Private Equity Fund Management
Private Equity Fund Management
Selecting the Right Private Equity Fund Management
Selecting a private equity fund to partner with or invest in can be difficult. With so many choices and limited information on many buyout firms, you should be careful in deciding what firm is best suited to their risk appetite and specific needs. This is the third part in a series of four articles on how to choose a private equity fund. To read the first article, see Sector Specialization and for the second, see Historical Performance. The following explains the importance of selecting the right private equity fund management team.
Private Equity Fund Management
Management is one of the most important aspects of a private equity firm, having the wrong management team in any part of the business could hurt the firm’s performance significantly. I think it’s best to break down management into three tiers: selecting transactions and investments for the firm; day-to-day operational duties in raising capital, structuring and finally executing the deals; and the management in place at the fund’s portfolio companies. It’s useful to consider the management through each of these aspects in order to get a sense of the private equity firm’s general management. For example, management issues at a fund’s portfolio company, such as an unusually high turnover rate, signals problems in the private equity firm’s management as well.
Private equity firms that have a impressive and consistent performance record usually have a consistency in their management approach. These firms have the structure in place to fluidly find and execute deals before the opportunity is lost. Poor management can cause private equity firms to act too slowly and fail to make decisions. A strong management team will have ultimate decision-making authority on what deals to open and which ones should close. A firm with a solid management team has consistent, disciplined growth–not volatile returns that subject LPs to a quarter of big losses for one with high returns.
Once the firm’s management has sourced, structured and executed a deal another management team has the responsibility for transforming the acquired company. If the company is purchased for reasons other than inadequate management, then the portfolio company’s existing managers might remain on staff. Other times, the business is underperforming primarily because the existing management is either inefficient or lack the knowledge and resources to expand the company. In this case, the private equity firm may recommend an addition or actively replace the management with executives that will be able to lead the company more effectively.
A portfolio company’s executives are often representative of how the private equity firm manages. For instance, if the company’s executives are frequently replaced it shows that the buyout firm either cannot choose a qualified executive or it lacks the ability to lead the executives. There are plenty of opportunities to lead the portfolio company’s management and the most secure companies often have a wealth of resources available to them. Private equity firms can give their portfolio company every opportunity to succeed by offering: experienced board members, advice from experts in the industry, and capital support to ideas that could grow the company.
A final level of analysis should examine what executives the firm typically places on a board or turns to for advice and analysis. If these executive consultants have a inconsistent track record of poor performing companies and irrational decisions then they are not the type of people you would like advising your investments. I hope this gave a helpful outline on analyzing a private equity fund’s management. Tomorrow’s final installment in this series will cover a private equity firm’s reputation in the industry and with past partners.
Please read Part One of Selecting a Private Equity Fund: Private Equity Investment Funds
Also see Part Two: Private Equity Fund Performance
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