Company men – The value giants know understanding business can make for better investors
Anxiety, introspection and self-doubt are not emotional states you would normally associate with private equity – quite the opposite, in fact – but the sector really does appear to be going through a period of soul-searching. Interestingly, one remedy now being prescribed for its ills echoes the thinking of two of The Value Perspective’s heroes – at either side of a gap of more than 60 years.
“‘Paranoia’ is the word at the top of the whiteboards in our offices,” was how Thomas von Koch, a partner at the Swedish private equity firm EQT, put it – quoted in this Financial Times article – as he characterised his industry’s current woes at a forum recently convened in London for what are known in the buyout world as ‘operating partners’.
These are the specialists in a private equity business who work most closely with the companies in its portfolio and, according to data provider Prequin, their numbers have swelled from 535 globally in 2013 to 919 today. That raises the possibility, as the FT puts it, that “there is even more upheaval” heading the way of private equity.
After all, this is an industry whose traditional model already looks to be under threat as the leveraged buyout-friendly environment of recent years – low debt rates and cheap equity prices – draws to a close. Now, with the number of specialist players all but doubling in the space of two years, how is your modern-day private equity professional going to stand out from the burgeoning crowd?
EQT’s answer, von Koch told the forum, has been to start hiring entrepreneurs – the theory presumably going it is no longer enough to have an intuitive grasp of financial engineering and so it might be handy to employ people with an understanding of running a business that goes beyond firing staff and cutting costs in order to recoup what you have spent buying it in the first place.
As it happens, the idea investors might benefit from knowing about the operational aspects of business – strategy, management, growth and so forth – also cropped up at the 2015 annual meeting of the shareholders of Warren Buffet’s investment vehicle Berkshire Hathaway, which took place at the start of the month.
A question from the floor invited the 84-year-old Buffett to dwell on the sort of attributes he would look for in an eventual successor and – yes, you guessed it – he replied that he saw experience in operations as very important. “I would not want to put someone in charge of Berkshire with only investing experience and no operational experience,” he added.
In the past, Buffett has been quoted as saying “I am a better investor because I am a businessman and I am a better businessman because I am an investor” and he went on to tell the meeting he had learned a lot through operations he would not have learned if he had stayed in investment all his working life. Having someone in charge who had experience in both areas, he thus suggested, would be “optimal”.
What is more, Buffett would appear to be matching word and deed, as he went on to describe Ted Weschler and Todd Combs – two hedge fund managers hired into Berkshire Hathaway in recent years and widely tipped as potential successors – as both being “very, very smart about investments but also about business – they understand the reality of business operations”.
Of course, none of this will come as a surprise to those familiar with Benjamin Graham’s 1949 value classic The Intelligent Investor, which observes: “Investment is most intelligent when it is most business-like.” Anyone aiming to be a better investor really should learn more about operations while any chief executive with an eye on self-improvement ought to take a greater interest in investment.
Fund Manager, Equity Value
I joined Schroders in 2004 as an equity analyst in the European Equity Team initially specializing in the Industrial sectors before moving on to Consumer-based companies and finally Insurance. In 2007, I became a co-manager on a fund investing in undervalued European companies and took on sole responsibility for the fund in May 2010. Prior to joining Schroders, I worked at Hedley & Co Stockbrokers and Deutsche Asset Management as a trainee analyst.
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