Private equity: People powered

Among industry professionals, high returns is often attributed to the industry's hands-on approach and superior governance models. In a paper presented at the conference, Rafaella Sandun of Harvard Business School asked if private equity companies really do have better management practices.

The study, conducted among 561 private equity-owned companies, suggests the industry is right to hold its practices in high regard. Interviews and performance monitoring showed that, in general, private equity ownership is linked with better management. According to the study, these companies' management ranked better than family-owned, listed and government-owned companies.

However, both industry professionals and discussion panelists pointed out that the data is likely to contain a strong selection bias. After all, private equity's investment methods are based on, finding the best management, or finding the best company and replacing bad management with excellent management.

Yet other factors such as board composition, for example, could also contribute to better management, as pointed out by CEO of EQT-owned Securitas Direct, Dick Seger. After EQT delisted the company in 2008, the board was replaced with a set of industrial experts. Publicly listed companies often suffer from owners and board members with varying and sometimes conflicting agendas. What Seger experienced after going into private equity ownership, was being part of a "team rather than a board". In this way, private equity investor obtains alignment of interest at both board and management level.

Harald Mix, founder of Swedish GP Altor, highlighted the importance of people in all stages of private equity. His advice to LPs was that you can't invest based on only quantitative analysis. He encouraged investors to dig into the material, and get to know the people doing the deals.

It's often said that private equity is a people business. However, this can apply across all parts of a private equity-owned business, and successful business plans require cooperation across management, board members and investors.

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