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The Move Online Is Hurting Europe’s Music Retailers

January 21, 2013 by Leave a Comment

Employees of two HMV record stores in Limerick, Ireland, started sit-ins last week, demanding unpaid wages after the chain, based in Britain, filed for bankruptcy protection.

In France, workers at Virgin Megastore music and video shops went on strike this month after that chain, too, was declared insolvent and placed under a court-appointed administrator, threatening the stores with closure.

In Italy, workers at Fnac, which sells compact discs, DVDs, books and consumer electronics, took similar action last autumn after the Italian division of the French chain was sold to private equity investors, who are expected to shut stores and cut jobs.

Faced with the possible demise of a broad swath of its retail infrastructure for music, movies and other media, Europe is, in some ways, merely catching up with the United States — and with the technological and economic forces that have swept through the entertainment industry. Tower Records, the U.S. equivalent of HMV or Virgin Megastore, shut down in 2006, unable to compete with online retailers like Amazon.com and iTunes, from Apple, as well as digital pirates. Tower Records in Japan, which split from the U.S. company about 10 years ago, continues to operate.

But the threat to bricks-and-mortar shops selling music and movies is being seen as a broader economic and cultural calamity for Europe. Not only are thousands of jobs at stake; these chains, European owned, also play important roles in disseminating locally produced media. Waiting in the wings to replace them are mostly American-owned Internet giants, whose growing presence and smaller contributions to European fiscal coffers worry policy makers.

“The physical cultural businesses are threatened today because of the emergence of large online sites that completely avoid fair competition, since they do not pay the same taxes as others, being based outside France,” the French culture minister, Aurélie Filippetti, said in a radio interview with Europe 1.

In addition to the potential economic fallout, there is nostalgia. HMV, for example, is an iconic British retailer, in business since 1921, when the composer Edward Elgar attended the opening of the first shop in London. HMV stands for “His Master’s Voice,” the title of a painting by Francis Barraud that became the basis for a widely used music industry trademark, in which a dog is mesmerized by the sound emanating from a phonograph.

The owner of that first store, called the Gramophone Co., was a precursor to the British record company EMI, which recently passed into foreign hands when it was sold to Universal Music Group, controlled by the French media conglomerate Vivendi.

“People feel very emotional about all this. They feel very sad about it,” said Neil Saunders, an analyst at Conlumino, a retail consulting firm in London. “They say, ‘HMV is a part of my youth.’ And then you ask them when they last went into an HMV store, and they say, ‘Um, three years ago?”’

Digital music is making significant inroads in Europe, several years after it did so in the United States, where it already accounts for more than half the market. In Britain, digital outlets accounted for 32 percent of music industry revenue of $1.4 billion in 2011, according to the International Federation of the Phonographic Industry, up from 19 percent two years earlier.

Counting compact discs sold by Internet mail-order businesses like Amazon.com, as well as digital services like iTunes, online distribution accounted for 73.5 percent of music and video sales in Britain last year, according to Conlumino. That could rise to 90 percent by the end of 2015, the firm forecasts.

The problems at HMV, Virgin and Fnac have heightened the scrutiny of online retailers like Amazon, with politicians in France and Britain accusing the company of unfair competition because of the strategies it employs to reduce its taxes in Europe. Amazon routes its European sales through Luxembourg, where corporate taxes are lower than in France or Britain.

Article source: http://www.nytimes.com/2013/01/21/business/global/hitting-the-mute-switch-on-europes-music-retailers.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

DealBook: Private Equity in China: Which Way Out?

January 11, 2013 by Leave a Comment

HONG KONG — Welcome to the private equity game in China: you can buy in anytime you like, but you can never leave.

At least, that is how it is starting to seem for many of the firms that bought in big during the boom of last decade.

Starting from a base of almost nothing in 2000, global private equity funds and their start-up local counterparts rushed into the Chinese market — completing nearly 10,000 deals worth a combined $230 billion from 2001 to 2012, according to a report released this week by China First Capital, a boutique investment bank based in the southern city of Shenzhen.

But of those deals, some 7,500 remain ‘‘unexited,’’ according to the report, meaning the private equity investors have yet to find a way to cash out of their investments and pocket their profits.

In the West, private equity firms make money by selling to peers in a given industry, selling to other private equity funds or recouping their outlay via dividends that the target company pays by taking on new debt. But the Chinese private equity market has been overly reliant on one well-trodden exit route: the initial public offering.

In retrospect, that has proved to be a bad choice.

Beijing flashed a regulatory red light at new stock listings last summer, and since then, the backlog of applications for companies waiting to list on the Shanghai and Shenzhen markets has grown to nearly 900. Many of those include private equity investors seeking to cash out.

At the same time, interest among investors in American stock markets for new offerings from China remains scant after a series of accounting fraud scandals that triggered a crackdown by the Securities and Exchange Commission and, more recently, prompted a standoff between the regulator and the Chinese affiliates of the world’s biggest auditing firms.

‘‘In China, historically the exit route has been an I.P.O. on the U.S. markets, but at the moment that route is not looking very encouraging,’’ Lucian Wu, managing director of Paul Capital, which has $6 billion in assets under management, said at an industry forum in Hong Kong on Thursday. ‘‘With the domestic market essentially shut until the regulators decide otherwise, the I.P.O. market in China is not really there.’’

