There's an old myth that a Silicon Valley VC won't back any start-up based more than 30 minutes drive from Sand Hill Road.
I'm not quite that lazy. In fact I'm posting this from the Qantas lounge in Auckland. But I've learned the hard way that distance is not a friend in private equity, and these days I expect potential investments based more than a couple of hours away from Sydney to clear a higher hurdle.
Distance is a minor nuisance when a portfolio company is performing well. You get on the phone, send emails, fly to the factory for monthly board meetings and management offsites-- no drama.
But when the wheels come off, or just wobble a little, distance can become a big problem for a PE investor. When a company underperforms it's not always obvious exactly what's going wrong. You can feel the momentum slipping away, but without spending plenty of time with the team, without "living the business", it's hard to quickly get to root causes and make correct decisions.
Was the rework problem in May really a one-off? Who's telling the truth about quality issues, the Sales Manager or the Plant Manager? Why is the CEO suddenly slow to return calls? Is there a good headhunter in Kalgoorlie?
These issues are even more acute when you start investing internationally and barriers like language emerge. It's dangerous to delude yourself that you can project the capabilities of a small PE team into another market.
A thought: I'm normally skeptical about the mega-buyout firms and the scale benefits they claim to enjoy. But their size does allow them to deploy locally recruited teams in many geographies (like 3i did in the UK). Perhaps that's a genuine advantage they have?