Time was you worked in private equity and people just sort of
shrugged when you mentioned it. You were in finance sort of; you
invested in companies, you made deals. Whatever.
Now, you’re in private equity, and well,
hello. You’re a
heroic job creator – or no, wait, you take pleasure in firing people.
You’re a savvy executive who knows how to grow the economy – or get
outta here, you’re a vulture capitalist with leadership skills, as
Vice-President Joe Biden recently put it, that are no better than a
plumber’s.
Hello, indeed, and with all due respect to the vice-president, and
certainly with no offense intended toward plumbers, we have a question.
Mr. Vice-President, where in the world are you getting your ideas about private equity?
Because we have an entirely different take, and we can tell you where
ours comes from – experience, 20-plus years of working with PE firms
and 11 years of working for one. And given that experience, and given
how private equity is at the epicenter of the political debate now,
we’d
say it’s time for a reality check about what private equity really does
and what kind of leaders it tends to produce.
Let’s start with what private equity firms do, which is actually very
simple. They buy troubled companies with the intention of fixing them
up. In time, they hope, that will result in a big payday when the
new-and-improved business goes public or gets sold to an eager strategic
acquirer. Yes, sometimes these turnaround efforts fail, and companies
and jobs are lost. And yes, on occasion PE firms have bought in and
overleveraged a business’s assets. Then, as a result of an economic
downturn, the company has tanked, while the PE firm has gotten out
whole.
But the
norm is different. Typically, that’s not what
happens. It’s just not. Indeed, research conducted under the auspices of
the World Economic Forum in 2010 shows the practice of “strip and
flip” during PE-led turnarounds is rare. What’s far,
far more common is
this: PE firms buy “orphan” divisions that no longer are a good fit with
their big corporate owners and have been left to fade away, or they
snap up stand-alone businesses that have lost their way and are almost
in the throes of death.
The key point here is that PE firms virtually never buy jewels –
happy, fast-growing companies with glistening profits. After all, such
companies have access to other kinds of capital; they don’t need private
equity. And frankly, private equity is generally not in the business of
polishing things up for a low-multiple return. It’s in the business of
reinvention and rebirth, with fireworks at the end.
During this kind of overhaul, do jobs get lost? Unfortunately, in the
early stages, they often do. It’s nearly impossible to massively
improve productivity by keeping everything the same. But are companies
saved? Again, yes. That’s the whole point of private equity. You’re
trying to get a business from terrible to terrific, from dying to
thriving. In the process, some jobs may go, but in the best-case
scenario, with success down the road, many more will be created. And by
preventing a company from going under, jobs will certainly be saved.
Now let’s talk about the leadership traits private equity’s most successful practitioners tend to exhibit.
Every private equity acquisition begins with a sophisticated
negotiation between the PE firm, the corporate seller and the employees
of the business being sold. Usually, several firms are vying for the
business, but it’s not accurate to assume price is the sole determinant
of who wins. Many times, just as critical is the case each private
equity firm makes for itself, along with its ability to bring
contentious stakeholders to a shared vision of the future.
In short,
most successful private equity managers have well-honed skills in the
art of getting tough deals done.
Next, because of their familiarity with turning around broken
companies,
private equity managers usually have a very clear
understanding of what it takes to establish a workable balance sheet,
how to develop strategy and how to execute that strategy. Moreover,
private equity managers tend to be very, shall we say,
un-academic about these pursuits. In the private equity environment, fatheaded theories don’t get you very far. Realism does.
Top private equity leaders also are typically very good at talent
management. You never hear that, but it’s true, and here’s why.
Everything about a successful turnaround depends on people – picking the
right ones to resurrect the broken company and placing them in the
right jobs from top to bottom to get it all done. Think about it. In a
well-run company, people make all the difference. Imagine how much more
important they are in a rescue scenario. Which is why private equity
people end up being smart about building great teams – and doing so
quickly.
Finally, when you’re trying to save a company these days, rarely does
the solution lie in hunkering down and keeping it local. Rather, to
regain your health, you need to globalize your sourcing efforts, enter
new markets, form a joint venture abroad or set up a foreign R&D
operation. Thus private equity firms often goad their acquisitions into
the borderless world, which explains why
most successful PE leaders tend
to have global mindsets about business, regulation, growth and
geopolitics.
Which brings us back to Vice-President Biden’s remarks.
Sophisticated
negotiation skills, balance-sheet management, strategy development and
implementation, talent selection and a global mindset sure seem like
tools you’d want any president to carry, don’t they?
Only politics would say it ain’t so.
Jack Welch was the CEO of General Electric for 21 years and is the founder of the Jack Welch Management Institute at Strayer University. Suzy Welch is an author, speaker and the former Editor of the Harvard Business Review.
