The Hindu Business Line : Let’s take this private

The moment you tell someone that your firm is called CrimsonWave Partners, SouthRidge Capital, OakHail Ventures or BlueWestJetStream
Mountbatten TNG they will immediately shout “Hey! You’re a PE firm!” and withdraw all their money in the bank and ask you to do as you wish with it.

Sidin Vadukut

This fortnight we are going to prove once again why Sid Says is one of those newspaper columns that are teetering and tottering on the cutting edge of contemporary news.

In these parts, we pride ourselves on our up-to-date grasp of the latest in business news.

For instance, take this latest hotel chain buyout that everyone is talking about. Someone has bought out a global chain of hotels for the mammoth sum of $25 billion. And that too all in cash:

Buyer: “Here take all this money!”

Seller: “Oh my! Now where do I keep all this cash?”

Buyer: “Umm… you will need a few rooms. Why don’t you book into a hotel or something?”

Seller: “Very droll…”

Now after that rather intense comic interlude we will concentrate on the protagonist of today’s column. Today, we are going to talk about companies like the one that forked out all that cash for those hotels. Yes people, we are going to talk about:

(Rumbling thunder, ominous violin music, sounds of cash counting machines in crescendo.)

PRIVATE EQUITY COMPANIES

The last couple of years have seen unprecedented activity by ‘PE companies’, as they are known in flashy banking circles.

These PE companies have emerged as the latest element of interest in the ever-changing world of global finance and banking.

But inspite of the increasing role played by PE firms in the economy, most young managers know very little about these companies, namely: “Bonus paid to employees last year” and “e-mail ID of HR manager”.

But this is a merely materialistic way of looking at things and as responsible and dynamic young managers we should strive to know more about how the economy and global business work.

Ha! I know! Good one! Phew!

But then, when you go for your next PE firm interview, it is recommended that you have some of the basic fundae clear:

PE HR fellow: “So what do you think you can do in this firm?”

You: “All sorts of… you know… PE roles… to put it more specifically PE type of things… PE mainly… pretty much all type of PE jobs…”

PE HR fellow: “Do you know even know what PE stands for?!!”

You: “What do you mean sir? Of course I know PE stands for? It stands for… P…AACHOO AACHOO SNIFF GURGLE SNIFF… and that’s what PE stands for OK?”

See. So read on.

Now PE stands for Private Equity. In other words, it means any asset that is held privately by a group of investors and not traded on any public stock exchange. And a PE firm is any firm that, in such manner, owns part or whole of several companies.

Now using this definition alone in order to identify a PE firm is difficult. Therefore, and what providence this!, you will be happy to know that after years of hard work, I have perfected the following tool which will help you identify and even set up your very own PE firm. I present to you:

The Infallible Sid Says Model of Identifying or Naming a PE Firm

There are three steps in naming a PE firm.

Step One: Choose the name of one of the following: a colour, a direction on the compass, or a large tree

Step Two: Now to the end of the word identified in the first step add one of the following: a name of a maritime phenomenon, a geographical formation, a meteorological phenomenon or a hoity toity sounding stiff-upper lip English surname

Step Three: Polish it off by ending with one of: Partners, Capital, Ventures or assorted three letters of the English language.

Voila! You have a perfect name for a PE firm! The moment you tell someone that your firm is called CrimsonWave Partners, SouthRidge Capital, OakHail Ventures or BlueWestJetStreamMountbatten TNG they will immediately shout “Hey! You’re a PE firm!” and withdraw all their money in the bank and ask you to do as you wish with it.

(The model also easily helps you identify a PE firm at first glance.)

Which brings us to the matter of what PE firms actually do.

After the three-step process listed out above, the PE firm approaches rich people (particularly not newspaper columnists) and institutions (especially including newspapers) and asks them to hand over large sums of money.

PE firms convince them by showing clients their excellent financial credentials, lengthy PowerPoint presentations on investment strategy and spycam photos of the CEO and the CFO in a position that cannot be hedged if you know what I mean.

Once they have the funding secured, they go around looking for potentially profitable businesses to buy into. Sometimes they buy complete firms and sometimes pieces of them.

(PE firms also provide several financing options to firms like Leveraged Buyout, Management Buyout, Venture Capital, Bridge Capital, Mezzanine Capital, Financial Capital, National Capital Region and Das Kapital.)

Not all firms agree to be bought, though. There are the rare few that refuse to budge and ask their shareholders to refuse to sell out.

The business newspapers call this situation “turning hostile”. PE firms call this situation “Time to get a new roll of mirco-film”.

A few e-mails with attachments later, things have returned to normalcy and the PE firm will have prevailed.

These investments are then managed by the PE firm for a few years till things have improved or a buyer comes along who wishes to pay the PE firm even larger sums of money for the asset.

At this point, the PE firm decides to sell its investment.

This is normally done at huge premiums to the initial investment and is extremely profitable to the PE firm.

Now is the time that the original investors, rich individuals and institutions, expect to see a return on their investments.

Therefore PE firms, the darlings, keep their cut of the profits, write cheques in the name of their investors, courier it to them with pleasant covering letters and then immediately close their bank accounts and move to Mylapore in Chennai.

This, in a nutshell, is how PE firms operate as a critical element in the global financial sector. I hope you all enjoyed today’s column.

More next fortnight. Happy Managing!

Homework: Which of the following two is a PE firm:

Saravana Bhavan

MagentaIsotherm Venture Partners

(The writer, an alumnus of IIM-A, was a management consultant before quitting to work as a freelance writer, author and general handyman. He blogs at www.whatay.com)

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