. Project your budget forward a year, two years, maybe more, and plan ahead.

Not setting goals

Maybe you are like me and have spent years just stumbling through life. If you aim low, you’re guaranteed to hit the mark. But if you set your financial goals and review and update them regularly, you’re much more likely to have a less stressful life.

Believing that stuff makes you popular

I bought everything that I thought would make me more attractive: designer clothes, watches, cars. This spending year on year left me both broke and feeling empty. Real relationships and friendships are built on fundamentals not material possessions. It remains true that you cannot buy a friendship or partner.

Keeping up with the Joneses

I hated it when my friends bought expensive new cars. I thought that I had to do the same just to be able to be accepted in the same social circles. It was disastrous and led me into terrible debt. If your friends are so shallow that they would shun you if you didn’t drive a new car, then you need new friends… not a new car.

Thinking that I couldn’t change

I deeply regret the years I wasted thinking that there was no point making financial changes because it was too late. It is never too late to budget, to cut back and to start to repair your credit record.…

Time saving investments

Money is an important aspect of life today. It is involved in almost all aspects of life. The only thing more important than money is the source to multiply it constantly. As the world moves forward hoarding something of worth like money is never a good idea. Therefore the concept of investment comes into picture.

Investment in lay man’s term is an opportunity where a person forgoes his current consumption so that he/she would be over-compensated for it in the future. An investor is a person who takes the risk of using his present surplus to constantly multiply his dormant funds. Every investment opportunity starts with the promise of good returns. One such opportunity is the Turnkey real estates. Turnkey properties are properties that are readily available for investment without injection of extra funds for repair, modification etc. just by turning the key of decision of purchase. The number of Turnkey investments is constantly on the rise due to rise of busy corporates and professionals who can’t afford to spend time on modification and repair of each and every asset that they invest in.

Long term investment- short term living

Turnkey properties have ushered in a new culture among the investors. With the availability of ready apartments, the buyers prefer to live in the property in the short term gaining utility from the asset. In the long run the assets are converted t investments by making them available as rented apartments. This enables the investor to gain maximum utility from the trade and investment. Many people who are looking to purchase apartments are switching to turnkey estates because it requires no repairs and can be turned into a rented apartment any day that the investor desires. And after a while if there is a need for moving then the asset still generates revenue for the buyer in the form of rent.

Why

Regular investment options might have been viable in earlier times but in today’s market a commodity that saves time is the best commodity available. Regular real estate need time and attention of the investor after purchase in the modification and repair of it which most of the large scale buyers aren’t comfortable with. Existence of an option like turnkey properties that doesn’t require much time after the purchase which provides incentive for more investors to participate and invest in the market thus helping the market in functioning smoothly without stagnation and slow growth.

How

Purchasing a house used to be an easy process because most buyers believed the fact they would invest most the money in repair and modification of the apartment post the purchase which usually turned to be bad decisions as both the purchase and repair would stretch their budget over their planned line. In the course of years, the process of purchase has improved drastically. With the dawn of the internet and mass media mechanisms, the distance between the investors/buyer and seller has reduced very rapidly. Many sellers of turnkey apartments are readily available via online portals or via advertisements in mass media.

Conversion

Along with the boom in turnkey investments, there has also been a rise in a phenomenon where the property is converted into a turnkey property. One of the popular methods for conversion of investments into turnkey is hiring a management company to look after the investments in a portfolio and which satisfies the needs of the investor. Right from repairing the broken tap to cutting the grass, the management looks after all aspects of the home thus making a home into a readily available investment that can be rented out for revenue generation.

Risk

Every good investment has the potential to generate return. But what exactly is ‘return’. It is the compensation to the investor for putting forth his money without the knowledge of the future and thus inheriting the risk of the investment. No investment is risk free and an investment which is risk free cannot generate returns. Turnkey investments also bring with it certain elements of risk that the investor has to inherit.

One risk that a turnkey investment faces is the problem of rising taxes and falling property rates. Sky-rocketing tax rate can lead to huge losses as rent rate cannot be increased at such a rapid rate. This is one of reasons many dream investments have turned to rubble in places with unstable tax rates. The return of a turnkey investment is dependent upon the occupancy of the property. There have been numerous cases where investments lay barren and vacant losing value over the course of time. Therefore it is always advised that turnkey investors keep an emergency buffer amount so that this amount can bail them out of a crunching situation with minimum damage.

Conclusion

The era of turnkey investment has brought good spirit and motivation for the investors. This market has a potential to grow into a big sector in the future because it provides the investors the most important thing, time.…

Top 20 ways to reduce monthly expenses

Unless you’re fortunate enough to be one of the super rich, it doesn’t matter where you find yourself in life – everybody wants to save money. Reducing your monthly expenses in a methodical and organized manner is a fast and relatively easy way to stabilizing your finances, rebuilding your credit record, paying off your debts and putting yourself in a position where you will actually be able to save money.

