Enter Private Equity…
Bar the door or put out the welcome mat?

We think we can do it on our own. With little effort our company will sail on smooth waters and watch the sun as it rises on our success. After all, our respected company has garnered praise, earned respect and remains in the black.

We meet investors expectations. The company is healthy and we’re progressing.

But deep down inside we know our goals haven’t been stretched and boundaries remain unchallenged. Full potential is still unrealized.

The company needs to expand.

Expansion will take a partner with capital. We don’t need a loan from the local bank or a buddy from college. Expansion—done the right way—will take tens of millions. Enter private equity…

Private equity may sound like a perfect solution or scary as heck. Either way, there’s a lot to consider. Do your research and understand just exactly what you’re getting and exactly what you’ll have to give up.

Success or failure of the partnership depends, first, on you. The process of choosing a partner—a private equity firm—is a really big deal. Like any good partnership there will be smooth times and rocky moments. The experience will (in large part) be dependent on which firm is chosen.

An examination of case studies proves a company shouldn’t necessarily choose the firm with the highest evaluation. That is only one factor among many.

For the purpose of this discussion, the focus is on expansion. But there are many reasons companies partner with private equity. Some companies don’t have quite the rosy outlook. They’re in the red and struggling for air.

Whatever reason a partner is needed there are pros and cons to be considered. The dynamics of your company—how it operates, who makes the calls and how business is done—will change. Absolutely inescapable. If change is welcomed or even tolerable, PE could be a real option.

Even if your company is healthy your new partners will break out the microscope, the looking glass…even the telescope. That’s their job. They’re looking for ways to smooth out the rough edges, make things more efficient and capitalize on their expertise.

The PE firm will examine the company with fresh eyes. With a good partner, this is a good thing. Check your ego at the door, perk up your ears and open your mind. The new partner has a lot of skin in the game. This might just allow them to make the tough decisions—without getting the heart involved. It might come in the form of management change or a shift in company direction. The changes might be numerous or very subtle.

According to business.tutsplus.com, the combination of funding, expertise and incentives that accompany a strong PE deal can

translate to a sharp rise in annual profits. A 2012 study by the Boston Consulting Group reported that more than two‐thirds of private equity deals resulted in the company’s annual profits growing by at least 20 percent, with almost half the deals generating profit growth of 50 percent a year or more.

The most difficult stage of a private equity partnership might not come in the beginning—or even as decisions are made—but in the end.

The investment horizon may come after five to seven years, or maybe ten. Before committing, research your new partners track record in exit strategies. You might catch a glimpse at your future.

A common exit is through an Initial Public Offer (IPO), selling the company’s shares to the public. Or the PE firm might prefer to exit via strategic acquisition, selling the company to another, with investors taking their share from the sale value. In a secondary sale, the exit strategy finds the PE firm selling their shares to another firm. This route is not uncommon.

Another exit strategy, often very attractive for management, is the option of buying back the equity stake from the firm.

Often taken when no alternative viable option is apparent, is liquidation. This is most often considered when the investment has failed.

Alfred Zaccagnino, the Samarian Group of Companies, finds an advantage in being a boutique PE firm. “Service is a significant element in whether a private equity deal succeeds or fails,” he notes. “ We work face‐to‐face with our partners. We work to understand where the company is succeeding and where it may need some work. Clients tend to choose us because we’re a boutique firm, not in spite of it.”

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The Big Business of Cybersecurity:

PE Firms All In as Cyber Attacks Threaten Private Industry

Cybersecurity, as a line item in corporate budgets, can get comfortable. Chances are, its belt will not be tightened in 2016. The 2015 cyber attacks on corporate giants Target, Anthem, and Sony Pictures (to name a few) sured up its position—and ensured that most CEOs would skip over data protection during their annual search to cut fat. In fact, according to research firm Gartner, global spending on cybersecurity is on the rise and expected to reach $108B in 2019, an increase of almost $31B from 2015.

