The Emergence of Private Equity
Private Equity (PE) has become a driving force in the business landscape.  The financial resources available to PE firms have enabled them to do record deals over the past year and there is every indication this trend will continue.  Financial services veteran John Bogle sees it as “a shift from traditional owner’s capitalism to a new form of manager’s capitalism.”

PE deals are done for many reasons, but most deals fall into one of two categories: restructuring or growth.  The first type is aligned around financial engineering, where assets are restructured for greater value, typically with a near term plan to sell the entity off in pieces.  We call the other type of deal “growth enablers.”  In these transactions, management is unleashed to pursue a different growth and value creation path than would be possible in public companies that face quarter-to-quarter earnings pressures.

A good portion of the activity we are now seeing features these growth-enabling strategies.  While there is talk in the press about “going private” to get out from under the burdens of Sarbanes–Oxley, this reasoning is not on the minds of executives we talk to.  Since most plan to re-enter the public markets within 4 to 5 years, they intend to maintain rigorous reporting standards regardless of their temporary private status.  The focus for these executives is the ability to pursue aggressive growth opportunities over a longer time horizon than public ownership typically tolerates.

For example, one client currently enjoys a unique platform for global expansion that combines on-the-ground physical presence and complementary online delivery of services.  While their industry is becoming increasingly crowded with new entrants, none is as well positioned to establish global brand recognition.  Now is the opportune time to invest and expand quickly across several regional fronts simultaneously.  The support of a PE investor will allow this organization to move forward with its ambitious plans.

Challenges in the Transition
Even with strong financial and strategic alignment, leadership teams moving in (or out) of private equity ownership face a number of challenges along the way.  We’ll look at a few common ones.

Transition Distraction
Given that all parties are in support of the growth enabling objectives of the deal, there is great incentive to make the transition as smooth as possible.  The last thing anyone wants is to shift leadership focus from growth to the deal mechanics, but it’s hard to avoid devoting some significant time to transition issues.  Beyond that, there is a “getting to know you” phase that needs to be anticipated and properly managed to minimize loss of productivity.

Clarity and Communication
Unfortunately, lack of clarity and communication around role expectations, decision-making processes, etc., often impedes performance and speed of execution.  One client we followed through PE ownership and sale went through periods of time marked by lack of clarity around strategic intent.  The executive team could not get clarity on whether the investor group was positioning them for imminent resale or was ready to invest more aggressively in the next phase of growth opportunities.  Strategic paralysis ensued.  When roles and objectives are not clear, the confusion can unwittingly create passivity on the senior team.

<< Back to The Institute  |  go to page 2 >>
Insights