Lessons from Private Equity that any company can use, by Orit Gadiesh and Hugh MacArthur, published by Harvard Business Press

This book is published by Harvard Business Press as part of their ‘Memo to the CEO’ series and the authors are senior people from Bain & Company, the prestigious management consultants who run their own Private Equity practice.

Private Equity (PE) has a bad image, some of it deserved and some less so. In the criticism of the extortionate amounts of money made by Private Equity investors who take over, turn round and then sell companies, it is often forgotten than many fail, particularly in the current downturn.

This book draws on another fact that is also often lost among the ill-informed criticism, that the PE operators are often only doing what the previous management didn’t want, or weren’t able, to do; to make the company more efficient and value creating. The authors therefore argue that if companies adopt the same practices before the PE operators can get their hands on them, they will keep their jobs and reward their shareholders.

The main headings of the potential for performance improvement are:
• Defining the full potential of the business through fact based analysis
• Developing what they call a blueprint; effectively a 3 to 5 year plan with a few (not to many) major initiatives
• Accelerating performance, monitored by a few key metrics
• Harnessing the high performing management talent (and sometimes taking it elsewhere when the turnaround has been achieved) and rewarding them well
• Making the assets sweat
• Creating a results oriented mindset

There is an interesting harmony with the messages of The Goal, in that the book recommends simple measures which drive cash flow and shareholder value. They look primarily at EBITDA (effectively operating profit before depreciation) and then monitor three other KPIs that impact cash flow – increases in working capital, investments in capital expenditure and the cost of servicing debt. If all these measures are moving the right way, the business will be cash positive and the shareholders will thrive.

So there is no rocket science about Private Equity. You need the capital backing and the guts to take the risk; then it is all about good business principles.

This is a highly impressive book and I will be reviewing others in the series in future updates to see if this is typical. As you would expect from Harvard it is conceptually strong and rigorous; what I did not expect was such a practical and concise approach. I particularly liked the chapter summaries and the many examples and case studies to illustrate the learning points, all within 126 pocket sized pages.