A guest Post from Tim Aldiss -
Financial regulations are always put in place with the intention of lending further transparency to decision making processes. However, the eventual results do not always mirror the initial vision. Although providing a new breed of qualified investment advice may help investors avoid financial pitfalls, many individuals are now distancing themselves from this prepaid and often times still confusing arena. The end result has been that markedly fewer people are seeking the services of a financial adviser; indeed, less than one-third of all adults will consult these professionals.

Although some analysts will state that a reduction in the number of professional advisers is one of the goals of many regulatory authorities, others will feel that the do-it-yourself tendency being witnessed may usher in dire consequences for those inexperienced in the financial industry. Is this a future financial debacle waiting to unfold?

Another effect that this shift has had is in the way financial companies now communicate with potential clients. Unsurprisingly, many professionals are now learning to embrace the internet as a means to drive business forward and to disseminate their services. It seems that online execution-only platforms may be the way forward. In fact, the investment giant Hargreaves Lansdown now boasts a website that attracts more visitors in the United Kingdom than The Times or the Post Office. They have also adopted an iPad version of their newsletter and cater to thousands of Twitter followers each month.

Additionally, it should come as no surprise that garnering investment advice from social media sites has also increased in popularity in recent times. Many of those who follow the do-it-yourself mentality will utilize the knowledge base of the larger, interactive populace to help shape their financial decisions. Although this methodology is still in its infancy, some feel that the purchase of equities and deciding upon the correct investment fund may be the next logical step forward in the social media arena.

It is obvious that financial companies and fund managers need to quickly adapt to a generation increasingly focused on mobile devices, business apps and real-time flexibility. No longer does this approach represent but a small portion of investors; rather this will be considered the norm in the relatively near future.

So, while the landscape of financial advice may be changing dramatically, the ability to acquire sound and secure advice is more important than ever before. While companies continue to modify their practices to accommodate this growing trend, individuals need to avoid the pitfalls often times associated with such a malleable environment.
Tim Aldiss writes on behalf of Broadgate Mainland, the financial services PR experts.

written by Joe \\ tags: Finance

A guest Post -

In an earlier post titled The Domino Effect, Joe describes the buyout of Domino’s Pizza by Bain Capital and their subsequent exit that left Domino’s saddled with debt. Bain made out with a 500% return on their investment. Joe questioned if this transaction, and indeed many other transactions like this, show capitalism in a good light. Thought provoking questions like this seldom have easy answers. But it is also important to realize the important role these transactions play in a well functioning capitalistic economies. These kinds of transactions occur because on average they do create incremental value to the society.

The Force that Drives Capitalism

Capitalist society functions with a single credo: maximize shareholder wealth. Also known as profit. And profits accrue to those who take risks and create value. The risk taking and value creation is what keeps the society moving forward. If the appetite for risk taking or the profit incentive were absent, we will all be content with our lot and there would be no progress.

It is also worth noting that profit at any cost might work in the short run but it seldom does on a sustained basis. Society as a whole must benefit, which means some incremental value must be created, otherwise one or more stakeholders in the endeavor will refuse to participate. In other words, if you have a history of not doing right by the employees of the business you acquire, for example, they will find ways of making sure your agenda is not carried out.

The Role of the Private Equity

Private shareholders such as you and I buy stocks with the belief that the management will continue to execute their business growth strategy and create shareholder value. Private Equity firms on the other hand buy into a company either to turn it around, or to inject fresh management ideas that will generate additional growth. They believe that the opportunity exists to create value on a larger scale than what the current management is capable of doing. This is a much greater risk to bear since more capital is at stake and the PE firms are stepping into a business as outsiders. Consequently, the rewards of a successful execution, if they come, are larger as well.

In the case of this particular example, Bain did lead Domino’s to an unprecedented growth spurt in the 12 years of their ownership. Domino’s added new franchises and expanded internationally. New jobs were created. For their troubles, Bain walked off with a take of $2.3 B after investing $385 million of their own cash and the company at the end was left with a business that was self sustaining. While the $1.5 B in debt for Domino’s after Bain exited could be termed excessive, it is worth noting that the economics of the Pizza business can support this capital structure due to the fact that there is tremendous cash flow and the cash turns over very very fast. For another company in a different industry where there may be a larger lag between initial cash expenditure and the return of cash through sales, this capital structure could indeed be lethal and I have no doubt that the lenders would not have allowed Bain to borrow so heavily.

