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During the private equity boom years, one of the most common criticisms of the private equity kingpins went like this: "All they do is buy companies at a discount, leverage up the balance sheet, and use the cash flow to pay off the debt -- extracting millions in fees in the process."
Well now that access to cheap, covenant-lite debt has dried up, buyout shops are turning to the other option for making money: operational improvements. A new white paper released by Grant Thornton and the Association for Corporate Growth -- admittedly a private equity trade group -- found that 42% of private equity firms are devoting between 51% and 75% of their time on the management of companies they already control.
According to BusinessWeek, "Thirteen percent of respondents said they were spending as much as 100% of their time dealing with the operations of their portfolio companies. ACG and Grant Thornton also asked firms if they were spending more or less time on portfolio companies this year than last. Sixty eight percent of firms said more. Only 5% said less."
Part of the increase in time devoted to management of portfolio companies probably just stems for the inability to do anything else. Without any money, why bother shopping for new companies?
The recession will be a chance for the private equity industry to prove that it isn't just about financial engineering -- that the old "We can take companies and make them more efficient outside of the glare of the public market" line isn't just hype, and that armies of consultants and bankers really can improve performance. I'm skeptical.
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