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In this issue Company News Past Issues Contact us 375 Roland Therrien Blvd. |
July 2009 - ISSUE 5
EDITORIAL
When I left the office for my summer vacation, one of the items on my “To Do” list was to write an article for this quarterly newsletter. I knew I wanted to touch on the subject of short versus long term investing, but I needed an angle. Sifting through newspaper articles on the way to the beach, I found it. In the July 6th edition of La Presse, a Montreal newspaper, Francis Vallières wrote an article which addressed investment as well as CEO salaries. The article described a startling change in investor behavior that over the last 40 years has mirrored society's change to a culture of instant gratification. The average holding period for shares in a public company by an investor went from:
This is a very dramatic trend. As author Francis Vallières points out, (roughly translated) “shareholders in publicly-traded companies are often just passing by and are not as interested in the longevity of the business as they used to be. Consequently, managers of these businesses are no longer concerned about it either”. This has a major impact on the way management teams run their businesses. In the financial press, there is a lot of attention given to short term earnings performance and very little to the long term potential of a company. Consequently, in today's business world, too much attention is given to building value in short term and not enough over the long run. As such, when the management team of a company sees a chance to gain rapidly, without pain of course, it tends to jump on it. This kind of thinking has definitely contributed to the economic crisis we are going through today. Short term thinking has influenced the behavior of many investors, managers and shareholders in recent years. Investors rewarded companies posting short term gains in quarterly earnings by buying their shares, driving up valuations. Often, executive compensation focused mainly on the short term and executives behaved accordingly. The ability to manage earnings for share price spikes led to a moral hazard with executive management, where their compensation was heavily tied to short term performance where one could enrich himself by “hitting the numbers.” People seem to have forgotten the fundamental crux of the word earnings, in that one has to earn it. During that same period, the excessive availability of credit led to an auction like atmosphere for company valuations. Blindsided by the low cost of such credit, many replaced sound investment strategies with speculation. Finally, bubbles (and we have seen a couple in recent years) often create a wrongful sense of security for many people: “it's going so well that nothing wrong can happen”: this is why bubbles contribute so much to favoring short term thinking. Instead of focusing on short term priorities, management teams should shift to a longer term focus. This approach will have a direct impact on their future wealth and longevity. Adopting a long term approach helps to maximize shareholder value in the long run. It affects the decision-making process of a business, its compensation, investment and spending policies and, of course, its strategy. It may seem odd to read about long term from a manager of a private equity fund, as the media typically does not portray those in our industry as such. However, at Novacap we believe that maximizing shareholder value is done over the long run. It does not happen by focusing only on short term goals or even on focusing only on maximizing shareholder value. It's the other way around: an effective long term strategy which, of course, takes into account the current environment and current company needs will almost always maximize shareholder value. We are talking about long term shareholder value. This might explain why, at Novacap, our average investment period exceeds seven years. For more than 28 years, Novacap has invested in management teams and businesses offering good long term potential. During that period we have helped our portfolio companies improve their operations, grow their businesses organically and through acquisitions. We have helped them define a sound, long term strategic orientation, improve their management teams and balance sheets. This has helped them focus on the really essential elements of their success. Meanwhile we have also instilled our portfolio companies with a sense of urgency: as even a long term approach will not be beneficial if you do not start implementing it immediately. Through the years, we have worked alongside with management to measure and quantify their company's performance and the success of their strategy. Thanks to this approach, we have maximized shareholder value, generated exceptional returns and, above all built businesses that will succeed in the long run. As a result of the irrational exuberance that investors showed, and the resulting deleveraging of the financial markets, many opportunities are presenting themselves to us today, such as:
Companies with a long term approach will be better at finding and benefitting from these opportunities. It is sad that today, the holding period for shareholders is probably less than the seven months reported in 2006 and I believe that this trend needs to be reversed. The only way to do so is to restore confidence. Success in restoring it will lie in management's ability to focus on long term goals that will create real shareholder value. At Novacap, we search for and invest in management teams that are dedicated and focused on sustainable long term growth and, we provide the support to help them in that pursuit. Thank you for your interest and confidence in Novacap. Have a great summer. Jacques Foisy COMPANY NEWS Creaform Inc.
LiquidXstream
Nautilus Plus
Octasic
Stingray Digital
Tenrox
ViXS Systems Inc.
About NOVACAP Novacap is one of Canada's leading private equity firms. Since 1981, our partnership approach has helped companies accelerate their growth and maximize their value. With over $785 million under management, our goal is to help leading entrepreneurs build world-class companies. Our highly-experienced, multifunctional team understands the operational and financial challenges faced by today's organizations. We provide active support, deep operational expertise and growth capital to help companies with strategic competitive advantages realize their full potential. Novacap is organized in two functional groups, each with its own team focused on building a strong portfolio in a given market sector:
While we believe the success of our portfolio companies speaks for itself, it is always an honor to receive recognition from our peers. Novacap has won the Canadian Venture Capital and Private Equity Association's "Deal of the Year Award" twice in recent years. In 2000, we won for our Venture Capital investment in InnoMediaLogic Inc. Then, in 2005, Novacap won again in the Private Equity category for its investment in Santé Naturelle A.G. Ltd. . Copyright© Novacap Management Inc. |
Short term versus long term