Lesson Learned #5 - There's No Place Like Home

  

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?

Comments

[Peter]

This is amusing because I am on the other side of the fence-- a CEO of a private equity funded business.

Being far away from our investor (we're in south of England, they are in New York) also causes us frequent problems.

At first they loved flying over for board meetings, but after the first year the glamour went and now getting them on a plane is like pulling teeth.

I would advise people to take local money. We were promised many forms of PE value add (contacts, consulting support, fund raising support, etc) but I struggle to even get them to a board meeting in England.

[Dosky]

Peter: you mention "PE value add"

Like many, I suspect you've come to learn the emptiness of that phrase. For all of the strict terms enforced on the business and previous owners, do you think you're getting the appropriate "value add"?

I think PE can work and be valuable in many instances, but the blanket approach by funds without the contacts, real-world experience or business nous, is value destroying in my opinion. Many PE managers think they know business, when really they have no idea. Their idea of strategy is empowering CEOs with the task of strategy, taking credit if it works and sacking management if it doesn't.

[nkalakatha]

I think the quality of management, particularly the senior management, can really affect the viability of doing deals in locations remote from the PE firm's office. Having a really great group CEO who can mentor an underperforming manager in a remote location, replace that underperfomer if necessary and even step into that division as acting CEO until a replacement is found can make all the difference.

If the PE fund executives need to ask the sorts of questions that you're contemplating, I think the portfolio company has a serious problem with senior management. Why aren't THEY asking (and solving) these issues rather than the PE executives?