A Glimpse into Indiana’s Private Equity Industry

EDITOR’S NOTE: Maggie Musgrave is a corporate development associate with LDI, Ltd. This viewpoint originally appeared in the Indianapolis Business Journal. You can find out more about LDI here.

When I tell people that I work in private equity, I get a range of reactions, from “what’s that?” to “like Richard Gere in Pretty Woman?” The reaction that gives me pause is, “Really? I didn’t know we had private equity in Indiana.”

I’ll concede that private equity may have a marketing problem. Somewhere along the way it got a bad rep, which is a shame when you consider the impact private equity has had in Indiana. Our private equity industry is both healthy, and growing.

Private equity invests capital for ownership positions in mature, stable companies. This capital can be a key ingredient to unlocking a company’s growth potential. At LDI, we work with companies that can see the path to growth, but are constrained by lack of capital or expertise and need a partner to drive their development. This can mean funding for greater production capacity, new product development, or expansion through strategic acquisitions.

Good private equity partners take time to understand a business and its growth potential, rather than focusing on balance sheet engineering to provide risky, artificial returns for outside investors. By investing capital and expertise, especially over a long-term investment horizon, private equity partners like LDI give average companies the chance to become good, and good companies the opportunity to become great.

Why is this important to Indiana? Because private equity means stronger companies, and stronger companies mean stronger economies and better communities. When a business finds a great capital partner and is finally able to turn the key on more expansion and growth, they’re not just investing in their bottom line. They’re investing in a community-wide ripple effect of more jobs and services. In fact, according to ACG Indiana, over the past 10 years private equity backed businesses grew jobs at a rate of 11.4%, compared to 9.5% for all businesses in our state.

Private equity comes in many different flavors, from traditional funds to family offices. Regardless of its form, private equity’s underlying goal is to support business growth and increase value, regardless of a company’s location or perceived sophistication. It’s a myth that companies need to be large multinationals, located in a big city or have a management team with prior M&A experience.

For example, this month Schafer Industries in South Bend partnered with a St. Louis based private equity firm to fuel future growth in their driveline and gear business. Before that, Champion Manufacturing in Elkhart found a new Toronto-based private equity partner that will invest in expanding its line of medical seating products. Both of these examples will see more employment and more growth in their communities.

Lately, I’ve had the chance to meet with promising, established companies in Fort Wayne, Warsaw, and Evansville. They are on the verge of taking their businesses to the next level, but encounter roadblocks on their way. Often these challenges can be overcome with the support of an equity partner. Support may come in the form of capital to fund working capital investments or to purchase new equipment. Management may also be in need of less tangible, but critically important, strategic guidance and operational support from a partner, born from years of working with similar businesses within an industry. A private equity partner is often able to work with the established company and provide the financial and intangible support needed for growth and expansion.

Frequently, private equity investment is positive for businesses and communities. Remember Pretty Woman? By the end, Richard Gere’s private equity firm was infusing cash and expertise to help the shipping company grow, re-energize, and build more ships. As Indiana moves forward, private equity should be seen as a valuable resource for creating growth. We have a number of good capital partners in Indiana – let’s keep the capital and growth at home.

We’ve Got New BizVoice For You!

The September/October edition of BizVoice magazine is now live!

We’ve highlighted venture capital, banking/finance/investments and Indiana innovation. Our own Tom Schuman also followed Indiana Congressman Larry Bucshon (R-8th District) for a day in Washington D.C. Read his story and the rest of the new content in the online edition.

You can also subscribe to receive a hard copy every other month.

Taxes and Public Finance: A Very Early Look at What We Are Following

We have yet to see the complete list of bills that have been introduced, and no bills having primarily to do with tax have yet been heard in committee. But of those that are available for viewing and assigned to committee, quite a few are worthy of note. They may or may not ultimately get a hearing, so it cannot be said that they are moving. Nevertheless, these bills are ones to keep an eye on.

Two measures will undoubtedly move through to the end of session – albeit with the expected/unexpected twists and turns. House Bill 1001 on the budget currently contains the Holcomb administration’s spending proposals – that is until the Ways and Means Committee has its way with it. Accompanying it will be HB 1002, the measure for long-term transportation funding (see Mark Lawrance’s infrastructure story).

