Some of you may not know this (it should be taught in elementary school): the rotation and orbit of planet Earth is powered by the continuous pronouncement (by private equiteers) that private equity only invests in the top management teams. That means, if private equiteers stop drilling this droll into unsuspecting civilians, the world will likely cease to exist. So, in the interests of self-preservation, let’s all keep this little secret to ourselves:
Private equiteers (especially in the middle market) look for opportunities with a high chance of closure, try to secure great terms on those opportunities and hope they get top managers they can work with. If the mangers don’t work out (too rebellious or clueless), they transition new managers into the investee business. As with any employment process, the best applicant, which agrees to the proposed terms, is hired.
Would a private equiteer prefer to hire the top manager in the industry? Absolutely. Do private equiteers only do deals in which they believe they have the absolute top manager in the industry? Ha!
As I’ve mentioned before, private equiteers don’t enjoy the same luxuries as venture capitalists; we can’t be so selective because we’re dealing with very successful businesses/people whom have myriad options. We do deals that we can do; we don’t go chasing managers hoping to get lucky. Similarly, we don’t limit our options to a single company in any industry (the one with the best manager, whomever that may be); we keep our options open.
So, why do private equiteers insist on spreading this top management team voodoo? Well, it sounds great and is difficult to measure, ergo, who’s to say you’re not investing in the best management team? Also, they have to say that because they don’t have the time, capacity or (often) capability to run these businesses themselves. And, it’s scary to think of a highly geared business with mediocre managers and a trigger-happy private equity investor.
What’s more, it doesn’t sound as holistic to sell your firm on its ability to invest on a low multiple, gear a business to the nines, and then sell it at a much higher multiple. The idea of long-term value creation, great managers, entrepreneurial flair and of course total humility is much more… post-financial-crisis-friendly. But, with all of that hate projected on deal-focused private equity firms, I must say there are truly great managers out there with real business experience and the nous/drive/passion to make a long-lasting difference. It’s just a wheat/chaff sorting exercise for Limited Partners.