Stanley Szeto is on the crossroads of making a decision of whether to continue with his current job at the Private Equity (PE) firm, switch job and lead a high-tech Venture Capital (VC) firm, or run his family business. Stanley’s family had diversified into garment manufacturing (Lever Shirt) and branding (Fordley & Lee Co.) businesses - Lever produced woven shirts for major US and European brands with the production base in China, Mauritius and Panama; Frodley owned Chinese and Hong Kong distribution license to sell brand name clothing and apparel products within China and Hong Kong. My recommendation to Stanley will be that he should join his family business and look for divesting Frodley as that is a distressed business with limited potential; Lever on the other hand has the potential to generate rents if operated efficiently under expert supervision.
Analysis
Lever’s primary production facility was in China and had plants in Mauritius and Panama as well. Chinese garment market manufacturing is fairly fragmented with multiple manufactures and working within the Multi Fabric Agreement (MFA) offers several limitations to grow. Similarly Frodley’s business has been suffering after the Asian financial crisis bust, which directly impacted the domestic consumption in China. Both companies are in bad health but Lever seem to have much better opportunities for making it a successful turnaround.

Reviewing Lever and Frodley’s Lever’s balance sheet Frodley has more debt than the assets with negative owner’s equity. Leverage is good for business but in case of Frodley it seems that the firm is over leveraged with not enough cash flow to service the debt. Almost 50% of the debt (35, 521, 798.81) originated from deferred payments to Lever, which in effect is overloading the receivables for Lever (35% of total receivables for Lever). Additionally, Frodley is mainly dependent on the consumption appetite (for luxury branded clothes) of the Chinese population while Lever is globally more diversified. Furthermore, Lever, upon successfully turnaround has a great potential on naturally diversifying into creating a style brand for it self, which, if successful, could be a source of great revenue for the firm.

With Stanley’s long-term plan of starting his own business, there will no better opportunity than taking over family business; run Lever and divest Frodley. He will be able to take advantage of his experience as a PE professional and also since the Asian market is getting all pumped with new entrepreneurial blood, it may be a perfect time to take advantage of the opportunity and potentially partner with a VC in case the funds are required for growth. He already has all the right connections within the VC and PE community and can tap in to them as needed.

Alternatively, had PE and VC provided better options when compared to running Lever, it would definitely be advisable to Stanley to join one of them; however, it is not. US PE funds are at about $ 145 B and most of them are focused on global buyouts. Investment in Asia went up from $ 6 B in 1997 to $16.8 B in 1999, an increase of 180% in 2 years – with china moving from $100 MM to $530 MM and Hong Kong from $ 1.9B to $5.4B) . Although there in an significant increase in the funds (dollar amount) flowing into Asia especially Hong Kong, the PE investment style is very different from that of the US and that is what makes it harder to project the success in near short term. In Asia PE firms usually invest in family businesses, which are self funded and are only interested in entering into agreement with a PE firm if a PE firm offers them growth potential – very a typical of PE investments