There are the usual sales tax exemption and sales tax holiday bills, which historically have not been favored by the budget makers: HB 1063, HB 1111 and SB 53. There are many dealing with property tax assessment and property tax appeals, which could get some attention: HB 1046, HB 1056, HB 1105, HB 1198, HB 1229, HB 1299, SB 292, SB 331, SB 350 and SB 415. Meanwhile, SB 449 addresses how personal property tax audits can be funded; SB 308 would take heavy equipment that is rented off the property tax rolls and puts an excise tax on the rentals; HB 1247 creates a minimum property tax fee; and SB 342 revisits tax increment financing.

On the local tax front, HB 1129 keeps up the ongoing work on local option income (LOIT) taxes while HB 1096 grants broad authority to locals to adopt food and beverage taxes.

Interestingly, and unnecessarily, HB 1160 seeks a further study of the Tax Court (on top of the review conducted by the Supreme Court just last year.) Tax attorneys will be interested in SB 440 as it gets into some procedural issues.

This is just a small sampling of what has been filed. Once bills involving tax matters begin to make their way through the committees, we will report on those that are of consequence to the business community.

Wellness Summit Preview: Your Employees’ Financial Stress is Your Financial Stress

19151085Hopefully you know by now that your employees’ financial problems are your financial problems. The financial stress that comes with financial ills can wreak havoc on productivity and worksite decision-making. As an employer, not only should you know this, but you should have a financial wellness plan in place to help your employees get back on their feet and get their head back in the game. But what if your corporate policies are the cause of financial stress?

Employers don’t realize that some seemingly benign corporate decisions can turn their employees’ financial lives upside down. At this year’s 2014 Indiana Health and Wellness Summit, I’m going to teach you exactly what corporate decisions to avoid and how to identify whether or not your current financial policies are a problem. Employees are fully responsible for their own financial success, but you can support them in their journey by having a great financial wellness strategy. Don’t miss my session on October 7 as we have a very frank and poignant conversation about your employees’ financial lives.

Peter Dunn, a.k.a. “Pete the Planner,” is an award-winning comedian and an award-winning financial mind. He released his first book, What Your Dad Never Taught You About Budgeting, in 2006 and is the host of the popular radio show “The Pete the Planner show” on 93 WIBC FM. Pete is also the resident Fox59 News personal finance expert and has appeared regularly on Fox News, Fox Business, CNN Headline News and numerous nationally syndicated radio programs.

Farra: Thoughts on Recent Market Turmoil

While we can’t make a prediction with 100% certainty, we can assign probabilities to the next trend for the U.S. stock markets. The major U.S. market indexes (Dow Jones 30, S&P 500 and NASDAQ Composite) all reached new highs for the rally on or about April 28.  Additionally, technical indicators of the market’s underlying health were all strongly positive as well. The correction that has ensued since April 28 has erased between 9% and 11% of the averages’ value. In a less tumultuous time, this kind of performance would be seen as a normal correction and not the start of a new bear market.

There are two root causes for the stock markets’ performance since the end of April:

  1. The U.S. market had not experienced a 10% correction since the start of the new uptrend in March of 2009. We saw two corrections (in June 2009 and January 2010) that declined less than 9% on both occasions. The selling was less intense than of late and the markets quickly rebounded from their lows. This correction probably marks the end of the first stage of the new bull market, where nearly all stocks — regardless of size or quality — go up. The second stage will see more selectivity among investors and moderating returns compared to the past 14 months.
  2. The Greek debt crisis and fallout among other members of the Euro currency zone has reminded investors that risk still exists in the debt markets. The U.S. experienced a private debt crisis in 2007-2008 when the mortgage market imploded and caused several large financial institutions to fail or need significant government help to stay afloat.  The Euro crisis is a government debt issue with Greece being unable to sell new debt without the explicit guarantee of the European Central Bank (akin to the Federal Reserve). This rescue package was announced two weeks ago but has yet to allay fears that more trouble may be brewing for Greece, Portugal, Spain and Italy. We think the rescue package has been effective by bringing down interest rates for all four countries though significant work remains to be done to reduce their budget deficits without causing major recessions in those countries. (This is something all governments need to do!)

A silver lining to the decline of the past few weeks is oil prices have declined from almost $90 to $70 per barrel. Look for lower gas prices as a result. Interest rates have also declined as investors have fled to Treasuries as a safe haven.  Mortgage rates will likely decline as well. Finally, the U.S. economy may have finally entered a durable recovery and this momentum is hard to reverse in a short period of time.

