PE Physician, Heal Thyself

As the economic downturn continues to bite and private equity chiefs increasingly shift talks from the now to their hopes for activity in the second half of 2009 and even 2010, operational staff may be amongst the few not looking over their shoulder for impending job cuts.

Private equity’s boom years of 2005 to 2007 – and 2007 was still a boom year in terms of full-year totals – involved significant strengthening of deal teams, especially in the run-up to new fundraisings, while intermediaries such as law firms frequently cannibalised their peers in the race to have the largest private equity practice, ostensibly in London.

With deal activity at a near standstill, obviously at the large buyout end but significantly so within the theoretically more healthy mid-market and later-stage segments, many firms will not just be overleveraged in their portfolios but also in their management company capacity.

People won’t be needed and private equity is notoriously ruthless when it comes to efficiencies. The bigger buyout firms are also having to undertake a seismic shift, from small deal teams backed up by large numbers of analysts reliant on financial engineering to more operationally-focused staff actually getting their hands dirty – on a regular basis and for a considerable time.

According to a private equity survey undertaken by the Economist Intelligence Unit and released earlier this week, only 2% of 220 senior private equity executives across Europe and the US said they were planning on cutting staff in the next twelve months, while some reports suggest that 26% are intending to make further hires.

Anecdotal evidence, however, suggests otherwise – or at least that those hires are more likely to involve luring experienced industrialists into operational positions as the focus narrows towards making underlying investments more defensive within an expected or already-begun recession.

“What has been evident in recent months is that there has been a significant shift from investment and financial re-engineering to focusing on the operational performance of companies within their existing portfolios,” said David Axon, head of private equity and M&A, Celerant Consulting, which commissioned the research.

“Shrewd executives realise that maximising their operational efficiency will ensure their short-term survival and guarantee long-term growth.”

Given that few of those executives saw the scale of the current crisis looming or are able to realistically predict the next few weeks, let alone the next few months, ‘guarantee’ is an optimistic term at best. But then, private equity is all about making a bet, and gamblers are notoriously hopeful, if reliant on a large slice of lady luck.

This post originally appeared at Thomson Merger News, a sister site to peHUB.