Few situations wield the power of a carefully orchestrated cyber attack on an unsuspecting target. The bigger the company, the larger the attack surface, and often, the greater the potential for damage. Data breaches unseat CEOs, affright prospective clients, and soil reputations. Therefore, it is no surprise that despite market unease, private equity investment in cybersecurity companies has remained steadfast. The low supply, high demand relationship is attractive to private equity, and there are a plethora of companies looking to fortify their global presence through capital infusion. Bain Capital’s 2015 announcement regarding the intent to purchase Blue Coat Systems for $2.4B will be one to watch, and is expected to be finalized in 2016.

As long as hacks make headlines, the supply­demand relationship for cybersecurity is expected to remain appealing—and signs point to the continuation of this trend through 2016. Alfred Zaccagnino, CEO and Founder of the Samarian Group of Companies, has closely followed the course of private equity investments in cybersecurity companies. “Cybersecurity will remain on our radar as long as the conditions remain favorable. All signs indicate it is a probability that cybersecurity will continue to have a presence in PE portfolios.” states Zaccagnino.

An outlook this good begs the question: what is the downside of private equity investment in cybersecurity companies? Keeping up with hackers—and hactivists—requires an evolving strategy (that’s code for lots of capital). On the operations side, keeping revenue up with escalating costs can pose a challenge for companies. Additionally, because of the low supply, high demand relationship, valuations of cybersecurity companies can be inflated.

Going Green in China: Paris, Private Equity & the Promise of a Cleaner Future

The COP21 Climate Change Summit in Paris marked the first time all countries—200 in total—have agreed to cut carbon emissions. The agreement will begin in the year 2020.

This climate agreement goes farther than any previously adopted, it’s detailed, with mechanisms for enforcement and a clear path to success. But not all elements of the deal are binding, and respected environmental organizations claim it falls far short of creating real and permanent change.

Past summits found developing countries and two of the top three biggest contributors to carbon emissions, China and India, crying foul. Their argument was based on who created the problem—the U.S. and other developed nations—and who would now be punished—nations just coming into their own.

Highlights of the deal include keeping global temperatures below 2C (3.6 F) with efforts to limit it to 1.5C. The plan and its progress will be reviewed every five years.

Perhaps the most interesting to private equity firms will be the $100 billion a year in climate finance for developing countries—which includes China—by 2020, with a commitment to further finance in the future.

Clean energy investments, into a country that has no choice but to change, has long been gaining ground.

According to Forbes, while most clean-technologies are developed in the United States, they are mostly infused into China’s new infrastructure, manufacturing and power generation projects.

According to Bloomberg, in 2012—far before the Paris agreement—the country attracted $65.1 billion in clean energy investments, up 20 percent from 2011 and 30 percent of the total commitment to G-20 countries.

Investments cover a broad range of green tech—solar panels, electric cars, advanced batteries and wind generation. China may be slow, but they’re catching on.

The value for China to produce at all costs may have finally reached its tipping point—the poor air quality has had a direct impact on the health of the economy, and continues to slow it down. While corporations may want to do business in Beijing, they’re hesitant to set up shop. Talent is reticent to move to a city with tiny particle matter measured at 886 micrograms per cubic mater—more than 25 times the standard in the U.S.

China’s poor air quality has now become a permanent fixture in the country’s identity. The issue has headlined international news stories and lead arguments made by human rights activists. According to the New York Times one of China’s largest exports is pollution, as “filthy emissions from China’s export industries are carried across the Pacific Ocean and contribute to air pollution in the Western United States…”

China has no choice to change. And with change is an opportunity for investors. Clean tech may be more about dollars than wanting to create a better world, but the impact will be the same. A healthier environment will bring a healthier economy.

Alfred Zaccagnino, founder of Samarian Group of Companies, a private equity firm with a growing international portfolio, recognizes the interest in green tech, not only in China but in other markets as well.  “It’s critical, when considering green tech, to examine the subsectors. Not every element of green tech is prospering. Do your homework and run the numbers. Start there.”

