Major private-equity firms, talk to the executives who run them, and you'll find a distinctive way of managing that's sharply different from what goes on in most publicly traded companies or most private companies under conventional ownership. Investigation shows why privately held firms - at least if they're owned by one of the major buyout shops - have important advantages over competitors, and why they're regrading the playing field in several industries. Many of the lessons apply to virtually any organization.
The differences begin at the most fundamental level, with new objectives. Private-equity firms want to buy companies for their portfolio, fix them, grow them and sell them in three to five years. The eventual buyer could be another company in the portfolio company's industry, another private-equity firm or the public, through an IPO. The holding period is occasionally less than a year or as long as ten years. But always the goal from day one is to sell the company at a profit.
Facing a goal like that changes a manager's mindset - usually in positive ways. No longer seeing a corporate future that stretches indefinitely into the distance, executives realize that they gain nothing by resisting change: With the exit looming, driving change is their only hope.
"Everybody in the company knows you're on a sprint to do well. "It's not this mindset of working for a company that's been there for 100 years and will continue for another 100 years. I find this much more intense than a public company."
Pay is a whole different concept in PE-owned companies. Don't come to play unless you're prepared to put significant skin in the game. While public companies talk a lot about aligning executive pay with performance, they typically award stock options and restricted stock on top of already substantial pay packages, giving executives lots to gain but little to lose.
And in big companies those options reflect the fortunes of the overall corporation, not the specific business a manager is running. By contrast, private-equity firms make the game much more serious. Not only is a far larger share of executive pay tied to the performance of an executive's business, but top managers may also be required to put a major chunk of their own money into the deal.
