What is the most important component of successful private equity investing? Leverage? Buying great companies? Outsize returns to investors? Hands-on operators rolling up their sleeves to help portfolio companies?
All of these things count towards success. But even more important than all other ingredients are the people. Private equity and venture capital is all about the people.
Choose the wrong partners, the wrong investors, the wrong management team and you will have to work much harder to make a return. The smartest capital structure tailored to boost the best portfolio company will not make any difference if the people are not right.
Perhaps this is the reason why, in September, news of the coming and going of senior executives was devoured by readers of PrivateEquityOnline.
The site's most read story in September was about the departures of Thomas Ramsay and Samir Kamal, two of Industri Kapital's country heads, ahead of the firm's imminent fundraising. Judging from the feedback we received, most readers found IK's argument plausible that there was a need for pruning the partnership ahead of the fundraising, and agreed that the firm would reinvent itself successfully after cutting back.
Only a small number of readers expressed concern for the future of the firm.
Few believed the departures of its Swedish and Finnish country heads might presage anything like the turmoil Harald Mix's leaving inflicted on the firm five years ago. Mix went on to demonstrate with his own firm, Altor, why investors felt his move keenly. He was a deal-doing engine in the IK firmament and the firm was caught on the hop when he felt it was time to do his own thing.
In any case, for limited partners the more intriguing issue is how IK will manage its succession to the next generation of partners. Had the layer immediately beneath the firm's founder, Björn Savén, chosen to go, then IK's imminent fundraising would have taken a critical hit, investors say.
The succession issue lurks in the shadows of an industry whose relative youth means a generation of successful pioneers has still to retire – showing few signs as yet of boxing up their lucky deal cufflinks.
No surprise then that the second most popular PEO item last month was the rebirth of Tom Lee, a veteran of the US scene, at his new shop Lee Equity Partners. Readers flocked to the story outlining his new team. Investors signing up to his new fund will be looking to that team's succession plans from day one. Although at 62, Lee is on the sprightly side compared to some of his peers.
It is not clear yet where Lee will be investing his money, but investors will be glad to hear it is unlikely to be in the UK mid-market, where a recent survey suggested almost 100 percent of deals failed to satisfy. The research, another big hit on PEO, says more about the industry's high standards, the constant pursuit of perfection and a British tendency to the maudlin, than any catastrophic flaws in the mid-market.
Perhaps head hunters for mid-market firms might want to add an extra dimension to any searches: GSOH essential.