Creating Opportunities : Canada Financial & Investment Advisors for High Net Worth Entrepreneurs in Toronto, Ontario

In the midst of gloomy economic data and mid-summer market doldrums, it’s nice to spread some good news.

Timbercreek Real Estate Investment Trust, a private portfolio of 62 apartment buildings in Canada, in which we had a $40 million investment, was sold to Greystone Managed Investments in late August for $182 million – a 15% premium over the recent unit price.

We owned Timbercreek REIT for several years through two of our private funds and it’s been a terrific steady performer generating both predictable cash flows and modest capital gains. Over the past ten years, Timbercreek REIT has delivered an average annual return of 13%, versus the flat performance of the TSX over the same time period.

In some respects, the sale is a mixed blessing because it’s always a challenge to reinvest at that level of return – particularly in this environment!  But as someone once said, ‘you never go broke taking profits’.

We have re-invested a portion of our sale proceeds in other Timbercreek apartment investment funds, additional select real property projects as well as a portfolio of quality Canadian commercial mortgages.

Congratulations to the Timbercreek management team, led by Blair Tamblyn and Ugo Bizzari for delivering outstanding shareholder value. We look forward to continuing to invest behind them in additional opportunities.

You can read more about the story in this Globe & Mail article, "Timbercreek REIT sold to private equity investors".

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With the apparent resurgence in the IPO market, it seemed timely to revisit my last blog What to know before you IPO and ask, “what’s changed?”

After doing a little digging, it seemed to me there are several points worth making, which haven’t really been front and centre in the popular press. Namely:

1. Yes, the IPO market has recovered from the depressed levels of past years, but it’s still at low levels;
2. The markets appear to be primarily focused on revenues and less so on earnings;
3. High valuation levels being accorded IPOs is at least one of the driving factors of this resurgence and there is a growing gap between valuation of revenues and profits that should provide a cautionary note for investors.

First, the facts: Presumably you’ve read about the hot IPO markets, with successes like the $200mm offering of RealD (riders of the 3D wave and makers of those clunky glasses you use to watch these movies), Smart Technologies ($660 mm - makers of “whiteboards”) and MEG Energy ($675mm – an oil sands producer). Even Skype, the internet phone service, owned by a consortium including our very own CPP, has filed today to access the markets.

The number of IPOs to date in the US (the world’s most active market) is 81 for the first six months of 2010 vs. 18 for the same period a year ago. This is 4.5X higher, and above the entire amount for 2009.

However, if you look at 2010’s performance over a longer time frame, the volumes are still historically low. Have a look at the website of Renaissance Capital, which provides a convenient source for IPO data and trends.

What is the reason for this flurry of activity? Particularly against a backdrop of an uncertain economic environment?

Well, first of all, according to some market observers, profits don’t matter. As David Milstead of the Globe & Mail wrote last week, Forget profits, it’s all about revenues. 

This applies to existing companies, i.e. whether or not Apple beat the “Street” estimate for revenues, without regard to EBITDA (earnings before interest taxes depreciation and amortization), or that number you hardly ever see in research reports – net income. It also applies, especially, to new companies. In fact of the three high profile IPOs noted above, only one (Smart Technologies) has a positive EBITDA.

Against a backdrop of the market’s focus on revenues vs. profits, the valuation levels being applied to these revenues is also expanding. An example of this is the pricing outlined in an IPO for Intralinks today. The pricing was 4.6X expected revenues (or rather the most recent quarter’s revenues, annualized) for a company that had accumulated net losses of $65mm+ in the three years that it had been owned by its private equity buyers.

Perhaps the graph below can explain some of the interest in issuers accessing the IPO market. This is for a peer group of “Software as a Service” or “On Demand” software companies. That is, those companies that provide their software product over the internet, rather than as a shrink-wrapped disk sold to their customers.

Valuation vs. revenue multiples are up 43% over the past 12 months, whereas valuation vs. EBITDA multiples are only up 5% - making it an ideal time for these types of issuers to access the markets – and a time for investors to be cautious.

