Much has been written of private equity's good fortune in recent months to be able to attract some of the highest-octane executives to portfolio companies. Firms have been able to accomplish this in part because they have so much more money in play, but also because of what many see as a superior form of remuneration: get this company from point A to point B, and you get to keep X percentage of the difference in valuation. This comes without complicated option programmes and public outcries over executive overcompensation.
Generating less ink is the fact that as private equity funds have ballooned in size, the firms that raise them are having a difficult time finding people to manage them. As we've written before in these pages, bona fide GPs are a rare breed. They must know how to find a good investment, close the deal, improve the performance of the company and sell at a maximum valuation.
The shortage of true GPs means that private equity firms have had to experiment with other types of hires. The trend toward creating a stable of operating executives coincides with a general recognition that firms will need to be much more hands-on with portfolio companies to create value, and even the most experienced GP doesn't know how to run, say, a hospital chain.
Where private equity firms have expanded geographically, such as to Asia, GPs are even more scarce, and so very senior bankers, consultants and corporate executives have been recruited (from Credit Suisse, McKinsey, General Electric, et al). Will these obviously talented and successful individuals succeed as GPs? If they don't, private equity may have to give some of its money back.
Whether private equity veterans or not, one thing for sure is that those individuals who do demonstrate an ability to add value to their firm stand to be handsomely rewarded. In light of GPs' strong bargaining power on the fundraising trail, investors are allowing their fund managers unprecedented levels of fees and carried interest to be written into today's LP agreements.
Turn to page 43 for this month's compensation special where discussion of these and other issues abounds.
Enjoy the issue,
Andy ThomsonCommissioning Editor