Thursday, May 31, 2007/
Bankers who eschew lending for consolidation might be tempted to back a roll-up. The difference? Well, they sound different.
Ah, that sounds much better
This week we learnt that the Howard Government’s WorkChoices is no more. In earlier times this would have meant that the Government had abandoned the program; nowadays it means that a new label has been attached to a program that will not change.
One may be tempted to observe that if the public is fooled by such a cynical exercise then we deserve to be, but of course similar exercises are undertaken in the corporate world; consider these examples:
“Leveraged Buy Out Funds” become “Private Equity”
In the aftermath of the 1987 share crash we learnt that LBO funds had contributed to the asset-price bubble and lost buckets of cash.
LBOs were a bad thing and we hoped to never see them again. Don’t worry – we won’t, as long as we call them Private Equity. Never mind that the business model is ridiculously misdescribed because it is actually about replacing equity with debt.
“Equity Cure” becomes “Debt-resizing”
When lending to riskier propositions, banks will impose “financial covenants”. Typically these are ratios, which, if breached, create an “event of default” that allows the bank an opportunity to break the contract. More often than not in practice this leads to a re-negotiation rather than the appointment of a receiver.
Private Equity funds like their loan agreements to have “Equity Cure” arrangements. An equity cure is so-called because it allows the borrower to “cure” the default by contributing further equity.
Now it must be admitted that from a lender’s point of view additional equity is usually a good thing. However, conservative credit types aren’t keen on equity cures because they allow the borrower to skate over the fundamental fact that the business is not performing to expectations.
Those enterprising private equity chaps have come up with a new name for equity cure: “debt re-sizing”. This is clearly a win-win solution because it provides the private equity fund with all of the advantages of an equity cure, and allows the lender to pretend that it is really something completely different.
“Consolidation business model” becomes “roll-up”
Readers over the age of 30 will remember the tremendous advantages offered by the consolidation business model. Buy-up small operators, keep all the revenue and strip out costs by removing duplicated administration functions.
A very sound theory, but as proven by Run Corporation (rent roll management), Garrisons, Stockfords (accounting firms), and RMG (Receivables Mangement) to name a few. But it turned out to be much harder to achieve in practice.
Now, if the private equity chaps told our credit fellows that they wanted to borrow money to implement a consolidation model, our credit fellows would get quite nervous. But those clever private equity chaps have managed to avoid all that unpleasantness by inventing the “roll-up” business model.
The roll-up business model however is fundamentally different to the consolidation business model, the key difference of course being that it is called something that sounds quite different.
Anyway it strikes your correspondent that this technique may also be capable of application on the domestic front, offering – if correctly implemented – an alternative answer to that inconvenient question: “Are you drunk?” Your correspondent will investigate, and report further.
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