Learning From PE Firms: Play Offense, Not Defense  

A recent Pitchbook study shows the number of active private equity (PE) firms increased 143 percent globally from 2000 to 2014. And they’re doing well: PE companies nearly doubled the performance of public companies over a 10-year period at 11.8 percent vs. 6.8 percent, respectively. That’s according to a 2016 report by The American Investment Council.

As a former CEO of two public companies, one of my main goals was to work with my team to deliver a consistently high total shareholder return. One way I did that was to learn from others – including PE firms.

While many people believe PE firms attract the best and brightest leaders, my observation (and my own experience) proves that public companies also have top talent.  So, what’s different?

“Public companies that apply the ‘offense’ strategies from PE firms will win in the marketplace, optimizing total shareholder returns.”

In public companies, the leadership team and board are aligned to not make a mistake and generate average returns, while PE firms are tightly aligned to generate exceptional returns. In other words, public companies play defense while PE firms play offense.  The good news is that public companies can play offense too. Here’s how:

Four Ways Public Companies Can Play Offense

1. Set aggressive goals, innovate and stretch management to be exceptional. As CEO of a highly regulated company, I cut costs in one area of the business to transform product lines and create new market opportunities. My team took major risks, investing in R&D and focusing on rapid growth. We significantly improved EPS and doubled share price over two years.

2. Commit to lucrative payouts if sustainable exceptional results can be generated. Believe me, the shareholders will not object. At the same time, Compensation Committees need to stop worrying about ISS and Glass Lewis reports and start aligning to shareholder interests and expectations.

3. Get comfortable sharing long-term goals and key initiatives (redacted to not provide competitive insights). The quarterly public guidance march needs to stop being the driving force, encouraging bad decisions to earn short-term returns.  Companies should change their script to focus on long-term goals. For example,  “By 2022, we will double EBITDA by doing the following…” General Motors is one example of a public company that is setting bold goals with its recent announcement that it will launch 20 new all-electric vehicles by 2023.

4. Enable the board to evaluate more aggressive strategic paths. This is the CEO’s primary job. He or she must work with their team to develop a robust, five-year plan with aggressive financial targets and details for each key initiative. Most 5 year plans are built on organic growth initiatives. The key to outline the upside options are to clearly layout how non-organic and disproportional investments in organic can minimize the downside and enable the upside over a 5-10 year horizon.  This is where the CEO and board chair need to align and discuss what risk/return profile are we establishing?

The key take-away:  Public companies that apply the “offense” strategies from PE firms will win in the marketplace, optimizing total shareholder returns. Certainly, that has been my experience.