'Structural turbulence' to force change in PE firms
Real Deals Magazine - 19-Jun-2003

By Shaun Beaney

"Structural turbulence" in the private equity industry will force major changes in the way firms work, according to Maurice Tchénio, co-founder of Apax Partners. Speaking at a conference organised by the London Business School's Private Equity Club, Tchénio said that firms will need differentiated strategies in order to attract the best investors, entrepreneurs and talent, and it is no good being "me too".

Deal origination will become vital, he said, and in the future the best rewards will go to deal originators. At present, transaction executives receive the highest levels of remuneration, but execution will become a commodity, he predicted. Sector experience will also be crucial, so firms know what they want to achieve with their investments. They will also need to focus on value creation and work hard: "You need to make your shirt wet." He said firms will pay a premium for people with corporate operational experience.

Tchénio, who is chairman and chief executive of Apax France, said the group recognised the need for a big team, and now has 180 executives across the world. But size demands entrepreneurial drive to get good returns, he added. Apax has also recognised the need to prepare for the succession of the next generation of partners, he said, and has introduced a compulsory retirement age. Co-founders Tchénio and Sir Ronald Cohen are due to step back from day-to-day involvement by 2007, and Alan Patricof has already retired from full-time work with the firm.

Tchénio contrasted "structural turbulence" with cyclical issues. These included the poor investments made by many private equity investors during the boom. The worst is over, he said, but this is not yet reflected in valuations. He said 1999 and 2000 were poor vintage years, and will be the first time that the industry has actually lost money. But those two years are equivalent to between four and six regular years of poor performance in terms of the amount of money invested and lost. He also criticised secondary buy-outs for creating "financial multiples" and not "corporate multiples".

However, Tchénio said that the future is bright for private equity. Changing demographics will continue to drive corporate innovation, and there is "huge" acceleration in technological development. Globalisation meant that large companies needed to focus on their core activities, but Europe is lagging behind the US in restructuring, while Asia has not even begun, according to Tchénio. Government action to create jobs has made the economic environment more favourable for entrepreneurs, he said, and the growth of managed financial assets will continue to fuel private equity. He also suggested that public equities could offer new opportunities for the application of a private equity model, and he pointed to Warren Buffet's Berkshire Hathaway, the US active investment group, as a possible template.

Private equity needs to develop common valuation methodologies in order to aid fund raising and also needs to become transparent, he argued. The industry has attracted billions of dollars, but does not publish its numbers. This is in contrast to the mutual funds industry, which would not be the size it is today without openness.