Tuesday, February 27, 2007

Private Equity: efficiency, system, economy

I am irritated, depressed and unsuprised by the labour / union attacks on private equity firms, calling them locusts and what not.

Balls. PE businesses strip out inefficiencies, simplify and improve processes, inject focus and drive, eradicate failing management and build value and growth. It is so much arse to claim that this is all smoke and mirrors through 'asset stripping' or unsustainable staff cuts.

The unions need to understand that too many businesses have headcounts that are in excess of their needs, generally as a consequence of inefficient processes, inadequate systems and management failure to keep an eye on COS and to innovate in how they deliver goods and services.

PE backing enables management the focus, time and backing away from the floodlights of the public markets to make tough decisions, and drive through change that leads to long term value.

Now some fool will comment and say "a-ha, but many former PE businesses see their share prices dip after floatation". Remedial classes on 'value: what it is and how it is measured' will follow when I have the time.



Anonymous Anonymous said...


I need to be careful what I reveal, but we have just sold part of our business to a leading PE firm. They are neither as bad nor as good as people say. They are not the devil incarnate, or we would not have put our former employees in that position. They undoubtedly do bring some useful disciplines and capabilities. But they will be most dependent for increasing the value of their assets on riding a wave of market perception, rather than on the marginal operational improvements. They may well have spotted a trend and by agglomerating assets in that sector will profit when people value the whole as more than the sum of its parts. And good luck to them if they do.

On the downside, they undoubtedly are short-termist in their outlook, which may help to drive up the value of the company quickly for a sale or float, but will leave the company with problems in the longer-term. But caveat emptor. It's their business to run how they see fit. And it's investors' money to waste when the business is sold, if they choose to ignore the likely consequences of the short-termist management.

We don't need more control of PE, but more wisdom in the valuation of their offerings, and that is not something that can be mandated, only allowed to evolve with experience.

11:21 am  

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