Are You Ready for the Private Equity Pace?
When you enter the world of private equity after selling your company, the first thing you’ll notice is that it moves at a very fast pace. It’s this way because time is ticking with IRR (Internal Rate of Return). IRR has an element of time dependency and is the single most important measurement for limited partners that supply capital to private equity firms and their funds. In a private equity-backed company, the environment can be twenty four hours a day. You have associates working 60 to 80 hours a week and sending emails at 2 am. There’s a high level of dedication.
You, as a player in this new private equity environment, have to get used to a faster pace. You have to learn how to deal with frustration and stress. As long as you did the work on the front end and picked the right firm to partner with, it will feel good to move at a fast pace and have people push you. Why? Because it’ll make you better.
In this way, both you and the company will achieve a better outcome. As an investor in the company, you benefit fiscally in two ways: first, by being fully engaged and, second, by allowing the faster pace to push you.
Here’s what you need to know about private equity to keep up.
Take Stock of Your Team
Upgrades to the company and its key personnel may be required in order for you to propel the company to the next level. Now that the game is quicker, now that the company is going to get bigger, do you have the right players on the field?
If someone is struggling today, imagine their struggle when the company is twice the size and 3x the speed. You have to quickly evaluate. Ask yourself, “Is the team I have on the field today able to perform? Can they make the leap to double our size and speed?” You may have loyalty to your employees, but you also have a job to finish.
It’s time to do an assessment of the leadership team and determine where you need changes. Ideally, you would have been thinking about this long ago and actually already have a plan in mind to address talent in the organisation. If not, it’s time to catch up!
As the complexity of a company increases, an evolutionary process takes place. Some people can’t make the transition, some can, and some need additional education or training. You can help them by sponsoring their MBAs or to get further certification. It’s incumbent on us to invest in our people and prepare them for the next level.
At the same time, it’s vital for the employer to recognise when a person doesn’t have the capability and needs to be let go. It’s better to transition them out early rather than slow down the process. Evaluate everyone holding a key position and act swiftly.
In my company, we have an inner circle that reviews talent in key positions on a monthly basis. Watching key leaders, interacting with them, mentoring them, and investing in their knowledge is important to sustainable success.
Adapt, Evolve, and Overcome
Win as a team; lose as a team. It’s not about me; it’s about we. If something starts to go south, engage early with the private equity partners and board members. Just as they challenge you, you need to challenge them, especially when something isn’t moving as fast as you’d like, or if adjustments need to be made. It may not have anything to do with your strategic plan; something may have happened in the economy or in politics. Keep in mind that diligence and sale processes might last four to six months.
Economic conditions may change between the time you go out to market and the time you find a new partner. Here is where you engage the team, letting them know, “Hey, things aren’t happening the way I thought they would. Help me with my analysis. Let’s talk about this as a board and agree on direction.”
Make them a part of the decision process on how to react or adjust. They will then have ownership in the direction that’s been decided. If things go well, everyone is happy. If things continue to be a challenge, you have an across-the-board buy in, and you’re less likely to be blamed for the results when the team has made the decision on the play.
I remember back in late August 2008 when I closed the sale of the company I was running, only to wake up a few weeks later and find myself in the biggest recession since the Great Depression that no one saw coming.
Sometimes situations change through no fault of our own. Adapt, evolve, and overcome – that’s how obstacles are conquered! How did that company turn out? Well, in seven years we increased both revenue and EBITDA by 220 per cent each. It took a little longer due to the recession, but while most companies were struggling, we were growing and hiring, just not as fast as we would have liked.
It wasn’t a home run by any stretch, but given the large size of the company and the nationwide financial meltdown occurring around us, our private equity firm was very happy with the outcome when the company was sold.
You’re In the Big Leagues Now
You now have an investment and skin in the game, and you are incentivised to execute. If you do well, you get the opportunity to sell the company again, roll over some of the profits, and get that next bite of the apple. This is where you generate wealth for your family. Oftentimes, you’ll be looking at a seven figure plus payday if you do a good job. Looking at it this way, there is nothing wrong with being pushed. You’re a professional. You’re in your prime. Play with intensity and play well. You are in the big leagues now!
Private equity firms have a relatively short three- to seven-year horizon to impact change in order to achieve a 3x MOIC (Multiple Of Invested Capital) return on the investment. The nature of IRR says, “Quicker is better than longer,” but IRR and MOIC need to be optimised for the best level of success.
Strong action is necessary to create a pivot point and change trajectory. Evaluate the team and make quick changes where needed. Get the right players in the right seats so the bus can leave the station. Be flexible. Adapt to changing situations and be ready to alter plans and directions. Things will happen that are outside your control. Better to ride the wave and navigate tangentially your direction than stand in front of the wave and be crushed by it. Win as a team; lose as a team. It’s all about execution.
For more insights from our expert contributors, sign up to our free weekly newsletter.