Let’s face it the Private Equity (PE) Industry has had an atrocious run of bad PR over the last few years. Of course some players have been rightly “called out” for excessive leverage, over generous fees, weak commercial judgement including some pretty huge losses (April 08, TPG loses $1.35 Billion in 5 months on the Washington Mutual deal). However as the owner of an ambitious private company don’t throw the baby out with the bathwater! PE works if the conditions are right. You can’t tarnish the whole industry with one broad bad brush. Take any collection of individuals: CEOs, writers, runners, chefs, software developers, doctors, professional golfers – there is a huge range of talent and quality. The same is true for PE players. A focused PE house that understands a sector, invests a significant but measured amount of equity say $5m, without leverage, in a strong market with a great management team can help build a real competitive edge.
Let’s put some balance on the table. First some assumptions and then I’ll note some real business results PE players deliver.
• Your company is at least 5 years old
• Your market has segments with above average growth potential (20% plus)
• Sales are running at $5m to $20m.
• The management team are experienced and have a clear executable strategy to define and dominate a space
• There is a clear plan of how $5m would be invested to quantum leap the competition
So what does money, experience and connections buy you?
Business Results that Create Competitive Advantage
1. Speed of Execution – the next 3 years are an unusually attractive time to define and dominate a market segment – now is a great time to get stuff done:
a. Recruiting great sales talent
b. Rolling out great marketing campaigns
c. Securing great property leases
d. Building out your R&D team
2. Validation of Business & Pricing Models – they have seen those that work and those that haven’t (of course they may have missed some good ones).
3. Connections – they have a vast network of experienced, relevant industry executives to tap into, including vital introductions to partners and customers. Their own portfolio companies may have solved problems you are facing, sharing and collaboration could accelerate your execution.
4. Credibility –
a. Successful PE brands can give you as much credibility as an IPO without the 3 month treadmill!
b. Prospects see your company in a different light; a well funded, highly stable partner
c. Prospective employees see a stable career choice
d. Banks offer better loan terms
a. Investment bankers selling businesses see a private company backed by a PE player as a credible acquirer
b. In today’s climate there will be an increasing number of reasonably priced targets worth acquiring
6. Board Meetings – There is nothing more motivating than a collection of talented directors gathered together with one cause – to execute a 5 year plan and dominate a market.
And believe it or not, you don’t need to lose control for the privilege!
Well done Ian. The trick is to find the right PE partner, and be prepared to work really, really hard to get results. Too many owners are set in their ways, not recognizing that they cannot grow organically, not just due to low capital, but often due to under-management. PE can solve both problems.