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A few weeks ago, my colleague David Lloyd wrote about how much money is needed for retirement. Most people have a number in their head. Maybe it’s sufficient. The next question is, how do you make sure you meet this number?

As a business owner, you have a unique savings opportunity you may not even know about. It’s called an Individual Pension Plan.

Imagine for a moment, the federal government gave you the opportunity to create a corporate pension plan, just for you. A plan that would provide you with dependable income in retirement – much like that enjoyed by teachers or civil servants – funded by your corporation.

How would you design the plan? Maybe something like this?...

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Last week, we hosted another of our Inside the Tent events (a series of evenings where we invite some of our clients and special guests to hear from other successful entrepreneurs and thought leaders from our network on topics of mutual interest).

Our theme for the evening was art appreciation and insight from the perspective of three different entrepreneurs in the art world: gallery owner, art consultant and artist.

The event was held at the fabulous gallery of our friend and neighbour, Nicholas Metivier. Art consultant, Robin Anthony offered advice on how to start building a collection. And special guest of the evening, John Hartman, one of Canada’s best known contemporary artists, thrilled us with an advance look at his new works (the official exhibit opened Thursday May 27th and runs until June 19).

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At Newport Partners, our perspective is always the same – how does an issue affect the personal and business affairs of our entrepreneur clients and their families?

It was very evident last week that investors were looking past Greece’s debt woes to the much larger fiscal problems in Europe. Bold measures were needed to calm the waters ...and fast! The authorities sent a forceful message to the market – “we will do what has to be done”.

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We had our quarterly visit from Maureen Farrow last week. (Maureen is a highly-respected Canadian economist whom we retain to provide us with economic analysis and briefings.)

All things being equal given the tough economy, she's feeling relatively bullish about Canada’s prospects these days. There is an unusual amount of global investor interest in our country and with good reason.

After all, it’s no secret that Canada has survived the financial crisis better than almost all other major industrialized nations of the world.

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I was given a lottery ticket as birthday gift at a dinner with friends on the weekend. The condition was that we would all share the pot. It was great value to dream for even a few hours of how life could change with $41 million.

Sudden wealth via the lottery, inheritance or selling a business can be life changing. In our business we see this first hand nearly every day. Unfortunately, for some people, the dream of financial freedom can actually turn into a nightmare.

Search the internet and you’ll find story after story of cash windfalls turning into personal downfalls, with some estimates that one third of all lottery winners are in serious financial difficulty or bankruptcy within just five years of winning!

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I blogged a couple of weeks ago about the entrepreneurial thinking of money manager, Tye Bousada in my post, How entrepreneurs -- and smart investors - really succeed. I was inspired by a New Yorker article written by Malcolm Gladwell, entitled The Sure Thing.

The premise of the article being that successful entrepreneurs are not really risk takers, as the conventional view suggests. Rather, an entrepreneur's strength is in "occupying a ‘structural hole'”, a niche that gives him a unique perspective on a particular market” and acting decisively to take advantage of it.

Here’s a related story of a seasoned entrepreneur who stands to profit from this great recession – not in spite of challenging economic times, but rather because of the turmoil and his ability to take advantage of it.

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Euromoney magazine released the results of its annual global private banking survey.

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If you’ve been reading the headlines coming out of the U.S. recently, you know the bottom’s falling out of the commercial property market. Defaults, delinquencies and foreclosures on office buildings, retail centres, industrial warehouses, etc. have swept the country. Pretty bearish conditions for mortgage holders on these properties.

In Canada, however, despite a difficult recession, the situation is quite a bit different.  And this is creating opportunities for investors north of the border.

So say Don and Ben Rodney -- two experts who ought to know.

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Late 2008 and early 2009, financial markets were in crisis and the world was in deep economic recession. 

The prevailing wisdom was to invest in 'obvious survivors'. Food, pharmas and other non-discretionary goods that penny pinching consumers couldn't live without.

Good strategy.  But as investors stampeded into those stocks, the relative upside became less attractive.

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