The Players in Private Equity

by Derek Loosvelt | March 10, 2009

So who's doing all of this? Who makes the private equity industry run? Like the rest of the financial sector--and really, much of the American economy these days--private equity is fueled by human capital. And when an industry has as many moving parts as private equity does, it takes a breadth and depth of experience unmatched by nearly any other business today.

From finding investors and researching companies, to making the deal and executing exit strategies, a private equity firm relies on a diverse group of players. The following is a look at the various roles in a typical private equity firm.

The fundraisers and investor relations

A private equity firm won't get anywhere without money. To that end, private equity firms employ fund raisers to help attract the capital needed. These roles are quite similar to investor relations positions at public companies, institutional banks and mutual funds. Their job is to sell the ideas behind the firm's latest private equity fund, convincing major institutions--hedge funds, banks, pension funds and the like--to give the firm hundreds of millions of dollars to manage.

These people also serve as investors' point of contact. They help manage investors' accounts, let them know when they can expect returns and assuage any fears they may have. For major accounts, they also bring in some of the firm's top leadership as needed to help close major investments.

Naturally, those in these roles are exceptional salespeople with experience in dealing with major financial institutions.

The researchers

The key to unlocking value is knowing where to look, and that falls to the researchers at the private equity firm. These are the people who comb through volumes of analyst reports, news releases and articles, looking for opportunity. They investigate potential targets thoroughly for signs of possible value. They're tenacious and determined, with the ability not only to crunch numbers but also to get a "feel" for a company in admittedly subjective ways.

First, researchers identify targets. Again, some companies make it easy by putting themselves on the block or having a proxy, like an investment bank, contact the private equity firm. Other times, an article or research report on a company highlights a potential problem that the firm's experts are known for fixing, or an analyst may simply note that a company's share price has been flat for a long time. That can trigger an intensive and somewhat covert investigation into the company's fortunes. The firm's researchers gather and collate all existing Wall Street research and media reports on the company. They'll contact the company's suppliers and clients. They may even reach out to a handful of key people within the company on an informal basis.

Then, the researchers coordinate with the deal makers to agree on whether the company is a potential target. Once the company is approached and enters into negotiations, there's a whole new set of data that needs to be explored. The would-be target opens its books and operations to the firm's researchers. At that point, the firm's overall investment thesis is tested and, hopefully, proven. Some avenues of potential value are discovered, and others are abandoned.

Finally, the researchers come up with a final investment thesis for the company that serves as not only the basis for negotiations, but the agenda for the company's entire ownership. This thesis outlines areas of savings, cost-cutting plans, new ventures, the state of the company's balance sheet and how much debt it can take on--everything. The researchers come up with the plan that will ultimately be executed.

Needless to say, it takes someone with an incredible depth of knowledge to engage in this kind of work. Most have a strong financial bent, and some have spent time in corporate finance, Wall Street buy-side or sell-side research shops, or both. A few actuaries have found themselves crunching numbers for private equity firms as well.

The dealmakers

Once a target has been identified and the investment thesis proven, the deal makers go to work. They're the ones responsible for obtaining the company at the best possible terms. In many cases, they work not only with the target company, but also with sources of financing, including investment banks and hedge funds, to obtain the necessary leverage at low enough rates to make the deal work. They are the old-school Masters of the Universe, making deals worth billions that can affect the lives of thousands. This is heady stuff, to be sure.

In most firms, the chief deal maker and the head of the firm are often one and the same. Deals don't get done, after all, until the top guy signs off on them, and men like KKR's Henry Kravis and Blackstone's Steven Schwarzman are renowned deal makers. That's not to say that they're the ones sitting at the table--though sometimes they are if the deal's big enough. But they're directing the firm's negotiations and making sure that the deal jives with the overall investment thesis.

Some firms employ their own negotiators who answer to the company's top leadership. Other firms don't; like any other would-be buyer, many simply hire an investment bank to do the negotiating. But at most private equity firms, at least one of the firm's top managers, if not the founder, is really calling the shots at the table, while the I-bankers are there in more of a research and advisory role.

The operators

Once a deal is done and the target becomes a portfolio company, the firm's operators go to work. Few are actually full-time employees of the private equity firm, though each portfolio company is supervised by one or more managing directors and their accompanying staffs. The private equity firm's staff acts as both top-level managers and consultants, making sure the portfolio company meets its targets, as outlined by the investment thesis, and offering advice on how to get there.

There's also a whole other level of operators that firms use: Established corporate executives who go from company to company on behalf of the private equity firm. They take on top leadership roles at the newly acquired company and get things done. These "hired guns" are generally successful C-level executives noted for their turnaround expertise and willingness to do whatever it takes to get the company where the private equity firm wants it to be.

To put it in another perspective, the private equity firm's representatives are the portfolio company's board of directors, and the hired guns take over the top-level positions and get the job done.

The in-house operators and hired guns must work together, though there have been times when the CEO installed by the private equity firm sees things differently than the researchers who came up with the investment thesis or the firm's assigned in-house operator. This is particularly true if the hired gun has more experience than the firm's assigned supervisor. This can generally be ironed out, though only after a managing director or a member of the firm's executive committee gets involved.

Hitting a moving target

All of the roles and people within a private equity firm continue to interact throughout the investment's lifespan. The researchers are often revisiting their thesis with input from operators on the ground, and the deal makers are often pulled in to iron out the investment's exit strategy, especially if it involves a direct sale. Investor relations personnel answer questions, provide updates on investments, assuage disgruntled stakeholders and make sure everyone gets their money in the end--and can often assist in IPO road shows, too.

And of course, these are positions in firms that, generally, have fewer than 500 full-time employees around the globe. Each person at your typical private equity firm can fit into one of these roles, but they're handling multiple funds, targets, deals and/or portfolio companies. And the top managers are often shuttling between different roles--approving the investment thesis, sealing the deal, ensuring operations go smoothly and glad-handing the firm's fund investors.

Filed Under: Finance


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