Private Equity in the Restaurant Sector: Hot or Not?

The formula for success in restaurant investment seems more art than science—and many middle market PE firms have demonstrated they perfected it in international markets during 2015. Successful restaurant franchises are scalable, revenue generating machines that can be replicated across both domestic markets and overseas. The entity may start with three or four profitable brick­and­mortar locations, then build credibility and hone their model by launching ten to fifteen additional stores. Planning for new, potentially international markets may be the next logical step—and the perfect time to roll out the red carpet for PE firms.

Franchises that have expanded internationally have experienced extremes in performance. Domino’s Pizza Enterprises entered the Japanese market, “quickly became the number two player”, and is predicted to become number one, according to an interview with Chief Executive office Don Meij by CNBC. G rowth has been strong and impressive —t he franchise reported a 48% increase in profit over a twelve month period in 2014. Creative marketing campaigns and revenue streams have been launched and, as the numbers show, made quite an impression on a sizable, hungry audience.

Other brands have flopped, failed or floundered by underestimating the demands of an international venture, sinking robust investments into operations and supply chain logistics, and failing to customize their offerings to the culture of the market. Recent changes in the global foodservice market include Yum! Brands announcement that their locations in China would become independent, publicly­traded franchises. This announcement was made after Yum! brands made headlines regarding food safety issues.

According to LEK Consulting report volume XVI, Issue 45, most countries remain (outside of the United States) “sharply underpenetrated” by chained quick service (QSR) restaurants, and casual dining restaurants (CDR). India has the fewest QSRs, with only seven units per one million people above the poverty threshold. To put this in context, the United States has 516 QSR units per one million people above the poverty threshold. In developing a formula for international success, however, many more variables must be considered, such as lease prices, availability of prime locations, operations and supply chain expenses to name a few.

“The growth of private equity’s role in the foodservice sector—and its sub­sectors—has been remarkable. Multiples have been strong, acquisitions have been plentiful, and it will likely prove to be a sector to watch again this year,” states Alfred Zaccagnino, Founder and CEO of The Samarian Group of Companies, a boutique private equity firm headquartered in Manhattan with a growing international presence.

The uptick of PE activity within this sector is reflective of its appeal. Top restaurant companies are selling for 10 times their earnings, an attractive multiple to PE. But new markets—and companies—must be tested, analyzed, and vetted before the leases are finalized and the signs go up.

The Expanding Role of Private Equity in Aviation

American media headlines portray industry volatility, lack of resiliency— the airline industry as helpless victim of market forces crippled by red tape, national tragedies, and federal regulation. The vox populi begrudges increased fares, fees, and foul­ups. But study global aviation market trends vis a vis private equity—and the upslope reveals the other side to the story. A story in which private equity is the perfect player, and the aviation industry is the perfect playground. Complete with twists, turns, and obstacles; and plenty of fun in the endgame.

The capital demands on airlines are steep. Fuel prices are high—fuel efficient aircraft is a must to keep costs down. Purchasing fleets of fuel efficient aircraft requires an outlay of capital that can be painful—or crippling—to bottom lines. So airlines have turned to leasing to mitigate cash flow demands—and private equity has seized the opportunity to be lessor.

Air travel is here to stay—the Airline Monitor projects a 4.8% annual increase in air traffic for the next twenty years. Consumer demand both nationally and globally remains strong, and history reveals volume has nearly doubled every fifteen years. Supply is low—airplane manufacturing is dominated by industry giants Boeing and Airbus—who’s waiting lists are years long. Given the capital demands, entrants to the supply side are unlikely—nodding to the stability of the supply­demand relationship.

Long­term, the transfer of assets (planes) between carriers is straightforward, lowering risk for investors and making it attractive to private equity.