But to reduce your monthly expenses you need to adopt a disciplined mindset. Cutting things haphazardly or on a whim without working out what you need to live on and to satisfy any of your commitments will put you on the fast route to resentment, impulse spending simply to “cheer yourself up” and, potentially, an even worse financial predicament than the one that caused you to think about making savings in the first place!

So, before you start making savings without thinking things through properly, take the time to read our top 20 ways to reduce monthly expenses:

Put everything down on paper

List all of your fixed outgoings and income either in a book or using spreadsheet software. Include everything – mortgage or rent, credit card payments, phone bills, electricity, etc – in one column and all of your income in another. Add it up and subtract your expenditure from your income.

Record other spending for a month

Keep all of your receipts whenever you spend money. Add these to a third column in your budget for a month and then add this to your other fixed outgoings. Getting close to your income or, even worse, already in negative territory? Then you need to read on to make savings.

Cut out the ‘little luxuries’

Can’t do without that caramel macchiato in the morning? Or the expensive sandwich at lunchtime? Start making a flask of coffee before you go out and a packed lunch and you’ll probably start saving yourself more than £10 a day – that’s £200 a month if you work a five-day week.

Stop shopping for labels

Don’t be taken in by designer brands on special offers – you can do better elsewhere. Go online and find last season’s line-up for a fraction of the cost of the latest designs. Better still – learn to mend your own clothes or visit charity shops in upmarket parts of town where the well-off take the clothes that they’ve grown tired of.

Switch your utility suppliers

Electricity and gas companies milk their loyal customers. It’s perverse and unfair but a fact of life. Always try to switch to another every year and give your current supplier the opportunity to better the price you’ve been offered.

Don’t let insurance companies automatically renew your policy

Four weeks before your car insurance is up, you’ll get a renewal pack from the insurer. It’s likely that your premium is simply going up because that’s how these organizations make their profits – by relying on their existing customers doing nothing. Shop around, you are almost guaranteed to find a better deal.

Walk or cycle

Stop taking the car two minutes down the street. Using a vehicle for short periods increases engine wear and uses proportionately more fuel than longer trips. Walk or get on your bike – you’ll get fit and save money at the same time.

Buy supermarket own brands

You may only save 10p on a jar of yeast extract compared with Marmite, but add all of these items up in a weekly shopping basket and you will have saved yourself pounds if you stick to the supermarket’s own brand equivalents.

Buy from a greengrocer or farm shop

You’ll save money if you buy your fruit or vegetables from a local supplier. Better still, if you’ve got a local vegetable box supplier, order a regular one and make use of everything in it.

Plan your meals

So many of us are too busy to prepare our own food so we resort to ready meals and takeaways. These are much more expensive than planning your own food and preparing it in advance – at the weekend, say – and putting it in the freezer.

Drink less

All the most recent advice has highlighted the damage that alcohol can do to your health. But it also can be very bad for your bank balance with beer at up to £5 a pint and a half-decent bottle of wine costing in excess of a tenner. Drink one of those a day and that’s more than £280 a month.

Reduce your overdraft

A bank overdraft is one of the most expensive ways to borrow money. And so long as it’s there, the temptation will always be to go into the red. If you have a good month, reduce or cancel your overdraft altogether to get rid of the temptation in the future.

Sell, sell, sell

If it’s stuck in your attic, the chances are that you haven’t and won’t ever need it. Sell it – either at a boot fair or on eBay. Any vintage or unusual items could possibly be worth more than you realized.

Find somebody to share the journey to work with

Driving solo to the office is expensive and bad for the environment. If you work with people who live within a certain distance of your home, arrange a car pooling scheme on a route so that you can share the cost.

Cut down on cleaning products

Oven cleaners, sink cleaners, floor cleaners … the list goes on and there’s a new product on the shelves every week. The margins on these products are very high and it’s you that is paying them. Learn about the financial benefits of cleaners you can make yourself which are just as effective – Google hydrogen peroxide, white vinegar and baking soda.

Put in LED or energy saver light bulbs

The average LED light bulb uses 20% of the energy that a halogen bulb does. Energy savers are similar. When a light bulb blows, don’t replace it like-for-like – an LED bulb will cost you more but will use a fraction of the power and last for thousands of hours longer.

Don’t leave things on standby

Laptops, TVs, dishwashers, washing machines – they all have that flashing light. That means they’re off, right? Wrong – that means they are on standby and still consuming power. Turn them off at the switch or at the wall if necessary. Over a year, you’ll save yourself three figures in electricity bills.

