By Raj Gupta and Alyssa Abbott
As featured in Directors & Boards.
For over two decades, I have served on several public and private company boards spanning various industries and sizes. I have developed a strong conviction that boards and C-suites of public companies can learn a lot from private equity companies. I also believe that CEOs of public companies with prior experience at a private equity firm see tremendous success, as illustrated by Ed Breen at DowDuPont (formerly at Tyco) and Kevin Clark at Aptiv (formerly Delphi Technologies).
PE firms have delivered better returns to investors in the last decade in rising public equity markets compared to index funds, hedge funds and active investors; even though their liquidity is limited and the cost of capital and fees are higher compared with their public counterparts. It is no surprise that the PE industry is growing much faster than public markets, and that the number of public companies has shrunk by nearly 50% in the last 20 years.
From my experience, there are several unique features to the PE approach that public companies should consider to enhance value creation:
Before making an investment decision in a highly competitive market place, PE firms develop a detailed understanding of the market, clear investment thesis, well-defined performance metrics, and a target return in four to six years.
Second, they attract top talent to the board and C-suite because of true pay for performance, total alignment between the owners, board, and management, and without the distraction of activists and quarterly earnings pressures.
Finally, they make rapid and, more importantly, bold decisions without the bureaucracy and regulations seen at large public companies.
Both public and private firms will continue to thrive. There are, however, opportunities for each to learn from the other as to how governance effectiveness can be enhanced.
I have been fortunate to serve as chairman of Avantor since the PE firm New Mountain Capital invested $280 million in a specialty materials company in August 2010. On May 17, 2019, the company was listed on NYSE for $14 billion in enterprise value. A series of bold acquisitions, flawless execution, an excellent leadership team supported by a patient PE firm, and an engaged board contributed towards this exceptional value creation for owners and a handsome reward for the directors and executive team.
The PE model allows for the agility needed to respond to today’s dynamic market place while managing risks and I believe public companies that adopt some of these practices are better positioned to enhance value creation.
Raj L. Gupta, Chairman of Aptiv PLC (formerly Delphi Automotive PLC). From 1999 to 2009, Gupta was Chairman and Chief Executive Officer of Rohm and Haas. He has also served on the boards of HP, IRI, The Vanguard Group and Tyco International, amongst other companies. Alyssa Abbott assisted in preparation of this column.