Keeping staff motivated during boom times is easy. They’re making money for themselves, and by extension, the firm, and they’re busy – busy doing deals, busy making exits.
But what happens when the market goes into hibernation, when there aren’t any investments to be made and there aren’t any sales on the horizon?
The number one answer a senior partner will give when asked this question – after denying that activity has slowed – is that they are spending more time with their portfolio, which has already taken on the echo of cliché.
Working with existing portfolio companies raises two problems – one, this isn’t what the associates and partners were hired to do, nor what many of them particularly want to do. They are deal doers – they want to look at the state of the market, create business models, identify opportunities, and execute their plans and then hope they money rolls in when it’s time to exit.
Most lack operational experience – most have never worked for a company below boardroom level, they haven’t got their hands dirty doing the nuts and bolts work. Which feeds into the second problem – the management teams of the portfolio companies.
Management teams aren’t going to take too kindly to an associate or partner in their early 30s, whose entire working life has been spent in financial services, suddenly becoming much more involved in the workings of a company that operates in, for example, the manufacturing sector.
It is worth distinguishing between the mega-LBO firms and the mid-market houses. At the top end, there are literally no deals being done, whereas there is still some activity at the lower end. However, this difference, whilst an important one, is not crucial, for the mid-market is still suffering.
The Centre for Management Buyout Research (CMBOR) revealed over the summer that the total value of deals worth between £100m and £500m had fallen to £3bn in the first half of the year, down from £7bn for the same period last year. The value of deals in the £10m to £500m range, slumped to a five-year low of £4.8bn, well below the £10bn seen in the first half of 2007.
The slowdown affecting staff morale at the top end is hitting the middle, but at least the mid-market firms don’t have to contend with the huge staff numbers some of the mega buyout houses possess.
This presents a huge cost base, and one which currently is unable to pull its weight. In order to keep busy, many firms are still looking at potential deals.
But the problem with speculative deals is they cost money and potentially waste time. As a source said: “What is the point of working on deals if there’s zero chance they are going to be able to raise the debt?”
And if they aren’t doing deals, then people aren’t getting paid. Some firms pay transaction bonuses. These will have to be reassessed in order to manage salary expectations.
Career expectations are also something which are going to have to be very carefully handled. How someone’s career at a private equity firm progresses is dependent on the deals they have worked on. Senior associates will generally expect to get a promotion within two years. However, with it looking unlikely that there will be a large buyout before the second half of 2009 at the earliest, this is effectively taking a year out. The firm’s top brass is going to have to explain to everyone else that the promotion due in two to three years may now take four, five or even six years.
Fortunately for private equity firms, there isn’t really anywhere else employees can go. With the financial services sector haemorrhaging jobs, now is not the best time to be looking for pastures new.