You Should Have Been There to Learn About Explosive Growth to Implosion for Private Equity
by “Should Have Been There” guest blogger, Larry Blumsack, President, Zoka Institute
It was quite an eye opening journey on the history of Private Equity that Vik Raina, Managing Director of Boston Ventures, took attendees at the ACG DealMakers Breakfast on January 15th. He woke up the audience with a straight forward, no holds barred, factual and informative presentation on how the explosive growth industry of PE imploded.
Step and by step, with candor, he built his case for the implosion and on what it would take for PE to survive and rebuild.
He clearly pointed out that long term thinking in a short-term focused world went to shorter holding periods and shorter fund investment periods. Instead of aligning economic interest – reduction of the “agency” effects PE went to astronomical growth in management fees (playing with the house money). Instead of exploiting inefficiencies created by the market, PE became the market. And finally, focus shifted from creating fundamental value primarily through operational improvements to not enough time to create fundamental value – financially engineer and then pass it along.
In essence, Raina’s point was that PE lost its way when it moved from the fringes of the financial market and became the market. It lost its way when it capitalized on the explosive growth of debt capital and equity available to the industry. It lost its way because PE was no longer private.
Where do we go from here? According to Raina it is going to be a long haul. There will be a major shakeout to a smaller industry more global in scope. The industry must focus on long term value creation and operational improvements, while dealing with sub-par returns and portfolio companies failing. The PE survivor rate will also depend on long term adjusted returns from when they invested and their ability to add fundamental value to their portfolio.
How long will the return take? Raina believes that it is at best an educated guess because there is no real historic guide. On the positive side lots of people in Asia/Pacific countries are coming into the system. When housing bottoms it will drive a new recovery cycle. The countries that own our debt are locked in with us.
Raina stressed that the key for success for PE is that firms go back to operating by providing value to their portfolio companies which in turn provides value to investors.
