I recently read a report from The British Private Equity & Venture Capital Association (BVCA), in association with PWC, that private equity backed IPOs are significantly outperforming floats not backed by private equity. It comes at a time when demand from investors for private equity funds is extremely high, and also at a time when I’ve been reading a lot of books about PE. It’s a fascinating industry where top performing funds have consistently beaten public markets.

Clearly Fram’s interest is understandable, given our focus, but I’m also interested in the industry personally. Whilst I think I will always tell people I’m a recruiter when asked at a dinner party, I am also a business owner and so you can’t help but be intrigued by the methods used at PE firms to create value.

I think that there has always been a view from those who don’t interact with the industry that they are mere financial engineers, but if you dig deeper it’s not hard to see that this is purely a myth. The majority of firms create value through operational improvements and hire very talented operations specialists, either from a specific industry or management consulting backgrounds. Below are some of the things I’ve observed from an industry we could all learn from:

1. Alignment of interests
PE firms really understand the importance of incentivising management teams, and key staff in less senior roles, to ensure they are focused on the job in hand. The late billionaire tycoon James Goldsmith said that he inspired management teams “by making them capitalists” and this seems true today of PE firms. PE firms encourage meritocracy and clearly set out what the rewards are for certain triggers being met. In my experience, this clarity is often more successful than a purely discretionary bonus.

2. Clearly defined exit & continuous review
Leaders in the PE industry have the exit strategy planned early – probably at the start.  By doing so, they stay focused on the key deliverables and regularly review these against their operational blueprint. For many key managers in larger established firms exit isn’t an option, or a goal, but certainly regularly scrutinising actions against 3-5 year plans is essential.

3. Talent
They understand the power of top talent and seek it out. They tend to hire those with proven track records in the industry they have invested in, but if specific industry knowledge isn’t key, they hire very, very smart people. They look for individuals capable of enabling transformation, and this almost invariably involves inspiring workforces and effecting cultural change.

4. A focus on KPIs
PE firms often bring a fresh perspective to acquired firms. They perform fact-based reviews on the industry and really understand the drivers that make money. From this they construct clear KPIs and combined with their mandate for change, they implement them with real purpose.

I’ve probably oversimplified things and so please see our book recommendations for books we’ve read of the subject. Some of these include case studies, which cover a wide range of industries and different areas where PE firms have made improvements. However, I would encourage all managers to take a look at this dynamic industry.