“The aviation industry holds interest for private equity firms across the globe”, notes Alfred Zaccagnino, founder and President of the Samarian Group of Companies, a private equity firm headquartered in New York with a strengthening global presence. “The industry has proven resilient and demand has trended upward. The supply­demand relationship is interesting. All indicators show the number of private equity and aviation partnerships will continue to grow.”

Building on Private Equity Dollars

The ebbs and flows of the South African private equity industry are in direct correlation to the evolution of South Africa’s politics and policies. History has played a central role in defining the pace and the players of the country’s PE industry, possibly more so than in any other emerging market.

PE was flourishing in the United States and Europe long before it came to South Africa. Oddly enough, the foreign disinvestment of South Africa by the U.S. and Europe—as a response to apartheid—would open the market to local banks that swiftly took advantage of lucrative deals.

However, it was only after the country became a democracy and economic sanctions were repealed that the South African PE market began to rise.

According to the 2015 Southern African Venture Capital and Private Equity Association Report, in the 1990’s, with the new political landscape, international investors became major players in South Africa. This was a game-changer. New opportunities for disenfranchised populations would develop.

But not all change came without growing pains. Tax legislation and extensive regulation did not always make sense. Tweaks and extensive alterations were made after it became clear that growth would be stunted.

South Africa was not impervious to the crash of 2008; it was felt around the world.   However, because that crash hit the United States and Europe first there was time to minimize the impact on the South African economy.

While South Africa is rich with natural resources, the present PE industry is diversified, with endless opportunity. The country’s infrastructure needs are considerable. Foreign investors have government support and are welcomed to work towards closing the gap. Construction is on the rise; a record number of South Africans are now entering the housing market.

A young, rapidly growing middle class has greater spending power than ever before. Retail demands are met with the construction of shopping malls that have a wide variety of stores and restaurants. Entrepreneurs are taking advantage of new technologies and seeking additional funding from domestic and international sources.

“The people and businesses of South Africa seem eager to enter into partnerships with companies in the U.K. and North America, ”notes Alfred Zaccagnino, President of Samarian Group of Companies, a private equity firm with an expanding international portfolio. “Their neighborhoods and malls should have the same brand names that are consistently appearing in other places around the world. Samarian Group is eager to participate alongside common brands in an evolving South Africa.”

Private Equity in Professional Sports: Perfecting the Endgame

Sports and entertainment, to most professional sports fans, feels redundant. Sports are entertainment. Football commands the attention of half of America’s population on any given Sunday, and marketing departments are hard at work attracting the other half. A favorite team, in any sport, that earns the “W” brings unrivaled bliss, impish satisfaction, and bragging rights. Sports are woven into the fabric of our culture; each game reminds us of our love for winning, hatred for losing, and our obsession with keeping score. Green fields, hardwood courts, and sheets of ice become battlegrounds of finesse, agility, pride and grit. We can’t get enough. Professional sports are America’s entertainment, and they’re here to stay.

Win-loss records, historically, have weighed heavy on bottom lines. Victories, winning seasons, and championships can be elusive. But to private equity, winning games doesn’t  matter. It doesn’t have to. Returns count–wins don’t– and history shows private equity could have the candy-making secret. In a nine year span, the enterprise value of the NHL’s Toronto Maple Leafs tripled, according to Forbes, accounting for $413M in value. So how does mediocre on-ice performance, a disenchanted fan base, and no chance of making fingerprints on the Stanley Cup lead to industry-leading returns?  It’s the business equivalent of terroir to wine grapes, merroir to oysters– the bounty is derived from the perfect, delicate balance of key factors and forces. It’s making astute moves, redefining surplus, and living for the bottom line and the trophy. It’s business sense unencumbered by love for a team.

“The role of PE in professional sports will continue to evolve. As professional sports has leveraged technology to engage fans and broken new ground in revenue generation, doors have opened for private equity,”  notes Alfred Zaccagnino, President and Founder of the Samarian Group of Companies, a private equity firm headquartered in New York City. “If current trends continue, ownership of professional sports teams will continue to be a promising sector for private equity in the next decade.”