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EquityFC Blog
The New Normal | 2 September 2009
Blogger Carried Interest has an excellent new post up discussing "the new normal" for the private equity industry. It's well worth a read. If you're joining a management team backed by PE or considering an MBO, it's vital that you have a keen sense of their priorities.
Carried Interest flags up these five new realities that he feels will define the industry for some time to come:
- Fewer PE firms.
- Tougher fund terms (which means lower fees and less generous carry terms for general partners).
- Longer hold periods (although personally I think that's still a function of market buoyancy, not some newfound doctrine of sustainable ownership...).
- Much less debt (CI reckons 50/50 debt/equity is a new norm; again, I'm not so sure GPs have fallen conclusively out of love with leverage - but gone are the days of fractional equity...).
- Improving GP operating skills. This is actually tied pretty closely with the longer hold periods and lower debt, of course. But it's right that the quality in the industry - GPs who help management teams add operating value - should rise to the top and out-price (or out-risk) the financial engineers.
I think that all adds up to excellent news - if these are, indeed, new norms and not just a relatively short-term industry hair-shirt. It's particularly positive for finance execs. In most respects, the FD (and even the FC) role is becoming more outward-facing and, frankly, interesting. When financial engineering ruled the roost, I got the feeling some PE-backed finance execs felt a bit pressured to be number crunchers. These new realities should help them be more rounded again.