The corporate raiders of the 1980s and 1990s had a ruthless reputation for acquiring companies and dismantling them. The play was to restructure by selling off parts of the business and abandoning the rest. The quick win mentality resulted in many lost jobs and only one winner.

When we take on new clients at Lancor, the first thing we examine is whether they fit the bill as an “anti-private equity, equity firm.” As an institution, we have a conscious focus on partnering with private equity firms that care about building a better business. We gravitate towards firms that are motivated to pull growth opportunity levers, instead of simply slashing and burning. 

Luckily today there are PE firms that are looking to differentiate themselves by thinking about the long term growth of the companies they acquire. They are proving that there are hundreds of value creation tactics other than simply dividing up a firm to try and maximize short term profits. Those companies  also understand that reputation and legacy matter, whether they are competing to buy a company or working to improve it.

Of course, improving margin is a given and can be achieved by determining which revenue dollars are most profitable and focusing on those that drive growth. Certainly, every PE firm underwrites margin improvement to justify the high price they are required to pay for the asset. All businesses can cut out excess spending or waste in manufacturing, so they always start there. But the smart firms, the long strategy firms, are thinking about the right business units, products and services to deliver the required returns, resulting in expansion and hiring.

It is always difficult to grow the top line, but even harder and more important to grow the bottom line profit or EBITDA. Adding profitable revenue is much more difficult than simply cutting costs. Clearly, PE firms need to focus on profitable growth because there have never been more PE firms in history. Simple supply and demand would suggest that to win an auction to buy a company, you need a business plan that can deliver greater value more efficiently than your competition.

To find success, firms also need to win the hearts and minds of the employees at the newly acquired company. Financial engineering is no longer a unique skill set, so if PE firms are directionally similar, the good guys are at a premium. It is a mistake to confuse kindness with weakness. Thankfully, more and more PE firms are equating kindness with better investment outcomes.