A leadership transition at consulting firm Bain & Co., which has advised private equity firms and their portfolio companies for more than two decades, sees Hugh MacArthur shifting to global chairman of Bain’s private equity practice.
MacArthur helped found the practice more than 25 years ago and has led it ever since. The consulting firm’s private equity work currently represents around one-third of Bain’s global business, according to the firm.
As part of the transition, Rebecca Burack, who has been with the Boston-based firm since 1998 and the leader of its private-equity practice in North America since January 2019, has assumed MacArthur’s previous position as global head of the private equity practice, becoming the first woman to hold the job.
Burack recently spoke to fellow Dow Jones Group brand WSJ Pro Private Equity about the current challenges facing private equity firms and how the industry may need to adapt its approach and portfolio assumptions. Responses have been edited for clarity and length.
WSJ Pro: The environment is getting more challenging for investing. What do you see as the biggest challenges private equity firms face in managing their portfolios?
Burack: We’re seeing investors really needing to go back to the basics of how to make companies more valuable. If we think about the past decade, returns have been driven by multiple expansion, and, if we assume inflation and interest rates [stay] where they are, that’s no longer going to be the driver that we can all count on. So how do you go back to the basics, meeting with management teams to drive that operational improvement, whether that be growth or cost levers?
If we go back to the basics, what’s the talent you need in order to do that? How does your operating model change? On top of that, just like every business, attracting and retaining top talent is a challenge. Then we [also] have the diversity goals that the industry collectively aspires to, which create even more challenges.
WSJ Pro: You have a strong background in the industrial sector. How do you see private equity firms approaching industrial deals now?
Burack: There are great opportunities in industrial deals today. It is an area of the market where we are seeing relative strength, and I think there are a few reasons for that.
The first is [the existence of] inflation winners in industry [sectors]. Which companies can pass on rising costs to customers without skipping a beat? Those businesses are going to disproportionately benefit in the current environment. One element of understanding that [question] is truly understanding the value chain of the business and understanding where in that value chain you can actually pass your costs through. Where you can [do that]this inflationary environment is actually not so bad for you.
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I think there are other industries [sectors] that are advantaged through having a clean-energy focus. That’s been true in Europe for years and it’s coming through in the US, with the passage of the Inflation Reduction Act. There are elements of solar or wind or mining [of] metals for batteries, where there are now opportunities driven by the focus on clean energy.
WSJ Pro: If you look at how private equity firms are managing their portfolios now, what steps should they be taking to make sure their companies can thrive?
Burack: Plan for scenarios, not certainties. The range of potential outcomes is much wider today than most investors or businesses have had to prepare for. Understanding deeply what are the most likely scenarios for your industry and identifying and focusing on those few things that matter most for the types of businesses that you’re investing in [is important].
The second thing is to realize that most people in our industry have never invested in or been on a board of a company in a period of sustained high inflation like we have had today. It’s right [been] too long since we have seen this, so [it’s important to] avoid what we might call a ‘straight line’ mistake. In a calmer market, you could assume that past performance of a company was predictive of its future trajectory. But in today’s market that’s not [a safe assumption].
Questioning whether the rapid growth of the past three years is a sign of real strength or an impact of inflation is critical to funds today, as is making the right call about how to partner with your management team in asking that question and then acting on the answer…Firms should take a fresh look with that lens at each of their portfolio companies.
It’s almost a certainty that a number of the assumptions originally underpinning how you planned to make money are just not true right now. Where do you need to shift strategy, and where do you need to up your game in certain elements of the existing strategy?
Write to Laura Kreutzer at [email protected]
This article was published by Dow Jones Newswires, a fellow Dow Jones Group brand