Pay in cash

Set a weekly incidentals budget and take that money out at the ATM. Stick to it when you’re tempted to go out and grab lunch or an expensive coffee. This is one of the most effective ways to introduce financial discipline.

Only wash clothes on dry days

It may sound extreme but think about how much power the tumble drier uses – it’s probably the least efficient white good in your house. If you know that the weather is going to be dry on Tuesday, put your clothes in the washing machine overnight and hang them out in the morning to dry. They will smell nicer, too.

Keep your old phone

Get a sim only mobile phone deal and save potentially hundreds of pounds a year. Those deals with a phone upgrade may look cheap but they aren’t – the network is making a fortune on top of the calls and texts that you actually make.…

6 perfectly lawful ways to reduce your Inheritance Tax (IHT) exposure

Nothing is certain but death and taxes, so goes the saying. And while there’s nothing at all any of us can do about the former, the inheritance tax burden that would be triggered by your passing can most certainly be mitigated and possibly eliminated altogether. All it takes is some good, professional legal and financial advice and some careful forward planning.

Let’s start at the beginning – or the end, as it were. When you die, the Government calculates the net worth of the estate you leave behind, which includes:

  • Cash in the bank
  • Investments
  • Property assets
  • Business assets
  • Vehicles
  • Life insurance payouts

Currently, your heirs will have to pay Inheritance Tax at the rate of 40% on anything above the threshold of £325,000.

From April 2017, a new tax free ‘main residence’ band will be introduced as part of the Family Home Allowance (FHA), to be phased in over 4 years. It only applies to the main residence and where the beneficiary is a direct descendant of the deceased. Starting at £100,000 in 2017, the FHA will increase gradually until it reaches £175,000 in 2020. This means that from 2020, family homes up to the value of £500,000 will effectively be protected from IHT – or £1 million on the death of the second spouse. If you’re not sure how this would apply to your particular situation, you may wish to talk it through with an experienced private client solicitor.

The new IHT regulations are welcome news, of course, but what if it’s not enough? If you are looking for ways to reduce your tax exposure and protect your wealth for the sake of your family, here are a few ideas worth thinking about.

1) Make a gift to your partner

If you are married or in a civil partnership, you are free to make a gift (of any value) to your spouse or partner. You can use this mechanism to reduce your estate’s value to below the IHT threshold, eliminating any tax risk.

2) Make a gift to family or friends

You are, of course, also free to make a gift (of any value) to anyone who is not your spouse or partner. However, in that case the monetary value of the gift will still form part of your estate for the next 7 years, although progressive tax relief does apply from 3 years onwards. See here for details.

For example, if you decide to gift your house to your son and you then pass away 2 years later, the value of the house will be taken into account for the purposes of calculating any inheritance tax liability. However, if you live for longer than the designated 7-year period after making the gift, you’re in the clear. The gift will then be outside of your estate.

You can also make an annual tax free gift of up to £3,000 in addition to special gifts such as wedding gifts for your children or grandchildren.

3) Set up a trust

Trusts are a great way to shelter your estate from IHT exposure. You could put money into a trust to pay for your grandchildren’s school fees, or support a disabled family member. Trusts can be set up at any time, though there may be a Capital Gains Tax (CGT) liability on certain assets transferred into a trust while you are alive – do check with your solicitor. There is no such liability if you establish a trust in your Will. Trusts are not for the faint hearted, and definitely not something you should try to do yourself. There are many complicated rules best left to an experienced solicitor to deal with.

4) Give to charity

Whatever you leave to a charity will not incur any IHT, so this can be a useful way to cut your tax bill while doing some good at the same time. What’s more, if you leave at least 10% of your entire estate to charity, the rest of your estate will benefit from a lower IHT rate (36%).

5) Take out life insurance

Setting up a whole-of-life insurance policy, written in trust, means that when the policy pays out it will reduce your estate by the value of the policy. In effect, is gives your heirs a lump sum that can be used to pay some or all of the tax bill. The key is to put the life insurance in trust, otherwise it will increase the size of your estate and have the opposite effect of what you intended to happen!

6) Enterprise Investment Scheme (EIS)

Established tax incentives such as the EIS encourages people to invest in smaller private companies and receive 30% income tax relief after shares have been held for 3 years. You can invest up to £1 million per year. After 2 years of share ownership, your investment will qualify for business property relief, meaning it will be excluded from your IHT liability.

If this is of interest to you, make sure you discuss the finer details with a good financial adviser or investment lawyer.

Article provided by Mike James, an independent content writer in the finance industry working together with personal injury law firm George Ide, who were consulted over the information in this post.…