PRIMER AND MASTERCLASS
ANYONE INTERESTED IN PRIVATE EQUITY WILL LEARN A LOT FROM WOLSELEY’S ANDREW PETERING, BUT CONSIDERABLY MORE FROM CHAMP CHAIRMAN BILL FERRIS.
BILL FERRIS, the doyen of Australia’s private equity industry and executive chairman of CHAMP, concludes his recent book Inside Private Equity by saying the local industry will not only survive, but thrive, with its ability to leverage the proximity of Asia a crucial factor. Given he has more than 40 years in the game and a vast store of inside knowledge, there are probably few people who would argue the toss.
Ferris’s book is rich in hardearnedwisdomand will suit both the general reader and business people keen to learn about an industry that had $30million undermanagement in Australia in 1987 and is now well north of $10 billion.
Wolseley Private Equity managing director Andrew Petering has also turned author in an attempt to demystify the sector. His In the Driver’s Seat, distributed by the firm, is more a beginner’s guide to private equity for corporate managers and executives and an effort to sell the merits of the game. It doesn’t try to match Ferris’s book in depth, breadth or tales of glamorous sailing trips, but as a basic introduction to how the game works it is useful and highly readable.
Private equity exists, so there must be demand for it. Yet it has its naysayers. It may fix up businesses, but does it create anything new? The industry claims the companies it backs represent just 0.01 per cent of GDP, but 10 per cent of all research and development. But the obscene profits on some deals raise concerns that either the buyer or the seller, or both, have been ripped off.
Jim Collins’ Built to Last is an old favourite among public company bosses, who see themselves as value creators and builders. The private equity folk do too, but they are essentially traders. In the end, the public and private equity markets happily co-exist, each with its own purpose.
Private equity narrows its focus to widen its profits and lives and dies by the rigour of its managerial discipline. A public company boss has to satisfy multiple stakeholders, many of whom are conflicting, whereasprivate equitymanagers can ignore a lot of them.
Ferris says the starting point is to work out a deal’s core proposition. Why is it better than other opportunities? Who can help you execute? What are the risks and the rewards? Simple really, and he looks at successes and failures.
Petering’s aim is more to explain how things work on the assumption that you want to access private equity, but don’t currently have much of a clue. He uses interviews with the likes of Dun & Bradstreet’s Christine Christian to sell the “empowerment” offered by private equity. His target audience is the company manager or entrepreneur who wants to get to square one. Hence many of his tips may seem blindingly obvious. They include: choose your private equity partner well because it works like a marriage; ditto your internal management; “don’t carry baggage into a Test match”; don’t borrow too much; don’t overpay; be realistic about financial projections; be ferocious about executing the plan; and don’t procrastinate on the exit.
The detail is informative, explaining nitty-gritty stuff such as fee structures, financial engineering, remuneration and timing your exit. The keys to success are a viable business plan, positive cashflow, a clean investment vehicle, a backable management teamand a clear exit strategy. The latter depends on the strategic value of your company, state of the public stockmarket, number of trade buyers and growth prospects.
These books are aimed at different readers. Petering delivers a useful basic guide. While Ferris also has good advice on tapping into private equity, he offers muchmore: historical context loaded with insight on howdeals are done and his perceptions of the characters behind them. He doesn’t try to sell the merits of the industry, as he assumes the reader needs no convincing.
CHAMP’s Bill Ferris has spent
more than four decades in the private equity game.