View from the board: back to basics

Given the state of the economy and the market right now, it is worth
mentioning again that the demand for finance directors and their teams remains
strong. There are good opportunities for individuals with the combination of
commercial and technical experience that allows you to really add value to any
business.

Let me explain for a second ­ I don’t want to bore you so I’ll be brief.

In the good old days, private equity bought unloved, badly run businesses and
developed them. The view was that better management and more focused attention
would help the business run better and that, in turn, would create value at the
exit.

However, over time, this evolved in certain firms into more of a financial
play. Buy the business, cost cut, use the increased cash flow to pay down the
debt, refinance and exit on a bigger multiple.

I am over-simplifying. Not all private equity firms operate this way ­
especially not any that I have worked with I hasten to add. But, even if it is a
huge generalisation, I think it is a fair analysis.

Now this works well in a growing economy and in a banking environment where
there is cheap debt easily available, which pretty much sums up the last few
years.

But, obviously (and sadly), this is not the case now, and that leaves part of
the private equity industry in an interesting situation.

As one old-school private equity director said to me: ‘It’s great to see the
market coming back to us.’

What he means is that private equity is going to move back into the world of
running businesses better, rather than simply using finance to make money.

This is great news for the management teams, or at least for those that are
right to run the businesses now.

What you have with a private equity role will be operational, commercial and
strategic ­ and you’ll have some very grateful shareholders if you deliver.

For what it’s worth, plc roles are suddenly looking like a safer haven, but
private equity-backed businesses still offer a broad, involved FD role and an
interesting potential upside. To paraphrase Mark Twain, rumours of its death
have been greatly exaggerated.

Mark Freebairn is a partner at
Odgers
Ray & Berndtson