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Within any business cycle there are winners and losers and at the moment it is certainly interesting to look at life from the point of view of the private equity houses. Seen by some as robber barons, by others as saviours of failing businesses who have helped to keep the economy going through tough times, the private equity firms are repositioning themselves to take advantage of the recovery.
Witness Apollo Global Management LLC which has announced that its latest private equity fund has raised $17.5billion from investors. Hailed as the largest sum any private equity fund has raised since the financial crisis began, the fund adds to some $400 billion in cash held across the globe by private equity firms all looking for suitable companies to buy.
This, according to a report in the latest edition of The Economist, raises an interesting dilemma. At this point in the business cycle, in general those businesses which met the private equity model have already been taken over and others which may be suitable in the future have not yet reached a sufficient point of maturity. With pressure on to make the most of cash funds, this lack of new businesses has lead to a boom in “secondaries”; the sale of companies from one private equity firm to another. So much so that it is estimated that nearly half the Private Equity deals in Europe in 2013 were in the form of secondaries.
According to The Economist’s report, secondary sales are far easier and quicker with many of the due diligence papers being dusted off from the previous sale and banks more willing to lend on an existing success story. But whilst it may be possible to rehash diligence areas such as plant or stock models, there are some areas in which a fresh due diligence operation is very much required; in particular, the need to revisit the company culture and employee engagement models.
Company culture is built up over time from all of the interactions of personnel and processes which have impacted on the organisation. Company culture drives the way in which the aims and values of the organisation are translated into everyday life and it drives the way in which employees are engaged or otherwise. Businesses which have been bought out, put under new management, slimmed down or had process and product changes imposed on them are likely to emerge with very different cultural and engagement levels than at the start of the process.
For the private equity houses this means that a full cultural and engagement due diligence procedure should be carried out in every instance. Not only will this help to give an indication of the current state of the organisation and its people it will also help to establish the capabilities of the leadership team and act as a guide towards choosing the most suitable leader to be appointed to move the business forward.
For example, if morale is low with high levels of staff turnover and wastage then a CEO needs to be appointed who will actively work on engagement levels. Conversely if engagement levels are high but the organisation is bogged down in processes and bureaucracy then an innovator may be better suited to transform the organisation.
But company culture and engagement are not just for buy-outs. They are a lifelong force which will ultimately drive success or failure. Transforming an organisation, finding ways to maximise potential and create success stories requires constant checking and monitoring of culture and engagement levels. Going back for a moment to Apollo Global Management LLC, their previous flagship fund (VII) reportedly generated from inception to the end of September gross and net annual internal return rates of 38 percent and 29 percent. With so much cash across the globe tied up in private equity and so much at stake, whether you are looking at a new acquisition or a “secondary” one, taking time out to truly assess the mood of the company is time well spent.