Posts Tagged ‘governance’

Profit In A False Sense of Security

Wednesday, April 26th, 2017

 

I am fascinated by the probable cause when owners, Boards and top management in mid-market businesses (US$10M to US$Bn), “don’t take the money” and shortly thereafter, end up with a failing or failed business. Specifically, when a serious offer is made for growth capital or even an outright sale of the business, and in the next 6-12 months after the refusal, the fortunes of the business partially or totally collapse. Nowhere is this more visible than today’s high growth private tech businesses (the infamous “unicorns”) and in an often overlooked area, service businesses with a powerful owner-operator or managing partner in a partnership structure.

The decision-making factors are consistent throughout. The business has deliberated carefully or taken an opportunistic approach to accepting external capital or key talent. What has varied is the owners’, the Board’s  and/or top management’s judgement, resilience or trust over time. Faced with changing market conditions (regulation, technological and other convergent forces), a key client “win” or “loss”, rising/declining investor or trade interest and so on, there is a discernible change. They consciously ignore other’s prudent advice that they have implicitly trusted in the past (mitigating risk). They increasingly believe that they are “impregnable” in their market position (market hype or vanity investments). They allow common sense to be distorted by inflated but unsubstantiated talk (valuations, growth prospects, barriers to entry, unique technology etc.).

Having worked with six privately-held mid-market businesses over the past 3 years around the globe, who turned down offers and subsequently, experienced very public falls from grace (legal, e-commerce, hotels, gaming, financial services), the underlying “cause” in my experience is ultimately, poor leadership. It is people, not the business that have screwed up.

For my current and prospective clients reading this, who fear my strategic advice comes with a poison in the tail, rest assured I have had a great many more winners than losers!

Yet in the immediate aftermath of a partial or total business failure, there is a rush to assume that the firm’s opportunistic or conservative approach to accepting new capital or talent is the “cause”. That is inaccurate, and here is why. There are a great many successful businesses, who have been consistent in adopting diametrically opposed approaches to accepting external capital or ownership (in insurance, AJ Gallagher vs Hub International, in hotels, Peninsula vs. Fairmont Raffles, or in the premium art business, Christie’s vs Sotheby’s). In just the same way, sticking to niche products, services or geographies or constantly, adopting a diversification approach, is rarely the “cause” of failure.

Take great care in jumping to a conclusion. Profit is to be found, as many smart long-short investors have found, in looking out for a business owner’s, the Board’s and/or top management’s increasing false sense of security, the resulting changes in their behaviour and the positive/negative impact on their business and the competition.

© James Berkeley 2017. All Rights Reserved.

 

Five Family Office Traits That Throttle Success In Portfolio Companies

Monday, February 27th, 2017

Patient private capital is arguably more in demand today as a source of growth capital than at any time this century. CEO roles in businesses backed by ultra high net worth family offices (Michael Dell’s MSD Capital, Jorge Paolo Lemann’s 3G or Azim Premji’s (founder of Wipro) Premji Investment) are arguably more in demand than at any point in recent history. Free from the demands of quarterly reporting for public stockholders and the constraints of the private equity investing model, why, here is the “perfect” career option surely? All we need to do is focus solely on growing and nurturing the business and its’ brand, take prudent risk and never have to worry about the cost or availability of capital. Wonderful. What am I missing? Actually a huge amount. In an article published today, in the market-leading Family Office media publication, Family Capital, James draws upon his experiences with over a dozen families around the globe. Learn about the Family Office/CEO relationship dynamics and the consequences that are often overlooked by many Family Offices and CEOs until it is too late.

http://www.famcap.com/articles/2017/2/27/insight-five-family-office-traits-that-throttle-success-in-portfolio-companies

© James Berkeley 2017. All Rights Reserved.