Busting some myths about private equity deals

10 January 2015
The Australian
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Such funding has its place, says the boss of an outplacement firm

When Jannine Fraser wanted to expand her executive outplacement business Directioneering a few years ago, the last thing she thought of was turning to a private equity investor.

She had heard all the horror stories about working with private equity, including some from executives she had helped who had been laid off as a result of private equity deals.

She rejected the advice from former Dun & Bradstreet Australia chief executive Christine Christian about her own experiences when she turned to private equity to finance a profitable management buyout in 2001.

But after sounding out a lot of alternatives, Fraser changed her mind and recently agreed on a deal that saw Mark Carnegie’s Sydney-based private equity firm MH Carnegie inject funds in return for a 51 per cent stake in the company.

The turning point in the deal was Fraser’s ongoing contact with Christian, who not only managed to convince her to consider a private equity investor but has just come on to the Directioneering board as a director.

“A couple of years ago I realised we needed an investor,” says ­Fraser, who has two decades of experience in executive career counselling, outplacement and helping retrenched executives find new jobs.

“We have a good growth story. I felt we need to be able to grow and capitalise on the ­opportunity beyond Australia’s shores.

“A lot of our clients are venturing over to Asia and they are ­asking for our support over there.

“I knew Christine’s story (about doing an MBO of Dun & Bradstreet Australia with private equity backing) but I dismissed it out of hand.

“There is so much rhetoric in the market about how negative the private equity experience is.

“I worked with a lot of C-level executives who had been moved out of organisations. Many of them have a terrible PE story ­attached to their past.

“I was very conservative and I really only looked at the banks as a funding model.” Fraser kept looking at different sources of funding, including bank loans and investments from high net worth individuals, but also kept on talking with Christian, who has also been president of Chief Executive Women for the past two years, along the way.

“She was forceful about keeping a far more open mind about private equity and what it could do beyond the injection of capital,” Fraser says.

After breaking off discussions with Carnegie several times, they finally agreed on a deal that also involved the firm appointing three new directors to the board, including Christian. Fraser now has just over 30 per cent equity in the company and is confident about expanding the business.

She says her final decision came when she realised the deal involved getting strategic advice on the business as well as financial support.

“It was more about the smarts and the strategic input I would get at board level (from a private equity investor),” she says.

“We now have a really logical, rational, objective board, which is an extraordinary sounding board. We are not bouncing things around and making decisions based on fear and risk avoidance at all costs.” The company has restructured its organisation on a national level. It now has more than 100 people working in the business around the country with plans for more expansion, particularly into Asia.

Christian was running US-owned credit reporting agency Dun & Bradstreet in Australia in 2001 when she and her top managers decided to do a management buyout. “The GST had just been introduced and the US parent was not willing to invest in Australia,” says Christian.

“They had decided they would direct their investment funds into China and India. I knew we were sitting on a goldmine once we had done the capital investment that was necessary (to be able to handle the GST).

“It led me to explore the opportunities around an MBO. That’s when I was first introduced to private equity.” AMP Capital helped to finance the MBO. A few years later, when AMP Capital wanted to exit, Christian began checking out the market for financing again. “There was no shortage of suitors to come in as the main investor,” she said. “ I wasn’t looking at private equity but I felt there was so much opportunity to explore (with the company), we decided to do a secondary buyout.” She was introduced to MH Carnegie, which took a stake in Dun & Bradstreet. Three years later they were planning to list the company on the stock exchange when they were approached by their old parent company in New York wanting to buy it back.

“We did it for 10 times the sale price we had bought it from them in 2001,” Christian says. “It was a very unique story.” Mark Carnegie has been a strong supporter of Christian and her business expertise, while Christian is one of the few women in Australian business to have a very positive practical experience of working with a private equity ­investor.

Christian said that, when she started looking at Directioneering and talking to Fraser, she felt there was a “huge opportunity for growth” for the company.

With restructuring now a constant part of major organisations, many want outplacements handled professionally and sensitively. Directioneering also works with laid-off executives to help them get new jobs.

“We are in the business of helping people land new jobs and taking the risk out of the exit for the organisation,” Fraser says.

She says there is always plenty of business, as the arrival of a new chief executive at a company these days almost inevitably leads to changes at the top executive levels.

“The change at the helm is really what triggers changes at the executive staffing levels and who sits where,” she says.

“That’s a pretty steady market in the scheme of things.” Christian says more people with small businesses should consider private equity investors as a source of investment capital.

“There’s a lot of misinformation out there about private ­equity,” she says. “There is a large part of the business community who sees private equity in a very negative sense. They have heard all the stories of years gone by where private equity investors come in, buy a large stake in the company, quickly cut out costs and sell it two or three years later. I just think it has a bad reputation.

“But then you see some of the largest companies around the world are private equity-owned. They are run by smart people who, together, grow the management. Together there is real potential to be unlocked.” Christian admits that working with a private equity investor does involve “an adjustment for many management teams who have operated in a corporate environment”.

“Private equity is about buying unexploited opportunities,” she says. “Generally over a defined ­period of time, they work pretty closely with the management team to do whatever is necessary to unlock that true potential.” Meanwhile, Fraser has aggressive plans to expand her business, including opening up new offices in Asia. “We want to be the market leader at the top end of the business across the Asia-Pacific,” she says. She also has plans to expand or tie up with similar companies in Europe or America.

Given the constant pressure on companies to restructure and cut costs, Fraser says everyone should expect to lose their jobs at least three times in their career. But while lay-offs are much more common these days, being laid off is “still quite a show stopper for most people”.Companies undergoing the restructuring also want to avoid personal and financial horror ­stories from their laid off executives. “Everyone wants softer landings,” she says.