Mr. Biden, here’s the truth about private equity
Now, you’re in private equity, and well, hello. You’re a heroic job creator – or no, wait, you take pleasure in firing people. You’re a savvy executive who knows how to grow the economy – or get outta here, you’re a vulture capitalist with leadership skills, as Vice-President Joe Biden recently put it, that are no better than a plumber’s.
Hello, indeed, and with all due respect to the vice-president, and certainly with no offense intended toward plumbers, we have a question.
Mr. Vice-President, where in the world are you getting your ideas about private equity?
Because we have an entirely different take, and we can tell you where ours comes from – experience, 20-plus years of working with PE firms and 11 years of working for one. And given that experience, and given how private equity is at the epicenter of the political debate now, we’d say it’s time for a reality check about what private equity really does and what kind of leaders it tends to produce.
Let’s start with what private equity firms do, which is actually very simple. They buy troubled companies with the intention of fixing them up. In time, they hope, that will result in a big payday when the new-and-improved business goes public or gets sold to an eager strategic acquirer. Yes, sometimes these turnaround efforts fail, and companies and jobs are lost. And yes, on occasion PE firms have bought in and overleveraged a business’s assets. Then, as a result of an economic downturn, the company has tanked, while the PE firm has gotten out whole.
But the norm is different. Typically, that’s not what happens. It’s just not. Indeed, research conducted under the auspices of the World Economic Forum in 2010 shows the practice of “strip and flip” during PE-led turnarounds is rare. What’s far, far more common is this: PE firms buy “orphan” divisions that no longer are a good fit with their big corporate owners and have been left to fade away, or they snap up stand-alone businesses that have lost their way and are almost in the throes of death.
The key point here is that PE firms virtually never buy jewels – happy, fast-growing companies with glistening profits. After all, such companies have access to other kinds of capital; they don’t need private equity. And frankly, private equity is generally not in the business of polishing things up for a low-multiple return. It’s in the business of reinvention and rebirth, with fireworks at the end.
During this kind of overhaul, do jobs get lost? Unfortunately, in the early stages, they often do. It’s nearly impossible to massively improve productivity by keeping everything the same. But are companies saved? Again, yes. That’s the whole point of private equity. You’re trying to get a business from terrible to terrific, from dying to thriving. In the process, some jobs may go, but in the best-case scenario, with success down the road, many more will be created. And by preventing a company from going under, jobs will certainly be saved.
Now let’s talk about the leadership traits private equity’s most successful practitioners tend to exhibit.
Every private equity acquisition begins with a sophisticated negotiation between the PE firm, the corporate seller and the employees of the business being sold. Usually, several firms are vying for the business, but it’s not accurate to assume price is the sole determinant of who wins. Many times, just as critical is the case each private equity firm makes for itself, along with its ability to bring contentious stakeholders to a shared vision of the future. In short, most successful private equity managers have well-honed skills in the art of getting tough deals done.
Next, because of their familiarity with turning around broken companies, private equity managers usually have a very clear understanding of what it takes to establish a workable balance sheet, how to develop strategy and how to execute that strategy. Moreover, private equity managers tend to be very, shall we say, un-academic about these pursuits. In the private equity environment, fatheaded theories don’t get you very far. Realism does.
Top private equity leaders also are typically very good at talent management. You never hear that, but it’s true, and here’s why. Everything about a successful turnaround depends on people – picking the right ones to resurrect the broken company and placing them in the right jobs from top to bottom to get it all done. Think about it. In a well-run company, people make all the difference. Imagine how much more important they are in a rescue scenario. Which is why private equity people end up being smart about building great teams – and doing so quickly.
Finally, when you’re trying to save a company these days, rarely does the solution lie in hunkering down and keeping it local. Rather, to regain your health, you need to globalize your sourcing efforts, enter new markets, form a joint venture abroad or set up a foreign R&D operation. Thus private equity firms often goad their acquisitions into the borderless world, which explains why most successful PE leaders tend to have global mindsets about business, regulation, growth and geopolitics.
Which brings us back to Vice-President Biden’s remarks. Sophisticated negotiation skills, balance-sheet management, strategy development and implementation, talent selection and a global mindset sure seem like tools you’d want any president to carry, don’t they?
Only politics would say it ain’t so.
Jack Welch was the CEO of General Electric for 21 years and is the founder of the Jack Welch Management Institute at Strayer University. Suzy Welch is an author, speaker and the former Editor of the Harvard Business Review.
PHOTO: U.S. Vice-President Joe Biden gestures after giving a speech regarding the Obama administration’s foreign policy record at New York University in New York, April 26, 2012. REUTERS/Lucas Jackson