Last week's Economist also ran a good article on mergers and acquisitions and private equity, Whither the great wave?.
The last five years have provided a great ride for private equity but this is now entering a more challenging period. Activity has slowed dramatically following the credit crunch and returns are likely to reduce.
However, private-equity firms are still sitting on record amounts of capital and continue to be able to raise large sums and so smaller deals should continue.
I think a more important reason for being bearish about private equity's future is about whether this model provides a sustainable way of running organisations.
Firstly, as more people seek meaning in their work, do private equity firms and the companies they manage provide working experiences and environments that meet people's needs? Particularly as more millenials enter the workforce? I think less and less people are motivated purely by cash. And a heavy financial focus doesn't usually lead to very wonderful behaviour.
In this, Business Week journalists discussed two types of employee:
- Cheaters, whose traits are aggressiveness, insistence on high standards, the ability to hold people to account, being driven by numbers
- Lambs, whose traits are listening, developing talent, being open to criticism, treating people with respect (it's not that cheaters can't do these things, but it won't be their strengths).
It's rather pejorative language, because you need some of both sets of behaviours to be fully effective. I'm a natural cheeta but have learnt that lanb behaviours are often more successful over the longer term.
However, Business Week quoted research finding that only cheaters survive in a private equity environment.
Secondly, private equity reduces the ownership of the organisation experience by employees, except at the very top. So it acts in an opposite direction to Charles Handy's call to separate company funding and ownership.
And thirdly, private equity firms only make investments for liquidity, none for the future (for example, creating value / human capital management). So given its required focus on the long-term, I can’t see talent management for example, ever succeeding in this environment.
These are the reasons I expect 2008 to be a less successful year for private equity than 2007.