How the rich are finding cash
IT'S a problem exercising the minds of thousands of company directors across Australia. The economy is recovering, expansion plans are a priority once again, and the world is full of opportunities to grab market share and make strategic acquisitions.
But there's one problem – the banks just aren't willing to provide the funding to back these plans. Worse still, the rising price of debt is starting to cause headaches.
While you will find this scene playing out in thousands of SMEs around Australia, it's also a problem that many of our wealthiest entrepreneurs are dealing with.
"There's only a finite amount of capital out there," says one adviser to wealthy entrepreneurs.
"Even if you've got a very successful business with a very cashed up individual behind it, you are being made to jump through hoops to even get a look at finance."
"And in those cases, the bank is probably going to say: 'if it's such a good business and you're so cashed up, why don't you put your own money in'."
At the lower end of the wealth scale, entrepreneurs snubbed the banks are turning to angel investor groups, with mixed results.
Many of these angels had been waiting to buy businesses at fire sale prices during the downturn, but this price crash hasn't happened. While some angels are looking for opportunities, others are prepared to wait and see how the market settles.
Of course, super-rich entrepreneurs have a bit of trouble finding angels with deep enough pockets.
This group – which includes Kerry Stokes, Adelaide's Gerrard family, Nathan Tinkler, the Pratt family and Clive Palmer - are being forced to come up with different ways to raise money, including floats, private equity, foreign banks and various combinations of all of the above.
Let's have a look at some of their techniques.
The moolah merger
Kerry Stokes lobbed his early nomination for billionaire deal of the year last week when he announced the merger of his private heavy equipment business WesTrac with his listed media empire, Seven Network.
While Stokes is painting the deal as a way to improve Seven's revenue base, diversify its earnings stream and pursue new growth opportunities, there is a strong argument that Stokes has come up with one of the most creative ways to find cash.
As many commentators have pointed out, the deal will allow Stokes to use $600 million of cash sitting in Seven Network to pay down part of WesTrac's $1 billion debt. While you would assume a business of the size and strength of WesTrac would have been able to roll over its funding facility, it wouldn't have been easy and it wouldn't have been cheap.
Seeing the IPO light
Robert Gerard, the patriarch of one of Adelaide's old-establishment families, has kept a very low profile since departing the RBA board in 2003 following a dispute with the tax office. But his lighting company Gerard Lighting will become public property when it floats before the end of June.
Debt is the driver here, as Gerard Lighting chief Simon Gerard has made clear. "We recently made an acquisition with debt [the $100 million acquisition of Lighting Corp last year] and banks aren't throwing money at businesses like mine," he told the Adelaide Advertiser. "If we want to continue to grow, we have to go to capital markets."
When the very private go public, you know cash is tight.
Packaging up the business
Another uber-private business that is reportedly considering going public is industrial packaging firm Pact Group. The company is owned by Raphael and Fiona Geminder, the daughter of the late packaging king Richard Pratt. The float talk hasn't been confirmed yet, and the family is intensely private, but with revenue thought to be in the order of $1 billion it would be a widely anticipated IPO.
Initial reports suggested the Geminders would sell about 50% of their stake in the business, with the proceeds used to fund further expansion. Stay tuned on this one.
The fund and float
Young coal baron Nathan Tinkler has used a two-step process to get the cash he needs to expand. Late last year Tinkler's company Ashton Resources announced the $400 million acquisition of the undeveloped Maules Creek project from Rio Tinto subsidiary Coal & Allied. After hunting around for a suitable funding source for the business, Tinkler eventually secured funding from Noonday Global Management, the sister company to US fund manager Farallon Capital Management.
Tinkler now plans to list the company on the Australian Stock Exchange within six months, although he will retain majority control and is only likely to sell off about 20% to raise money to develop the project further.
The Chinese connection
Gold Coast coal baron Clive Palmer might not be heading towards a Hong Kong float of his coal and iron ore empire Resourcehouse (or he might be, we've lost track) but he is relying firmly on the Chinese to fund the company's ambitious projects.
The $US8 billion China First coal mine will be funded through $US5.6 billion in funding from Export-Import Bank of China. However, Palmer is likely to need further funding for Resourcehouse, so it wouldn't be a surprise to see the float plans revived at some stage.
Hunting for a buyer
The entrepreneurs behind the Direct Factory Outlets chain, David Goldberger and David Wieland, announced a few weeks ago that they were on the hunt for cash, either in the form of an investment from an institutional investor or an outright sale of the business.
This move looks to be partly an exit strategy and partly an expansion push. The DFO chain has plans to expand within Australian and potentially overseas, but Goldberger and Wieland appear prepared to look at number of scenarios, including selling the property and retain management of the sites, a partial sale or a complete sale.