Uninvested private equity liquid assets, so-called dry powder, have reached new heights. According to a Q2 2017 study from Prequin, there was more than $900 billion in dry powder as of May. Dry powder grew more than $80 billion in the past six months. By 2018, we may see $1 trillion of dry powder for the first time ever.
But whether a giant pile of dry powder is a good thing or a bad thing depends on context. It can signal incredibly lucrative turnarounds on once underperforming holdings or indecisive PE managers who don't know where and how to distribute funds. Investors don't want that money idling, if only to avoid paying fees on it, but managers don't want to risk it all on what won't deliver returns. After all, according to a joint study conducted this year by researchers at the London Business School and the University of Columbia, firing underperforming PE managers has a net positive effect on the firm performance. Now more than ever is it important for managers to prove their worth.
And thus we come to a stalemate.
To overcome such an impasse, PE managers must reshape their thinking, embracing a new paradigm in the form of old wisdom. You'd be surprised how helpful simple adages are in a complex industry like PE. Can't we solve this whole dry powder conundrum with that old saying about spending money as it relates to making money? In essence, sure. But how exactly? For that, let's turn to a few other private equity proverbs every manager should consult to better direct the spend on their holdings or invest anew.
1. You're never too good for an easy win
Turning an asset from piddling to profitable takes more than a few game-changing wagers. After all, the bigger the change, the more risks PE managers invite. Small changes, however, diversify risks and, in some cases, have a 100 percent chance of returning on investment and then some.
Here's the catch: You must put in the nitty-gritty work.
Consider, for example, building out your organization's corporate travel policy: more than $300 billion is spent on corporate travel annually, according to the U.S. Travel Association. For businesses with employees who jet around regularly, a more robust policy that caps air travel expenses or limits travel to a few key stakeholders can really make a difference, all for the cost of your time and attention. Apply the same surgical precision to cuts to extraneous services that won't be missed but will stack up savings immediately, even if it's pennies at a time.
2. Don't take an ax to your support beams
Sometimes, something frivolous only appears as such. Employee incentive programs may look like a nice gesture (and they are), but they don't merely deal in morale. Successful ones keep the momentum of productivity moving ever forward and create intangible bonds that are difficult to stick a price tag to - until they're gone.
Outsiders though they may be, PE managers must exercise caution when cutting programs and processes for the sake of financial buoyancy. Chances are good that anything internal worth big bucks is that way for a reason.
With incentive programs, however, a realignment toward new objectives may be in order. Are these programs incentivizing employees and managers to act in ways that accord with the direction your firm wants their businesses to go? If not, these workers are devoting themselves to the wrong cause.
3. You'll grow into it
People with older siblings and penny-stretching parents know this advice all too well.
Why so many businesses underperform can often be traced back to a single root cause: a reluctance to change when the market calls for it. Modern enterprise must account for the possibility for expansion, not to mention expanding efficiently, as well as the inevitable destruction of its many parts in order to build something better in its wake. It's a very postmodern idea that all processes must include something resembling built-in self-destruct sequences that don't take the rest of the business with them. But these days, such considerations are essential for real continuous improvement.
Every addition to business holdings must therefore include strategies for how best to scale and how best to uproot it if innovation comes knocking. Sometimes, all it takes is a migration to a more flexible enterprise software platform. Other times, it will require deep organizational change. In either event, know that whatever resources you put into these considerations will pay dividends later. Planning for growth doesn't make you smug, nor does planning for disruption make you paranoid. Doing both does, however, make you a PE manager with a grip on reality.
4. Don't act like a stereotype
PE firms have a nasty - but not wholly undeserved - reputation for laying off workers left and right in the name of maximizing profits. But how else will firms make good on the debt they've accrued through the leveraged capital they poured into a revitalization effort?
They can start by investing part of the savings they claim from redundant or underperforming staff back into those that survived the cut, whether that be through on-site training, off-site certifications, or hiring top-tier talent to complement the organization's best legacy workers.
Although some might argue it isn't really the place of a private equity firm to dig so deeply into organizational change and recruitment efforts, a scorched earth policy for employees is not a strategy for enduring prosperity. If layoffs are in the cards, they ought to be stage one of a multistage process. Without that broader plan, brace yourself for anticipated short-term gains followed by steep declines in productivity once workers turn against you.
USC Consulting Group has a proven track record for helping private equity firms turn their holdings around. Click here to read about how one firm worked with our operations management teams to uncover its holding's true production capacity.