Friday Letter Flat earth theory

Private equity's embrace of Thomas Friedman's popular theory means even mid-market firms are going global from day one.  

Thomas Friedman’s best-seller “The World is Flat” is clearly a tome the private equity industry has taken to its heart. In the book Friedman argues globalisation has changed core economic concepts. The competitive playing fields between industrial and emerging market countries have been levelled creating a flat earth.

This week alone has seen a number of cross-border deals and manager launches that give credence to his theories.  There has been a fresh wave of US firms looking beyond their domestic territory, only this time it is not just the mega funds. Their scale made venturing abroad a necessity. Big deals are almost always global deals.

This latest crop however is mid-market, even lower mid-market in focus.

Lightyear Capital, a US buyout firm, bought the UK arm of a German insurance company, relocated it to Bermuda, while arranging for it to be admitted to the UK insurance market Lloyd’s of London.

Meanwhile Fidelity, the US fund management power house, launched its own global buyout play with teams in the US and UK. The London team under Nick Martin is targeting lower mid-market deals and has a European brief. Indeed its first investment was in the Netherlands.

Intriguingly his firm’s differentiation, the element that it hopes will raise it above the competition, reads as if Friedman had a hand in it. Fidelity is promising to deliver more than just financial muscle to the companies it backs. It is looking to leverage its experience in deploying technology to competitive advantage. This embraces communication software, back office processing, offshoring and outsourcing.

Friedman’s “flatteners” included Netscape and the web, which broadened the audience for the internet from its roots as a communications medium used primarily by “early adopters and geeks” to something that made the internet accessible to everyone from five-year-olds to eighty-five-year olds.

Friedman also wrote about the ability of machines to talk to other machines with no humans involved. He believes these forces have become a “crude foundation of a whole new global platform for collaboration.”

Add to that outsourcing and offshoring: Friedman argues that outsourcing has allowed companies to split service and manufacturing activities into components, with each component performed in most efficient, cost-effective way.

Finally, “The Steroids”: Personal digital devices like mobile phones, iPods, personal digital assistants, instant messaging, and voice over internet telephony. “Never before in the history of the planet have so many people-on their own-had the ability to find so much information about so many things and about so many other people,” says Friedman.

Friedman’s thesis describes an opportunity for even mid-market firms to move seamlessly across continents. Fidelity is betting $500 million on this most 21st Century of strategies.

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