What corporates can learn from
In an exclusive interview with Bill Ferris, Executive Chairman of CHAMP Private Equity, we discuss the very private world of private equity and hone in on what corporates can learn from the industry.
- How has Private Equity evolved and what have been the implications for the corporate sector?
- How are some of the best Private Equity organisations managing current challenges in the market in terms of volatility and uncertainty?
- What are the top three lessons corporates should learn from Private Equity?
How has Private Equity evolved and what have been the implications for the corporate sector?
The specialist Private Equity (PE) fund managers emerged in the United States during the 1960s. Virtually all of the US venture capital (VC) and PE managers were established as general partnerships (GPs), which managed funds provided by their investors, who were referred to as limited liability partners (LPs).
This GP/LP structure, with its 'see-through' tax structure, has never been part of the national taxation Acts of Australia, and so other corporate and unit trust structures have characterised the Australian PE management business. In 1970, I began Australia's first PE business, International Venture Corporation Pty Ltd, as a limited liability private company — that is, investors and the management were all in the same single limited liability structure. In those days, investments made and held for long-term gain (greater than twelve months was the guideline) enjoyed capital gains tax-free treatment.
In 1987, Joe Skrzynski and I teamed up to form a VC and PE funds management company, and raised Australia's first institutionally subscribed PE fund in a unit trust structure. The investors held their interest through units in the trust, and the manager was our separate private company that managed the trust.
It was not until 1998 that we believed a case existed for us to establish a dedicated buy-out fund in Australia. We would need to convince investors that the Australian capital markets were ready for private equity organisations. The implications for the corporate sector have been numerous. On the demand side, both pre, during and post the Global Financial Crisis (GFC), PE has assisted corporates in sharpening their focus and get back to the core knitting of their business by acquiring unloved or underperforming assets.
On the supply side, PE has been successful in strengthening capital markets, with many of the Australian banks lead players in the PE syndicate loans markets.
PE has also assisted in demonstrating best practice and awakening professional management. The PE model clearly articulates the advantages for management to take control of their businesses and shape it accordingly.
How are some of the best Private Equity organisations managing current challenges in the market in terms of volatility and uncertainty?
When the equities bubble burst upon the arrival of the GFC in 2008, many journalists predicted that this spelled the end of the PE buy-out model. The reasoning was that with the collapse in the equities market, there could be few opportunities for exits via IPOs, and with the inevitable collapse in liquidity and bank credit, the PE model would fail. This prediction was of course facile and many of the PE companies have weathered the storm relatively well.
PE does tend to have an unwarranted bad reputation for taking a 'slash and burn' approach. However PE focuses more on operational efficiency, cutting out lazy practices or taking a hard line on asset accumulation.
PE is generally focused on optimisation of the balance sheet - ensuring that it is not overweight, has the right structure and is extremely nimble to adjust to changing market conditions. In today’s challenging climate of flat to zero growth in specific sectors and markets, the businesses who are exposed really need to put a blow torch on operational improvement. They must develop and implement processes to survive the downturn, and be on the front foot for when conditions reverse.
What are the top three lessons corporates should learn from Private Equity?
I have a total of 33 'lessons' in the book but let me briefly mention three:
- Special returns require special angles, so look for the special angle you have or can bring to the deal.
If you hope to make exceptional returns for your investors then you better have a special angle. This can be a special person, insider knowledge, a synergistic bolt-on acquisition and/or products and services.
In the case of Austar there were two: bringing 'clean hands' to the vendor, enabling us to solve a problem with the junk bondholders' position; and discovering a pioneering legal concept of 'international comity', which enabled a transaction otherwise impossible.
- People still make the difference, and do not let anyone tell you otherwise.
Every so often timing can prove to be the principle determinant of fortune or tragedy. And, of course, insightful analysis and comprehensive due diligence are essential for any private equity manager to deliver sensible investment performance through the cycles. But in my direct experience with more than 70 VC and PE deals, superior returns (better than four times your money inside five years) are only delivered by outstanding portfolio company CEOs. Only a great CEO can turn a good company into a great one.
- Be prepared to embrace cross-border complexity in the deal, not shy away from it.
Cultural, time zone, currency, tax and other such challenges do reduce the field of credible buyers. Ensure you are well-positioned to deal with cross-border issues, for example, ensure you have offices set-up globally. This will ensure that your business is agile enough to maximise opportunities as they arise, and allow you to boost your return on investment.
Bill Ferris’ latest book, Inside Private Equity, is now available.