Books do not need to be long to add huge value, and coming in at only 120 pages, this one packs every page with wisdom and insights.
Written by the Chairman of Bain Capital, the book covers what private equity does and how they engage with their investments. The premise of the book (clue in the title) is that a company should not have to wait until they are under PE to implement the strategies usually deployed by the PE operating partners. He illustrates this through a number of cases studies, including Nestlé.
Strategic Due Diligence
As part of any transaction, due diligence is performed to get an overall view of the company. It is a very disruptive process for sure, but it is inevitable that it uncovers areas that are unknown to even the most connected executive team.
The book argues this is a process that should be done regularly instead of waiting until a formal process, going as far as recommending bringing in an external firm as they have no inherit bias. The outcome from this process is to identify a few core initiatives that will take the company to the next level of growth
The authors point out that companies can quickly take on too many fronts without focusing on their core product – “Focusing on the right critical issues – no more than three to five in most cases – is critical to achieving success“
Private Equity event horizon
PE does not make money until it sells the entity it is holding. Its goal, therefore, is to create wealth in the company, selling it for more than it was purchased for. This usually happens within 3 to 5 years of purchase.
Selling a company is more than getting a higher multiple than it paid. It has to show the potential buyer there is more opportunity post transaction – in other words there is more juice to squeeze in the orange.
The book notes that PE is trying to create as much growth value as possible within the 3 years, so it does not make sense to run after multiple areas. This is the mindset a CEO should be thinking as they lay out their future plans.
That isn’t to say the company should be a one-trick pony, though it should be known for a single, strong, defendable core offering.
- Google – search
- Facebook – social network
- Amazon – online retailer
- MacDonalds – burgers
As a company evolves and grows, it is very easy to drift away from its core offering. The authors argue they should always have a laser focus on the core offering, and this is the area that PE will focus on.
Right People
The book details that PE does not want to run the company. It has neither the experience or the time to do so. There are only 2 things a PE firm can effectively do:
- Put in more capital
- Replace key personnel
Leaving aside injecting more capital, the human element is worth exploring. The authors make a good case for outlining that they don’t want to take a bet on an unknown quantity. They want people that have “been there, done it“. But it is not as easy as that.
“In one candid conversation, a CEO told us that he not only didn’t have the managers that he needed to undertake the actions that his blueprint had mapped out; he also didn’t have the talent in HR to hire the missing managers!“
This is a real problem and one often overlooked. The authors delve into this making an argument that the right people, doing what they do best is crucial. The last thing they want is to see is a CEO micromanaging their executive team. They also don’t have the time to “develop” a resource. They are on a tight timeline.
Conclusion
The book is a collection of common sense directives, as it highlights the areas that PE looks for, and by letting the CEO in on the “secret plan”, they can get a head of it and start focusing the company in on the core foundational pieces. Don’t be put off by the fact it was published in 2008 – it is still very relevant.
Recommended.
Alan Williamson 