Risk, Return & Time in Private Equity

Last week, we commented on Risk, Return & Purpose and agreed that the notion of Risk & Return does not make sense anymore when not put in perspective with a wider Purpose. This week we tackle Risk, Return & Time when investing in Private Equity.

Philosophically, it is tantalizing to know that Time is the scarcest commodity we have.

From a private equity investor, the time allocation to be invested for a portfolio’s company is key for an optimal governance.

When starting in Private Equity, you study other’s patterns and behaviours. Often, you will understand that time dedication will flow to the higher promises in a portfolio, while others may be left aside or, in an accounting manner, be written off if not meeting on expectations – synonym for financial death.

There are different ways of interacting between the financial investors and entrepreneurs, which will obviously depend on several parameters, a main one being the maturity stage of the company invested.

In private equity, of unlisted companies, you may opt for any position from very passive to operationally active.

While it is difficult to judge on the optimal level of implication, we avoid, as much as can, contributions in kind, which may give dissatisfaction on either side of the contributors, while we also refrain of being operationally involved.

We have devised a Governance Facilitation process that dedicates on average 27 man-days to the participated Company.

It allows to maximize the efficiency of the alliance by implementing Governance mechanisms that, if well put into play, allow a maximized readability of the Company.

An important building block of the Governance Facilitation process is the exercise of strategic mapping, which will take place on average 2 times every 3 years; Upon instruction of the Board, we will support the management in identifying, analysing its competition, so to understand the competitive positioning and, eventually recharge the batteries for another shift.

It is a vital component of our Governance facilitation process. Taken back to the “credit” of 27 days / year, it may come to 15 days, the 12 remaining days being used for supporting the preparation and the debriefing of the other Boards.

A good balance between involvement, support and facilitation allows the management to focus on its operational duties, while the Board may evolve with more comfort as to its mechanics, hence the needed transparency for a good alliance.

Jean-Marc Legrand
Founder
TheClubDeal

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These are both fund investors and the entrepreneurs with whom we have created alliances.

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