Read of the Week: Lessons from Private Equity Any Company Can Use (Memo to the CEO)

Why I picked it up:

Book coverMy curiosity about private equity was piqued ever since I started getting an increasing number of enquiries from executive clients looking to enter that highly competitive, lucrative world of investment, deal-making and business transformation.

Back then, all I had was a fuzzy idea about what private equity was—some kind of ultra-sophisticated suited titan that goes around eating up companies and spitting them out, making truckloads of money in the process. Some kind of financial wizardry goes on somewhere in there, but like I said, it was all fuzzy. At the same time…I knew there had to be more to it than just that, because any form of value creation has to have real world applications beyond mere paper gains, right?

Written by Bain & Company chairman Orit Gadiesh and Global Private Equity Practice Head Hugh MacArthur, Lessons from Private Equity Any Company Can Use (Memo to the CEO) held the promise of demystifying what private equity is all about, how it works and how the money is made.

What it’s about:

While firms used to be able to generate superior returns through a combination of aggressive use of debt and passive stewardship, the PE game has changed. As the industry matured and deals on the cheap become harder to come by, PE firms have to actually apply management expertise to create value in their portfolio companies in order to realise returns.

Ok, not exactly rocket science (as its authors qualify, “…in reality these lessons have been around for a long time. They just haven’t been codified as formally by most businesses.”) But when it comes to the PE business model, it can get tricky.

With PE’s fixed time horizon of typically under 10 years, it’s not so much a question of what to do but what to focus on doing in order to drive the maximum level of growth. The key premise—no company can be successful when it spreads its resources too thinly.

With this premise in mind, the book lays out six management principles to generate the kind of outperformance that, in turn, enables them to command them the kind of money they make.

Pragmatism is one of the book’s strong points. The content is not just comprised of high-level concept and strategy but application i.e. actual lines of thinking along these principles that translate into real-life success cases.

The writing is succinct and easy to understand—a huge plus when it comes to any kind of business literature (many people cannot help writing corporate gobbledygook for various reasons, but nobody likes reading it).

Why you’d want to read it:

At the heart of this book is the question of how to make businesses more valuable, regardless of who owns them. And with productivity growth nearing historic lows (McKinsey & Company) presently, there is a dire need to create value.

Err, but isn’t Bain & Company (where the authors work) set up by the very same people at Bain Capital—one of the PE firms that bought out Toys R Us? Critics will point to failures such as the iconic toy store’s eventual demise as among the reasons the PE playbook should be the last place to turn to on the topic of value creation (Toys R Us went bust seven years after it was bought out, putting 30,000 people out of work.) It’s all smoke and mirrors and “financial engineering” i.e. the aggressive use of leverage, they say.

As with almost everything in the world, the truth lies somewhere in the middle. Proponents, on the other hand, say that private equity wouldn’t be in business if it did not succeed often enough to make up for the failures, which is what happens sometimes with investing, otherwise spelt r-i-s-k.

But I digress.

If you’re exploring opportunities in PE firms or portfolio companies, the book will help you better understand how PE guys think, what makes them tick, and in turn better position yourself for opportunities. Chances are that you’re already applying some of these principles in your current work, and this book gives you the right language to bring it to the fore.

This is NOT an exercise in mere keyword stuffing. It’s about speaking the right language to build the right connections by weaving it into all your career communications, from your resume to your executive bio, LinkedIn profile, and later on in your conversations.

Read this if:

You’re looking to cross over into the PE sector and need to know how best to map your experience and skillset with what PE is looking for, or drive value creation and performance turnaround right where they are at.