“Debt is a sword. Equity is a pillow” asserts a recent article in CEO Forum. The authors are referring to the fact that for the past decade or so, much of the activity in the private equity world has been fuelled by corporate raiders racking up huge amounts of debt as they took over companies.
But the global financial crisis has brought this reliance on heavy debt loads into question. Some PE executives are proposing that too much debt pressures executives to make short-term decisions at the expense of customers, corporate culture and employees.
The article quotes Warren Buffet, a longtime believer in equity ownership, saying that executives acquiring companies are like “princesses, looking for a frog to kiss and turn into a prince. But “if you kiss a frog, you end up with a bad taste in your mouth.”
The moral of the story is to examine the underlying fundamentals of the company or private equity team you are thinking of joining. What is the reputation of the team you’re joining? How strong are their customer relations? What is the nature of competition in the sector? What is “broken” in their target companies that management can fix? The overall message is, in this changing economic environment, the premium will be on finding private equity managers who can improve the long-term operational efficiency of companies through strong management, rather than through financial engineering.
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