Lessons from Those ‘Outsider Money Guys’

Is measurable management really a foreign concept?

This artcile first appeared in the March/April issue of ID. View it here.

Is measurable management really a foreign concept?

At a recent NAW meeting, I got the chance to catch up with a number of old buds and to get a sense of the ‘buzz in the biz’. I was a little surprised at the interest ‘consolidation’ and ‘private equity’ had reacquired.

Not surprising really, with high profile players like Rexel and SunSource showing a continuing appetite for growth through acquisition, coupled with some big supplier names heading in the same direction.

But one thing that gave me cause for pause was a common refrain from those either involved in (or considering involvement in) private equity partnership. “Those guys are really numbers guys… We’re not sure they really understand our business”.

Really? What kind of business have we been in from the start? Ours was a ‘private equity’ deal Day One… it’s just that it was our private equity. As to being numbers driven, no one who hasn’t been concentrating on measurable results is even in the conversation today.

There is no magic to the concept of private equity (PE). They are simply investment pools searching for operations that are likely to provide a better long term return than alternative investments (stock market, real estate, etc.).

But as such, PE typically involves a very disciplined view of their opportunities. Since they haven’t heard all the stories (excuses) before, they continue to ask questions — questions that most often appear first in financial reports; questions that can’t be answered with a simple “because that’s the way it is done in distribution.”

Having been personally involved in several of these deals, I have been able to identify a few common PE insights that will be helpful, whether the equity is yours or someone else’s:

Discipline Improves Cash Flow: Private equity firms typically finance acquisitions with as much debt (leverage) as practical. This instills a sense of urgency to liberate and generate cash as expeditiously as possible.

PE firms tightly manage receivables and payables, reduce inventories and question every expense. They cancel lower-value discretionary (pet) projects or expenses, investing only in those initiatives and resources (including talent) that contribute significant value.

Apply a Long-term Lens: PE firms can act with speed, but usually employ rigorous analysis (discipline). After realizing the short-term cost benefit of eliminating low-value activities, they can afford to invest in long-term value creation potential. This is the only way they earn targeted returns — by proving that they have positioned the company for future growth and profitability.

Right Team Is Essential: PE firms intuitively and universally believe that strong, effective leadership (not just management) is critical to the success of their investment. They sometimes select a company based on the strength of its team talent. Talent evaluations are swiftly completed. This is scary to many who may have been carrying dead weight based on personal relationships.

Relentless Value Focus: Private equity firms are genetically driven towards value creation, well beyond accounting tricks and unfocused cost cutting. Successful deals feature substantial operational improvements from the application of broad functional expertise. These firms are in the trenches at their portfolio companies investing in core operations as often as they are cutting extraneous costs.

In short, there is no intrinsic value in cost reduction, only in increased competitive advantage. As we move from being simply product/service sources to real problem solvers, the extra cash generated by the ‘private equity discipline’ can provide the increase in value that should be our goal in the first place.

Bill Wade leads Corporate Management & Innovation for Wade & Partners. For further insight on private equity and industry consolidation, see: ‘Some Thoughts on the Next Wave in Distributor Consolidation’ in the articles section at www.wade-partners.com.