Friday Letter: More than money

According to some, private equity’s shadow is being cast over public companies that as a result are now facing the prospect of an unprecedented brain drain as their most able managers disappear behind the closed doors of a fund.  

The appeal of huge earning potential is given as the fairly obvious reason why these individuals are eager to join GP groups and implicit in much of the media coverage therefore is the supposition that private equity is too rich for its own good. The multi-billion dollar and euro funds, the size of the resultant management fees, let alone the seductive appeal of carried interest – these are all reasons why private equity is buying its way to success it seems.   

Talk to some of these managers, their GP peers and – crucially – to the investors putting capital into these funds, and the reality appears somewhat different though.

It goes without saying that the chance to earn very large amounts of money has its attractions but there are other very important – and non-financial – reasons too. The chance to join a compact team of highly able and motivated individuals is one: the lines of communication are simple and clean, both hierarchy and bureaucracy are largely absent. You can speak and people will listen – and act.

You also can be far more focussed: no more interminable meetings over intractable issues that seem inherent to large organisations. No more navel-gazing. And – if you’re leaving a public company – no more conference calls and meetings with analysts. To many who have spent years scaling the heights of a large company only to find that the view from the top is beset by cloud cover, the change is liberating and lets them concentrate on what they like doing best – building businesses.

Private equity firms themselves are also eager to have seasoned managers join them. Few are blind to the fact that – despite today’s easy financing environment – the companies they are acquiring will not deliver the necessary exit valuation without significant inputs from themselves over the three to five years of ownership. As a result, senior partners at GP groups are working continually to attract appropriate talent. Good managers will find many a prospective fund to join.

These senior partners are also increasingly minded about an issue that is common to all institutions intent – and obliged – to map a long-term future: where are the people who are going to run this firm in ten years’ time? For private equity firms, this requirement is bought into sharp focus every time they raise a new fund. As those partners sit in front of prospective investors, the question of succession arises. And as their firms grow in scale (size of funds, number of funds, number of personnel), so the need to have furnished the group with talented individuals has to be evidenced.

They must also evidence how they are planning to retain this talent – which takes us back to the aforementioned reasons why a private equity firm is a good place to work. LPs increasingly want to know exactly how key individuals’ compensation is structured and – significantly – how these people fit within the organisation. What are the reporting lines? Do they sit on any internal committees?  How do they get to contribute to the development of the firm itself? And – last but by no means least – how does the firm invest in this individual in terms of skills development?

This last issue is why we and our sister publication Private Equity International have put together a two-day conference in New York next month (18 – 19 October) focussing on how private equity firms can nourish the skills of their next generation. We have bought together an exceptional group of senior, seasoned private equity people to discuss some of the key aspects of private equity deal making. It’s intended to provide private equity firms with a chance to deliver an intensive bout of knowledge sharing for people who are going to carry their businesses forward. Wherever they have come from.