What do private equity firms want? It’s quite simple – money
In the final part of his series on external investment in law firms, Jeremy Black of Deloitte explains that private equity firms have one goal – to make money – and briefly looks at the implications of raising funds through listing
Cash: private equity wants this. Lots of it
I have an Australian friend who works in HR in a senior role in an Australian mining company. It’s quite a demanding job, having to deal with the unions and with accidents in the workplace. However, in true Australian fashion, he’s developed his own management philosophy, which is: “The answer’s money. What’s the question?”
And the answer to what private equity firms want is the same: money. They want to make as much money as possible from their investment. While that might sound a little trite, it is true and does make things easy. You’re not in a world of multiple conflicting goals.
How much do they want?
Typically they’d be looking for an annual return of around 20- 25% per annum. In order to make the returns required, they will need it to sell it for more than they buy it, and therefore they will need the value to go up. Normally they would expect to hold it for a period of around five years and then sell it either to another party or exit their investment through an IPO.
In order to ensure an increase in the value, they will therefore be looking for a business where there will be a growth in earnings, which would directly increase the price, and that will require a suitable strategy and strong management.
That’s what private equity wants – actually pretty straightforward. The more interesting question is what do you want? Do you need their funds, their expertise, their contacts? If you don’t need any of these, then grow the business and reap the benefits for yourself!
Listing of law firms
There are a number of advantages and disadvantages compared with the raising funds through private equity. Both the main advantage and disadvantage is that in a listing there is no single owner, rather a diverse group of shareholders. Whether this is an advantage or disadvantage depends on your perspective!
Other advantages of using the public markets are that it would boost a firm’s profile, provide relatively easy access to additional capital and it would facilitate the use of share options to incentivise staff. The downsides are the cost and level of public scrutiny.
Finally I think it is worth noting that if you are a listed business, there needs to be some clear thought around whether the share is to be seen as an income-generating share or a capital growth share. If it is the latter, then there does need to be a paradigm shift as to what the business is about and how it operates.
So what next?
There are numerous views on this from numerous different people, so all I can say is that I believe the pace of change will increase and there will be opportunities as well as threats as a result.
Jeremy Black is associate partner in the professional practices group of Deloitte
Tags: ABS, Alternative business structures, external investment, initial public offering, private equity, stock market listing
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