Exits are crucial because private equity funds typically raise money to invest over a fixed period — often a comparatively short three to five years in China — after which it must be returned to investors. Because of the lack of exit opportunities, pension funds, university endowments and other big institutional investors in the United States, Europe and Asia have taken a more cautious approach toward investing more money.

‘‘There is increasing skepticism about the ability to put large amounts of money to work here in Asia. The exits haven’t been there,’’ David Pierce, the chief executive of Squadron Capital in Hong Kong and the chairman of the Hong Kong Venture Capital Private Equity Association, said at the forum, which was organized by Mergermarket and Ernst Young.

‘‘There are good reasons why institutional investors will continue to put more money out here, but they are more cautious,’’ he added.

Some industry players see so-called secondary deals, or a sale of an asset between two private equity firms, as a viable exit path from Chinese investments given the chilly market for I.P.O.’s. But those deals, too, bring challenges because the institutions that invest in private equity funds may have stakes in both the buyer and the seller.

For them, a secondary deal is ‘‘like moving something from your left hand to your right hand — and at a higher price,’’ said Mr. Wu of Paul Capital.

For private equity firms in China, domestic and foreign, the net effect is that there is no easy way out.

‘‘If you need to or want to do an exit in 2013, you will need to be more creative, because the I.P.O. route, with a few exceptions, is probably not going to be available — and if it is available, it won’t be at an interesting valuation,’’ said Tim Gardner, a partner at the law firm Latham Watkins in Hong Kong who specializes in private equity and mergers acquisitions.

Article source: http://dealbook.nytimes.com/2013/01/10/private-equity-in-china-which-way-out/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Crowdfunding for Small Business Is Still an Unclear Path

January 5, 2013 by Leave a Comment

Mr. Caldbeck and his peers on the panel fumbled for a response. The fact is, most private equity investors and venture capitalists won’t touch a consumer products company until it has surpassed $10 million in sales — anything else is too small to bother with.

The best advice the panel could offer was for the entrepreneur to tap his credit cards.

“The purpose of the panel was to help entrepreneurs raise money, but we had no answers,” Mr. Caldbeck remembers. “That’s when I knew that there is a big issue here.”

That big issue caused Mr. Caldbeck to leave his job to start CircleUp, a company that aims to connect up-and-coming consumer products companies with investors.

Right now, the people allowed to invest through CircleUp must be accredited, meaning they have a high net worth. CircleUp hopes that soon not just the wealthy few, but the general public — whether friends, family members, customers, Facebook friends, or even total strangers — will be able to invest in deserving companies through a hot new area of finance known as crowdfunding.

To its advocates, crowdfunding is a way for capital-starved entrepreneurs to receive financing that neither big investors nor lenders are willing or able to provide. To others, it represents a potential minefield that could help bad businesses get off the ground before they eventually fail, and in some cases could even ensnare unsophisticated investors in outright fraud.

Those fears are partly why the Securities and Exchange Commission has delayed rules allowing crowdfunding that were supposed to take effect this month as part of the JOBS Act (Jump-Start Our Business Start-Ups), signed by President Obama last April. The S.E.C. is wary of loosening investor protections that have been in place since the 1930s.

Despite the uncertainty, the outlines of a new industry are emerging as a few crowdfunding start-ups have found ways to raise money within current rules. They include companies like CircleUp and SoMoLend, which lends money to small, Main Street-type businesses that typically wouldn’t interest private investors.

By themselves, of course, a few start-ups can’t completely democratize finance. But they begin to illuminate what the future of crowdfunding could look like, as the debate continues over a vast widening of the private investor pool.

Mr. Caldbeck formed CircleUp last fall along with Rory Eakin, a former business school classmate who was working for a philanthropic foundation. Through their start-up, the two men seek to finance food, personal care, apparel and pet-related companies, often with an environmental or social bent.

CircleUp considers applications from companies with $1 million to $10 million in revenue. Companies whose applications are accepted make their pitches to investors behind a firewall on the CircleUp Web site, offering equity stakes in return for capital. CircleUp, which helps companies raise up to $3 million, takes a small cut of the money.

Under current federal regulations, CircleUp wouldn’t be able to arrange such deals on its own. But it struck a partnership with W. R. Hambrecht, a registered broker-dealer that can handle investments from accredited, or high-net-worth, individuals whom the S.E.C. considers sophisticated enough to invest in private companies.

“Living here in Silicon Valley, a lot of people don’t understand the need,” Mr. Caldbeck says. “If you’re a tech company with a good idea, you can raise money. But it’s a different story for food, agriculture, retail and other consumer-oriented businesses.”

Mr. Caldbeck sees a big opportunity. Consumer goods companies account for a sizable portion of the nation’s businesses, yet very little capital — from private equity funds or from accredited investors — flows to them, he says.

What’s more, only a tiny percentage of those who qualify as accredited investors actually invest in private companies, he says. (These are people with a net worth of at least $1 million, not including their primary residence, or who have earned more than $200,000 — $300,000 for couples — in each of the last two years.)

Amy Cortese is the author of “Locavesting: The Revolution in Local Investing and How to Profit From It.”

Article source: http://www.nytimes.com/2013/01/06/business/crowdfunding-for-small-business-is-still-an-unclear-path.html?partner=rss&emc=rss

Filed Under: Small Business Tagged With: , ,