EquityFC Blog

...and then the downs | 19 March 2007

If it's true that bad money chases out good, then the massive amount of cash that has flowed into private equity must have been having some kind of negative effect. Sure enough, there are now plenty of stories about the fabled "wall of money" having worsened returns for PE funds and encouraged PE managers to make riskier investments driven by financial engineering.

Take this observation from "bloggingstocks" that highlights Carlyle co-founder Bill Conway's comment to staff that "fabulous profits are not solely a function of our investment genius, but have resulted in large part from a great market and the availability of enormous amounts of cheap debt." Or this analysis explaining how PE fund returns have, and will continue to, fall as a result of the sheer size of the industry now.

Point being, it pays to evaluate every PE opportunity on its merits. I meet a lot of FDs and FCs who just want into "the PE world" - sometimes, I think, because they reach a point in their career where they want to work like billio for three years and then pay off the mortgage with a fat exit bonus or share deal. But it also needs to be the right company, with the right strategy. That's going to be a very long three years if you hate every minute or the (possibly under-pressure) fund that's investing in your business is going to be on your back every day. But the best PE deals have a strong logic - and as a financially trained professional, you won't have to look too hard to see what that is and work out how to make it happen. Several senior finance guys responded the survey we conducted of PE managers' expectations of investee finance functions. As one said: "Anyone planning to work for an investment house either directly or indirectly needs to fully understand the requirement and that it very different from 'having a job'." Wise words.

(Incidentally, click here for the Observer's potted history of PE... a reasonable primer to the current debate.)

Back to top

Ups and downs for private equity. First, the ups... | 19 March 2007

If you're thinking about joining a PE-backed business, you can't fail to have been intrigued by the huge public debate about its pros and cons as an ownership model. At the bigger end of the market, this has crystallised into an argument about asset-stripping. And it would be wrong to say this is just unions and tree-huggers moaning about profits: at a recent conference in Switzerland, Ian Shanks, Bank of Scotland's director of fund investments (who controls a £2bn European portfolio) told delegates: "Those involved need to be very careful about how they handle their public relations." Another PE leader quoted in The Scotsman said: "If you are not open it fuels the debate and people might then assume you are doing something that you should not be doing, which is not the case. At the end of the day we are making good returns for investors, often pension funds, some of which are local authorities, and involving a private equity market which, whilst still relatively immature, is fast becoming institutionalised."

The problem is that bad apples - Google "Burger King" and "private equity" together, for example - spoil the barrel in PE, as in other walks of life. And that's particularly annoying for smaller buy-out teams who take growing, underperforming or spin-out businesses and empower their management teams to effect dramatic change. In these deals, it's less about financial engineering (although debt, for example, is still an important factor) and more about discipline and direction.

But in both cases, the financial management are crucial. In the big deals, it's the aforementioned financial engineering: how does a financial structure affect the ability of the asset to work for its owners now and in the future? At the smaller end, it's leanness, responsiveness and creativity. Either way, PE businesses are fascinating places to hone one's financial management and communication skills.

Back to top

And we're back... | 4 March 2007

Apologies for the radio silence, but winter has been busy. So blogging... well, it took a back seat. But hopefully we're back with a more regular look at issues around private equity, growing businesses and financial management.

Starting with this story about "edgy fashion designer" Jonathan Saunders, which is notable here merely for the journalist's observation that: "Tall and lean as a lamp-post, Saunders looks boyish yet not at all frivolous. Rather, his all-black raiment and titanium-framed glasses give him the appearance of a dynamic business manager or financial controller..." Times are changing, folks: the FC should look like they shop at FCUK rather than C&A these days. Worth bearing that in mind for the job interviews...

Back to top