5 Lessons From Failure: A Private Equity Chief Exec Shares Hard-Won Learnings

I learned from failure.

If you don’t know what the Private Equity market is, I’ll explain. 

First, the industry is huge, estimated at USD 5.3 trillion.

Second, the model is: 

The firm builds a network of high-net-worth individuals to invest in its portfolio funds. Then, the investors invest in the fund, which will eventually be full of companies. The private equity team acquires attractive companies that it believes can be improved and sells them at 3–5X their purchase valuation.

Most of the time the private equity firm does very well. Sometimes it goes south almost from the beginning. 

That’s where I came in.

Don’t over-leverage

We had nearly $1 billion of debt.

I had joined a corporation as the President of the medical division. One year into my tenure, the board of directors decided to sell our division.

Once we went through the sale process, I was” leading” a private equity-owned company. My success in corporate America stems from my beliefs and values. I believe in a company’s purpose and in treating customers and employees with respect.

I was not a good fit for this new ownership, and I knew it.

Fierce commitment X 2 = 1

I grew to respect the PE firm’s commitment to their sole purpose which was delivering 3X their investor’s money in 3–5 years. So, a banking firm invests $100mm in this entity and they get back $300mm in say 4 years. It’s impressive.

We were required to invest our own money in the company and were offered a loan of the same amount as our investment. This is called aligned incentives. Either we all win, or we all lose. 

Unless you get fired before the company sells.

Then only you lose.

Distribution: an easy industry

We began to carve out our business from our corporation. The corporation had done a fine job servicing our business with shared services. But, when we went to move away from those services, it was quite difficult to set these functions up due to having little expertise.

 Ten years' experience vs day 1 is a cruel match.

Those functions were CORE competencies of our mother company.

Not us.

A decision was made to outsource our logistics (again, which is a core competency of the mother corporation) to a third-party logistics company. 

This goes against everything I learned over my 40 years in distribution. 

There exists a myth that “Distribution is an easy industry.”

You buy low, sell high, collect fast, and pay slow.

It is simply not true.

Our model appeared easy yet was more complex than any of us anticipated.

When a business model is unique or better said differentiated, it becomes difficult to replicate. 

Redundancy would have changed everything.

Your Board of Directors is made up of private equity VPs and above and outside “friends of the firm” investors, who don’t want to add cost to the company. 

I believe this one decision would have saved the company $100s of millions of sales that went away to our competitors.

Redundancy

1. We were operating effectively on the server that our mother corporation sent us to host in our office. This was a custom, and old system that was operating in today’s environment effectively. Should the new IT system not go live at “go-live”, then our backup plan would be to switch back over to our old reliable system. But we said, “damn the torpedoes, full speed ahead” cutting ties with the old system.

2. When we went live in the two distribution centers, we could have maintained a distribution center in the center of the U.S. with reach and transition into the new facilities in phases and avoided disrupting our customers supply chain.

3. Both of these decisions would have cost money and probably slowed the transition down. Yet, I believe delivering a better outcome.

Financial engineering; the only thing

Three to five years is the maximum amount of time that the PE firm wants to be involved with a business. I have a serious respect for the amount of money they paid for our business unit.

This is driven by the financial Return On Investment expectations to deliver 3 times their investors’ money within this 3–5 year period. The longer the “hold” period, the harder it gets to return 3X. The pressure then begins to mount even further on the company’s management team.

Action, speed, execution, exit. There are no please and thank you, customers or employees.

They are simply numbers and easily replaceable.

Time is the worst enemy and time never pauses to course correct.

What should you take away from this story?

1. In overleveraging your company, you become a fatality.

2. Recognize whether you are a good fit for the new culture or not. Then follow whichever you believe. Don’t back up, don’t back down.

3. Deciding to ignore the core competencies of a business will cause huge disruption. 

4. There are no easy businesses. The people and processes make it look easy.

5. Redundancy is a solid strategy, especially when facing a major transition like we did. It’s called risk management.