What Is The Future For Private Equity Funding ?
Active Ownership Best Practices and the Future of Private Equity Funding
As the global financial system continues to struggle its way out of disaster we continue to question the future of private equity funding. The culture of doing business almost solely built on leveraged portfolios is no longer a viable or profitable option. While it may seem the industry continues to face a less than confident future as returns continue to be under pressure, the industry and those who are part of it, such as property developer Lincoln Frost, has a history of employing a more hands-on approach than that traditional investors and this may be what helps turn the economic tide for the industry.
A shared virtue within the private equity funding industry has long been that of active ownership. Private equity firms have historically directed performance in ways that increase returns via an active-ownership approach. Returns continue to be under pressure, however, private equity firms can still benefit via continuing to implement active-ownership best practices. Successful private equity firms create value via outperformance.
Corporate Governance : Influence and Leadership
A primary driver of private equity active-ownership is improved corporate governance. Successful private-equity driven deals include representation of private equity firms at the board level. Influence and leadership at this level is crucial in order for the firm to institute improvements. For example, re-configuring and streamlining corporate management as well as instituting higher incentives can be an effective approach to eliminating inefficient procedures and practices thereby increasing productivity and profit.
Of course current management’s plans are reviewed and considered, but private equity firm’s hands-on approach allows the creation of better plans as well as the ability to execute those plans in a more effective manner. This is because of the PE’s more objective analysis. PE active owners conduct extensive research and then develops and then implements continuous improvement of management plans via regular and systematic review and revision.
Delay Can Consume Critical Resources
However, in order to create plans of greater value, PE’s to not delay in infiltrating and directing the acquisition at top executive levels. This is most effectively done via meeting one-on-one with executives on a day-to-day basis in the initial stages. Any changes in management personnel are usually made quite early in the deal process as delays consumption of critical resources. Another important part of the process is creating relationships with executives. These relationships are necessary in order for the PE to provide necessary leadership which often includes challenging current assumptions and indentifying true sources of value creation. Additionally, PE’s lead by creating consensus as well as communicating and monitoring revised management responsibilities.
Successful deals also involve taking into account the cultural and social component of acquired companies. For example, creating a culture of openness and transparency with the workforce engenders their support when introducing new governance standards as well as organizational reform in general. PE’s must declare and appropriate disclosed their intentions in order to get the greatest return on their investment from the acquisition’s workforce.
