What do private equity firms have that public firms don’t?:
Private-equity firms want to buy companies for their portfolio, fix them, grow them and sell them in three to five years. The eventual buyer could be another company in the portfolio company’s industry, another private-equity firm or the public, through an IPO. The holding period is occasionally less than a year or as long as ten years. But always the goal from day one is to sell the company at a profit.
Facing a goal like that changes a manager’s mindset — usually in positive ways. No longer seeing a corporate future that stretches indefinitely into the distance, executives realize that they gain nothing by resisting change: With the exit looming, driving change is their only hope.
“Everybody in the company knows you’re on a sprint to do well,” says von Krannichfeldt. “It’s not this mindset of working for a company that’s been there for 100 years and will continue for another 100 years. I find this much more intense than a public company.”
Pay is a whole different concept in PE-owned companies. Don’t come to play unless you’re prepared to put significant skin in the game. While public companies talk a lot about aligning executive pay with performance, they typically award stock options and restricted stock on top of already substantial pay packages, giving executives lots to gain but little to lose.
And in big companies those options reflect the fortunes of the overall corporation, not the specific business a manager is running. By contrast, private-equity firms make the game much more serious. Not only is a far larger share of executive pay tied to the performance of an executive’s business, but top managers may also be required to put a major chunk of their own money into the deal.
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Making a big new investment or taking a write-off for a plant closing may be the best thing for the business, but many public companies hesitate because such actions could cause the stock to tank. PE-owned firms don’t have to worry about it. “In private equity, you don’t need to go from quarter to quarter,” says von Krannichfeldt. “You can take write-offs, you can make investments that aren’t accretive in year one or year two. It’s a very different dynamic.”
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What makes a huge difference is the release of managerial time from trying to placate and massage the public markets. Talking to shareholders, analysts and the media may be important jobs for a public-company CEO, but they’re massive distractions from the company’s operations. In practice, a public-company CEO is lucky if he spends 60 percent of his time actually running the place. In a PE-owned firm those distractions disappear, and the CEO is free to spend close to 100 percent of his time focused on the business.
Increased managerial attention comes to many PE-owned companies in another way as well. Several of these companies were initially parts of much larger outfits where they were not central to the mission. The parent firm focused top-management time and corporate resources elsewhere, which not only was bad for the stepchildren financially but also demoralized the managers.
“I used to joke that I had to fly to London to beg for attention,” says CEO Luther, recalling when Dunkin’ was part of giant Allied Domecq, which Pernod Ricard later bought. “Now it’s just a 20-minute ride downtown” to Bain Capital’s office in Boston. Genpact’s Pramod Bhasin adds, “We weren’t a strategic business for GE. Our whole intention was to be able to offer our services to the broad market.”
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Combine all those factors and here’s what private-equity firms have figured out how to do: Attract and keep the world’s best managers, focus them extraordinarily well, provide strong incentives, free them from distractions, give them all the help they can use and let them do what they can do. No wonder these companies tend to be outstanding performers.
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