PE Firms Confront the Unthinkable

High interest rates have made it harder for PE firms to roll up and flip the businesses they buy. That means they may have to—stay with me here—manage those businesses.

Good Morning!

Here are today’s highlights:            

• Lou Mosca offers advice on how to take advice.

• Can one real estate agent represent both the buyer and the seller?

• A lot of hiring managers think Gen Z is just unemployable.

PRIVATE EQUITY

Oh, no! What if PE firms actually have to run the businesses they buy? “Dealmakers have always been the stars of private equity. They find and evaluate deals, use debt to stretch the value of the equity invested, and help offload companies at the right time — all to maximize profits. They're even part of the industry's former name: buyout funds. Private equity is the buying and selling of companies for a profit, using debt. There's a reason most of the industry's founding fathers were investment bankers first. But what do you do when this formula no longer works? If both the debt and the company you're buying are too expensive to flip for a gain, how do you put your client's money to work?”

• “Enter the portfolio-operations executive. Every private-equity firm has a team of people responsible for working with the management of their portfolio companies to run their day-to-day operations. Unlike their jet-setting counterparts in dealmaking, they tend to remain behind the scenes, doing the dirty work of making sure these companies are running smoothly, from the tech to the payroll.”

• “In this climate, portfolio-operations professionals are gaining esteem. Firms are bringing them into the deal room to assess the technological-transformation potential of acquisition targets before signing deals — even though it can create conflict when operations teams poke holes in a deal team's plan. It's part of a shift that Desai describes as private equity 3.0 that has firms relying more on companies' management — and even total transformation of the companies — to generate returns for investors.”

• “Desai used the example of a car-wash chain that previously would have used its earnings to purchase more locations. With extra cash flow eaten up by high debt costs, ownership has to bring in labor-saving back-office technologies, such as generative AI or chatbots. Those savings would then be used to roll out new money-making opportunities, like developing an app to drive more loyal business or selling adjacent services at the car-wash locations.”

• “It's one reason private-equity firms have increasingly focused on blue-collar businesses like pest control or cleaning. ‘A lot of clients will tell me, We have to now start thinking about taking old-economy businesses and bringing them forward to the new economy,’ Desai said.” READ MORE