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Sunday, 18 November 2012 00:00

Private equity in need of a makeover

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Ken Mehlman, KKR & Co. LP Ken Mehlman, KKR & Co. LP

DETROIT — The private equity business could use a bit of a makeover, especially in the wake of the PR beating it took during the recent presidential election.

That’s the opinion of Ken Mehlman, who served as campaign manager of the 2004 re-election of President George W. Bush and later as chairman of the Republican National Committee. Mehlman, who now oversees global external affairs for the New York-based private equity firm KKR & Co. LP, was the keynote speaker at an event for institutional investors hosted by Crain's Detroit Business and Pensions & Investments, a national financial publication. Both are published by Crain Communications Inc.  

During the hour-long conversation, Mehlman shared political insights and talked about the changing nature of the private equity business. Some of his sharpest comments involved Mitt Romney’s inability to explain his association with the private equity business during the recent election.

 “He didn’t explain it. He simply said, ‘I’m a businessman,’ and he thought that was sufficient,” Mehlman said. “He certainly didn’t help himself when he said 47 percent of people were freeloaders. Then [he went] through a series of putting his foot in his mouth … People thought he was Mr. Burns from The Simpsons.”

The perception problems Romney created got dumped on top of the negative opinions many Americans have of private equity firms. Many of those perceptions are unfair, but some were created by the industry itself, Mehlman said.

The nature of the business is that private equity firms go in and change companies, upsetting the incumbents and making a lot of money for their investors, he said. The secretive manner in which many PE firms worked for many years exacerbated the image problem. And then, there’s a fourth factor:  the smartest-guy-in-the-room attitude.

“Too often private equity views itself as the smartest guys in the room. If you’re the smartest person in the room, no one is going to like you,” he said. “What you need to be is the person in the room who is best at bringing people together.”

The ability to bring people together stems, in part, from a growing recognition that the industry’s name is a bit of a misnomer. 

“Private equity is not private,” Mehlman said. “It’s not about explaining yourself. It’s about engaging. Explaining is telling the world what you’re going to do. Engaging is getting their input and figuring out how you operate the company in way that addresses some of the concerns they have.”  

The change toward engagement is the most recent step in the evolution of the private equity business, he said. In the ’80s, PE firms helped businesses by creating alignment around corporate governance and management compensation based on ownership. In the ’90s, PE firms stressed operations with lean consulting and best practices. Today, firms are focusing on what he calls a “stakeholder alignment model.” 

To be successful investors, PE firms need to know more than what’s going on inside the company, he said. PE firms need to understand the relationship between labor and management, the regulatory changes confronting the company, the supply chain relationships and how the company treats the environment.  

“If you don’t know those things, you’re going to make a bad investment both financially and reputationally,” he said. “So today, we think it’s very important for good investors to not only create alignment around how a company is structured, how management works, and how operations work, but finally the stakeholders – not just the shareholders – impacted by the investment.”

When it makes investments today, KKR uses organizations like Transparency International and the United Nations Principles for Responsible Investment as guidelines, and pays particular attention to labor and environmental practices at the companies and their suppliers. The firm trains purchasing officers at investment companies on the protocols of business responsibility and how to look for potential corruption or labor issues in the supply chain.

“By the way, it’s not just (that) this is nice to do,” he said. “What happens when you figure out you have a factory that’s using child labor or environmental degradation or prison labor? You know what happens? You have a supply chain problem. That’s a bottom line impact.”

In a global business world where social media and the Internet are creating new levels of transparency, the reputation impact is also critical to the bottom line. 

“If we want to own the Hiltons, the Dunkin’ Donuts, the HCAs, and the Dollar Generals, you cannot in today’s world with Twitter and the Internet … you cannot own those companies and say, ‘Trust me, it’s all good.’” he said. “We have to recognize: Not only are we not trusted as investors, but the industries and companies we’re investing in are not trusted … and that can have a material impact to the bottom line of the company. So if you want to be smart about the company, you need to understand first all the other people who care about the company.” 

Read 27858 times Last modified on Monday, 19 November 2012 11:01
Brian Edwards

Editor & Publisher

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