Investors can expect that volatility could remain elevated over the next few weeks or months as more news coming out of Europe could influence opinions about the impact on U.S. economic growth.


George Farra is co-founder and principal of the investment firm Woodley Farra Manion Portfolio Management in Indianapolis.

Complying with Tax Code Costing Billions of Hours

The Heartland Institute crunched the numbers and discovered that — contrary to popular opinion — taxes really stink.

U.S. Treasury Department paperwork, some 90 percent of which consists of personal and business income tax forms, imposes a burden of 7.75 billion hours on Americans. That’s equal to 3.7 million employees working 40-hour weeks year-round without vacation, according to NTU’s study—more than are employed at the five biggest Fortune 500 companies combined.

Individual taxpayers will spend about 3.8 billion hours complying with income tax laws this year—up from 3.6 billion hours last year. This time is worth $110.6 billion. They’ll also spend an estimated $29.33 billion for tax software, tax preparers, postage, and other direct out-of-pocket costs.

The cost of paperwork time burdens for corporations facing the federal income tax (3.2 billion hours) adds up to $159.4 billion—equivalent to 54 percent of corporate income taxes collected in FY 2008. The expense is generally passed along to consumers, employees, and shareholders.

My sardonic intro aside, I think we’d all agree that taxes are a necessary cost of order, but could there be a simpler way as to prevent so many man hours dedicated simply to compliance?

Special Session: Budget “Cliff” and Governor’s Plan

Everyone on every side of the state budget debate is framing their remarks around a metaphoric “cliff” that the state may find itself standing at the edge of in two years. Three inter-related matters make up the primary elements of this fiscal cliff:

1) the availability of reserve accounts (surplus balances) come 2011
2) the extent that the federal American Recovery and Reinvestment Act (ARRA) of 2009 monies are used for ongoing programs or services for anything other than one-time expenditures
3) the rate at which the economy recovers and accuracy of the revenue projections/forecasts

Taking all of this into consideration, Gov. Daniels’ budget proposal is sound. The uncertainty of the economic recovery makes his line in the sand – maintaining no less than a $1 billion reserve balance – a prudent standard and an important step in avoiding a cliff. (See historic reserve balance data going back to 1976.)

The governor’s use of stimulus money only for things that would not add to the base operating budget is also essential to avoiding a freefall. His plan includes a significant amount to be directed to capital projects; although new construction adds to operating costs over time, the projects still fundamentally constitute one-time expenditures. And much is directed to immediately funding needed repair and rehabilitation of higher education facilities – a good way to apply one-time federal monies without adding costs down the road.

What the governor’s plan is being criticized for is building state K-12 education funding around the federal stimulus money specifically designated for schools with a high population of disadvantaged students (Title 1 monies). The proposed school funding formula results in a 2% overall increase. But critics point out that it is only 2% if you count the extra Title 1 – money that would flow to mostly urban schools, regardless of the level of state support.  It is suggested that this funding approach actually creates a cliff for those schools by making them dependent on that additional money.

This debate requires consideration of the big picture. First, these schools generally have declining enrollments, so their funding can’t be expected to rise steadily. By operation, the Title 1 money goes to schools that have more special needs, so the money will go to cover those needs. Even though state revenues are plummeting, the state portion of the school funding is still increasing, albeit by a very modest 0.5%. It is worth noting that most states are having to reduce education spending. So a 2% increase (0.5% state money; 1.5% federal stimulus money) is reasonable in these tough times. The final item below plays into this discussion too.

According to the projections, state revenues are expected reach a level by 2012 that will be sufficient to bridge the funding gap that will exist when the Title 1 money goes away that year. (See links to May forecast and Gov. Daniels’ budget presentation.)

Unfortunately, yes, schools are probably going to have to make do with smaller increases than anyone prefers.  Only “probably” because of another component of the governor’s budget proposal: if the economy recovers faster than the revenue forecasters projected and the revenues end up exceeding the projections, 50 cents of every unanticipated $1 will go directly to education funding; the other 50 cents goes to build back up the reserve balances.

While the governor’s plan may not be perfect, it is thoughtful and fair, and is well designed to prevent the state from heading toward – or off of – that financial cliff.