Prior to becoming a partner at KKR, Clive Hollick was already well-acquainted with private equity. As an investor in several funds and a member of two advisory boards, he had “witnessed consistently good investment returns, seen how investment decisions were made and how companies were managed,” Lord Hollick writes in the FT.
“There was evidently much more to their success than simply piling on debt and reducing corporate overheads,” he says.
Lord Hollick deplores the failure of the private equity industry to explain itself and, in the case of many privately owned companies, to provide information beyond the statutory minimum. This information blackhole has led to a caricatured version of private corporate life – where calculating investors sanction unsupportable levels of debt, a squeezed cash flow and a low level of investment.
“Private equity specialists do not operate this way,” Lord Hollick protests. “They know it would be a sure-fire recipe for disaster – destroying value and fatally compromising the private equity business model. And research in the US demonstrates this: initial public offerings of private equity-backed firms perform better than IPOs in general.”
So what is the private equity specialist’s recipe for success? Simple, says Lord Hollick. Find a good company, add talented management and then implement a bold plan to invest in growth and optimise operating and financial performance.
Unsurprisingly, Lord Hollick thinks there are “significant benefits to being – or going – private”:
- Free from the short-term perspective of quarterly reporting and the aversion of some institutional shareholders to sensible levels of debt and risk investment in growth, privately owned companies can adopt a long term approach and embrace an entrepreneurial growth culture
- The governance structure is based upon ownership: all directors have a significant stake in the success of the business and board meetings can concentrate on products, customers, people and performance.
But private equity ownership is not going to be to every executive’s liking, especially not those power-trippers who “seek newspaper profiles, the adulation of the gabfest crowd and the unquestioning support of their colleagues.”"Executives should leave their ego at the door and prepare to answer tough questions from private equity executives often less than half their age but with formidable intellects,” Lord Hollick notes, modestly.And what if you’re a chief exec or cfo mulling going private? Lord Hollick offers a handy how-to:
- Conduct extensive research – Always speak to a number of firms before making your choice. Look for companies with a proficient understanding of your sector.
- Spend time with the team – You are looking for people who you can work with for five or six years – professionally and personally. Ask for the advice of past chief executives who have spent time with the firm.
- Develop the business plan – Set challenging but realistic targets. Ensure you have the financial resources to sustatin an economic cycle and deliver the plan.
- The management equity plan – This must require all key executives to make a meangingful investment within the context of their own financial circumstances.
Now you know.