Much talk these days centers on how financial engineering can’t give you a competitive advantage. Instead, buyout shops are turning to operations and especially opeartional partners to generate exceptional returns.
But perhaps this is becoming overly trendy. And even worse, perhaps buyout shops don’t really know how to treat their operations guys.
Such was the verdict of
“In the short time I’ve been in this business the folks I’ve run across seem to talk about their stash of operators like it’s a secret. Like somehow they’ve got a unique take that no one else has,” says Riccitiello. “But I keep running across people with banking backgrounds who got 1600 on their SATs and who all have degrees from the same five schools and have had their formal training from Goldman Sachs and Morgan Stanley. But when it’s all there, do they really have a competitive advantage?”
Riccitiello then mockingly read snippets from the Web sites of several major firms that claim they have deep and ample operating experience—but whose advisory board structures don’t really integrate the operators into the firm.
Riccitiello offered a few bits of advice on how to keep operartors happy, loyal and effective.
• Senior operators need to be full partners, equal to the people with the Harvard MBAs. Operators must be made integral, given the same decision making power and be compensated for it. If you want the best, they aren’t going to take a secondary role.
• Pick the right kind of executive. Think about guys that get their hands dirty, someone that is as different from the financial partners as possible. Someone comfortable with dirt under their fingernails.
• Don’t pick people who have 25 years at one company, ill-equipped to look a the high number of deals a buyout shop typically looks at. Likewise avoid someone who has had too many jobs. Instead, get someone with experience in two or three industries and at four or five companies. They have enough breadth to help you source deals as well.
• Operators often have overseen hundreds or thousand of people, making important, quick decisions. Buyout firms are partnerships, and partnerships can be slow in decision-making, with things turning ugly even on such trivial questions as where to hold the annual meeting. Let the operating partners make some decisions. “The alternative, in my view, is to burn in hell,” says Riccitiello.
Riccitiello had a few other biting comments about the market place, especially its newfound wealth. “When I think of private equity I think of Jerry McGuire and ‘Show me the money.’ Four out of the five largest deals in private equity history have been done this year. Frankly, even when we started two years ago I had no idea that private equity firms would be raising the kind of money they do,” he says.
Riccitiello went on, “There was a time when private equity firms were viewed as a business that was a fast and sleek. They would get the deal that nobody saw, they would get the deal first. But the private equity firms I’ve come across are more like sumo wrestlers. The floor trembles when they walk in the room, the target companies don’t feel like they have a competitive advantage, and a lot of the time the total market cap of the target is less than the capital under management at the buyout firm. The tables have been turned.”—M.C.