Good thoughts and comparisons.
Is it "pie in the sky" to think GE Capital would consider an investment in TSIG?
I don't know, but after reading this about them, comments appreciated.
businessweek.com
3.5.99
GE Equity's Investment Universe Is a Lot Wider Than the Web
In a Q&A, President Michael Pralle talks about what kinds of deals turn him on
Veteran entrepreneurs who aren't running Internet startups probably feel a little left out these days. After all, 75% of last year's $14 billion in venture capital went to high-tech enterprises, and $3.5 billion went to Internet companies. If you run a more traditional business and are trying to attract private equity, take heart. One of the most closely watched investment companies in the U.S. -- GE Capital Group's private investment arm, GE Equity -- sees plenty of value in less-trendy sectors.
Not that the General Electric Co. unit is ignoring the Internet -- it's just keeping a skeptical distance from those with revenue models based on advertising alone, says Michael Pralle, GE Equity's president. It's betting on E-commerce and Web infrastructure, instead. For example, more than a year ago, GE invested $5 million in Previewtravel.com, which has grown to become one of the top online travel agents.
GE Equity doesn't fund startups, but it does invest about 15% of its $600 million investment budget annually in fast-growing, small to midsize companies -- those with $20 million in annual revenue -- primarily in such areas as manufacturing, retailing, and financial services. Since 1996, GE Equity has invested $1.6 billion in 141 companies in the U.S., Latin America, Asia, Europe, and Israel, about two-thirds of them in industries that complement General Electric's 11 business units. And, yes, it does accept unsolicited business plans (www.equitycapital.com or 888 809-8500).
How does Pralle see the outlook for small and midsize companies seeking financing? He recently shared his views in an interview with Business Week Online's Jeremy Quittner. An edited transcript follows:
Q: What kinds of companies do you invest in today?
A: We invest in consumer businesses and medical technology devices, enterprise and other types of software, Internet companies, light manufacturing, traditional industrial companies. We don't invest in agriculture, biotech, airlines, and we stay away from energy.
Q: How are you set up?
A: We are a wholly owned subsidiary of GE and GE Capital, and we have only one source of capital, which is our parent company. So we don't raise third-party money at all.
Q: What is GE doing different from other venture capital funds?
A: What distinguishes us are all the advantages that are given to us by our parent: Very low funding costs, extraordinary ability to originate transactions all over the world. We see deals in Indonesia, China, and South America that no one else sees because we may have a GE business down there dealing with a supplier. We will find out that supplier is extraordinarily well managed and growing rapidly. They will get in touch with our people, and we will wind up making a joint investment.
About two-thirds [of our investments] are tied to complementary arrangements with GE, the other third are classic financial investments like other funds would make, where we feel we have an undervalued asset, and we expect the value of the asset will grow over time.
Our typical size of investment is somewhere between $5 million and $75 million. [We don't buy someone out], which is what a lot of our competitors do. We prefer to put in new money and have it stay in the business for the purpose of fueling growth, because we feel generally we will get a better return.
Q: What are the major trends in financing growth companies?
A: You have to be more and more careful about overpaying. You are seeing a great run-up in valuations in the last three or four years, particularly in the U.S., but also in the United Kingdom. So recently we have been looking outside the U.S. where we see lower valuations -- in Latin America and Asia. You can argue whether or not Asia is at the bottom of the trough, but if you can buy something at 2 to 2.5 times cash flow, you can wait a while.
Q: What is being overlooked in the VC community?
A: I think there are fewer people willing to take the risk of making investments both in traditional industrial companies but also financial-services companies, in markets like Latin American and Asia. Even in the U.S., a traditional company that makes insulation, for example, or makes factory equipment for paper manufacturing -- those sectors are deemed less sexy than the Internet sector and E-commerce. Those are things we look at, because we can be fairly satisfied with a fairly stable, moderate-growth business that is well managed, that will return 25% internal rate of return. A lot of the big buyout firms are targeting 40% to 60% IRR, so they have to take more risk and more leverage. We can invest in more stable, traditional companies and still get a return that makes our shareholders happy. When you get a cost of funds of 6% -- at least on the margin -- a 25% IRR is just fine.
Q: What kind of business works for GE?
A: We pretty much look for...proven management. The second issue is pricing. Third, is a proven revenue stream. [The company] doesn't necessarily have to be profitable yet, but it does have to have a proven revenue stream. I would say we are looking at north of 20% annual revenue growth. A fourth thing we look for is...that the company is adequately capitalized. You want to make sure that you are not in a situation where you put the money in, and six months later, they run out of money.
We are also looking for -- ideally -- a company that has some type of edge in the marketplace. For example, an Internet company is going to be very highly valued, and I only want to invest in the leader in a particular sector, because the leader very often has a first-mover advantage that is very difficult to replicate.
Q: Is GE as interested in Internet investments as everyone else? What do you think makes a successful investment today?
A: The industry we have today has far too many participants. It is much like the PC industry was seven or eight years ago. You know there is going to be a lot of money made on the Internet, particularly on the E-commerce model, which I am more comfortable with than just a pure advertising model. We want to invest selectively and carefully and try to pick the leaders in that space. A lot of companies that support the Internet backbone in one form or another are also attractive investments.
Q: How many Internet companies have you invested in so far?
A: Between 12 and 15.
Q: What is the rate of return on your portfolio?
A: Historically, it has been in excess of 30%. The last two or three years have been pretty good for the private equity business, and we are pretty realistic about that. So, we target a return of around 25%. |