And while we are used to thinking about debt as something to avoid as much as possible, the fact is that debt remains a cheaper way to finance a business. It is much cheaper to borrow than to issue equity and the companies have a fiduciary duty to their existing shareholders to use debt in the levels that is appropriate for their business. A software/internet company may not want too much debt as technologies change rapidly and the barriers to entry may be quite low. However, a business making a product that is not going to be out of fashion any time soon and where branding and capital investments create barriers to new entry should always use a reasonable amount of debt that their economics can support.

The Rewards are Commensurate with the Risk

It is easy to own businesses these days. You and I can just open up our Zecco Trading accounts and buy and sell stakes in a company as we please. At the slightest possibility of capital loss, we can exit our positions at the click of a button. A Private Equity firm faces a different type of risk. When they purchase a business, their capital is tied up for extended period of time. Many years, maybe even decades, may pass before their investment and any profits can be recouped. There is a significant lack of liquidity and the possibility exists that entire investment might be lost if the transaction does not work out as planned. The rewards need to be sufficient to entice someone to take this level of risk to perform this essential role in a well functioning capital markets.

Ultimately, Private Equity is the garbage collector and the recycler of businesses, taking on the risks that no one else wants to take on. If they did not do what they do, businesses may not get a lifeline to restructure and become profitable, or in other cases they may continue to prod along with unrealized potential. This leaves the society poorer.

About the Author: Shailesh Kumar writes about value stocks at Value Stock Guide, a popular site devoted to value investing.

written by Joe \\ tags: bain capial, dominos, Finance, hedge fund, private equity

I consider myself a capitalist. As Larry Kudlow states on his CNBC show,”We believe that free market capitalism is the best path to prosperity!” And yet, there are times that I see certain situations that make me wonder if the system isn’t broken. Which leads me to ask the question, if something is legal, does that automatically make it right?

Let’s look at one deal that deserves a bit of discussion. The takeover of Domino’s pizza chain by Bain Capital. Here is the timeline for this series of events:

• 1998 – Bain Capital buys Domino’s for $1.1 billion. $725 million is borrowed against the company, with Bain investing $385 million of their own cash.
• 2003 – Bain refinances the debt, pulling out an additional $188 million to pay out to its investors. Domino’s debt is now nearly $1 billion.
• 2004 – Domino’s is taken public by Bain. Bain retains 79% of the company,  and receives $108 million for the 21% sold to the public
• 2010 – Bain sells out and over a 12 year period makes over 500% on their investment. Domino’s is saddled with a debt load with interest equal to half the company’s income.

I bring this up as an example of what seems to be a typical leveraged buy out. There’s always more to the story, but the common theme among the leveraged buyout I’ve studied are twofold, a lot of money is made in comparison to the amount invested, and the newly public company is left with a debt load that puts it at risk for bankruptcy for years to come.

In the end, the Domino’s franchises have increased and more people employed over the period, so on a positive note it wasn’t case of firing people and reorganizing. Nonetheless, I’m hard pressed to understand how these deals are shining examples of capitalism.

written by Joe \\ tags: capitalism, Finance

The recession lasted 18 months and just as we didn’t know there was a recession until we were well into it, we are now told it ended in June 2009.

I was thinking back to my post last July, Dennis Kneale Recovery in which I remarked that he had declared the bottom was behind us, and it would just take time before it was declared. As you can see, the recession lasted longer the the prior three, and it will take somemore time before we feel that we are in a vibrant recovery. a bit of patience.

written by Joe \\ tags: Dennis Kneale Recovery, recession

In another guest post on Good Financial Cents, today I offer the first of a two part article on Estate Planning. In today’s installment, I discuss Wills, Beneficiaries, and Probate. Whatever your age, good estate planning is something you shouldn’t avoid, it’s the right thing to do to protect your family as well as the assets you’ve worked so hard to accumulate over your lifetime.

Joe

written by Joe \\ tags: beneficiary, Estate planning, Finance