Single Owner Private Equity Firm
The Possible Risks of a Single Owner Firm
If you're working for a single-owner private equity firm, you may be a little worried if you read the Private Equiteer's post on the problems with this type of management. Basically, the post is an argument that a single-owner private equity group is typically run by an authoritative and stubborn person who does not receive the help that is essential for running a private equity shop. It's extraordinary for one person to possess a deep knowledge in all aspects of running a firm such as legal issues, the deal-making process, accounting, business strategy and management. This conclusion caused one reader to lament "I wish you had written this before I accepted my job offer."However, all is not lost. A single-owner firm may be a poorly-managed dictatorial mess, with one person at the helm steering straight for disaster. But this is by no means always the case. The owner probably does not possess all the necessary skills, so he delegates other duties to specialized employees or outsources it to service providers. For the reader worrying his/her new boss is a closet-Stalin, I wouldn't be too scared. The following pitfalls of single-manager private equity firms should be considered when applying for a position or deciding whether to work with such a firm, but take it with a grain of salt. Here is Private Equiteer's paraphrased list of problems:
- They’re a textbook example of a dictatorship – One person never has all the answers, but don't try telling that to the manager. A one-manager firm means that "all of their emotions, persuasions and biases has carte blanche over every major decision." And these are important choices like hiring new staff (whose agreement with the manager's style may take precedence over talent), heading due diligence and choosing where to invest.
- Key-man risk is a repellent - Many private equity investors, target companies, staff, lenders and consultants see the risk of a single-owner firm and will steer clear. According the the Equiteer, "LPs will give a wide berth because there’s increased risk borne by having only one decision maker. Investees will do the same because there is often less value-add from a less experienced team. And staff, if they know better, will steer clear because a dictatorship is not the best place to learn."
- There is fundamental risk to the fund – One great point as to the risk in such a firm is that if the manager is incapacitated in some way (i.e. illness, insanity, etc.) the fund may collapse if there is no one qualified to take the lead in his absense. Firms headed by multiple partners have the ability to shift the burden to another manager if one leaves.
- They circumvent necessary checks and balances - Without anyone to check on the owner's decisions, save his limited partners--who may be unaware of what's really going on at the firm--a owner has free reign to implement any number of stupid ideas. In multi-owner firms there is a system of checks and balances to ensure that no one person can endanger the firm with a poorly conceived plan.
- The arrangement is often a sign of the owner’s character – "[Equiteer's] experience is that single-owner firms are single-owner for a reason: the owner finds it hard to compromise and deal (closely) with other people."
- Management fees are squandered to profit the owner - "with a single owner, there is a real conflict regarding management fees. 'Do I spend $x on business tools or tell staff to make do and save the money for dividend time?' Of course this could happen in multi-owner firms, but chances are they’ll keep each other honest. And, having multiple people with a financial interest in the management company will increase the chances that fees are put to good use."
Tags: private equity firm, single owner private equity firm, single owner buyout firm, single manager buyout firm, single partner buyout firm, private equity firms risk
Link to This Resource: Single Owner Private Equity Firm
http://privateequityblogger.com/2009/07/single-owner-private-equity-firm.html