Since the credit crisis started in 2007, the private-equity asset class has been battered. And while things have improved somewhat as the economy has entered its slow recovery phase, it's a still tough time to be in the leveraged buyout business. Just look at the busted deal between Apollo and Cedar Fair (FUN), which collapsed under the weight of shareholder disapproval this week.
But private equity is a boom-and-bust business: The situation will eventually improve, leading to large paydays.
Interestingly enough, some of America's top executives are positioning themselves for that rebound. This week, Robert Essner, the former CEO of pharmaceutical company Wyeth (now a subsidiary of Pfizer [PFE]) joined the Carlyle group as the senior advisor for its Global Healthcare group. This was after the firm hired Dubai International Capital's Eric Kump to run the European deal team.
But perhaps the biggest recent move was made by former Procter & Gamble (PG) CEO A.G. Lafley (pictured), who joined Clayton, Dubilier & Rice as a special partner. CDR has a track record of attracting top-notch executives such as former GE (GE) CEO Jack Welch.
The 21st-Century Deal-Maker
Over the past decade, the private-equity industry has undergone a major transformation. Because of the huge influx of capital, the deals got much larger. By 2005 to 2007, it was commonplace to see LBO deals over $20 billion: Equity Office Properties ($38.9 billion), Hospital Corp. of America ($32.7 billion), Harrah's Entertainment ($27.4 billion), Clear Channel Communications ($25.7 billion) and Kinder Morgan ($21.6 billion).
However, when financing is plentiful -- and equity markets are frothy -- it is not tough to buy companies. It's really a matter of analyzing the prospects of a company and making a competitive bid in an auction. Hey, any top MBA grad can do that, right?
Under those conditions, the hard part of the leveraged buyout comes afterward: restructuring the company and dealing with the debt load. In other words, deal-makers need deeper skill sets, and Lafley fits that bill perfectly.
When he came on board at P&G in 2000, the company was struggling to find growth, create compelling products and fight through disruptive competitive forces. Lafley realized that, to deal with its problems, the company needed to find ways to be more innovative. This meant encouraging more collaboration and implementing incentive structures that would reward fresh thinking. Lafley also sought innovation from outside the company -- even from competitors. He describes his strategies in his excellent book, The Game-Changer: How You Can Drive Revenue and Profit Growth with Innovation
At the same time, Lafley re-focused P&G on its core strengths. This meant a variety of brand divestitures -- Comet, Jif and Folgers -- as well as major acquisitions, such as the $57 billion deal for Gillette.
Finding ways to bring growth to massive companies is no easy feat, but Lafley, who left P&G in February, has proven that it can be done. For a private-equity firm looking to get strong returns on its mega-deals, tapping that sort of innovation-oriented skill set will be critical to success.