The outcome of a private equity buyout is a better-run, more active company, not mindless cost cuts and a lack of investment, argues Rafeh Masood
Private equity (PE) buyout: a pain, a boon or a necessary evil? However you feel about these deals, one definite outcome will be better governance. Over the past few years, PE houses have not enjoyed the recognition they deserve. Cutting costs mindlessly and failing to invest in infrastructure or talent are some of the accusations laid at their door. However, after serving more than two years with a PE-owned company, my view is that, if anything, they can bring improved direction, discipline and rigour to companies.
Just compare the boards of a publicly traded company and a private equity-held entity – there is a stark difference in their governance. A PE-owned company board is much more active – the backers look at detail more rigorously, are not afraid to change the CEO and leadership teams if things are not going in the right direction, and they also provide much more capital if required. In short, they try to bring life back into ailing companies.
Consider the case of one PE buyout that I was lucky enough to be part of. BAWAG, an Austrian retail bank, was founded in 1922 by the trade unions. Around 10 years ago, it merged with another bank to form BAWAG PSK, one of the biggest banks in Austria.
In late 2005, Refco, a US commodities and derivatives brokerage, collapsed and the investigation led the authorities to BAWAG. Wolfgang Flöttl, an Austrian-born financer, was one of the personalities behind the collapse of Refco. He was also one of BAWAG’s most important customers and the bank had been prepared to try saving Refco to protect this elite customer. It lost more than €1 billion as a result.
In late 2006, BAWAG was rescued by a sale to Cerberus Capital Management, a US-based private equity-led consortium. Post-sale, it has undergone major restructuring to restore the bank to its glory days.
After the sale to Cerberus, management quickly moved to address the exorbitant cost income ratio of the bank. While most financial institutions, before the financial crisis, enjoyed cost income ratios of 50-70 per cent, BAWAG’s was above 90 per cent. To address this, the bank decided to transform a transactional back office unit responsible for processes and logistics into a world-class central procurement function.
The intention was to dramatically improve the cost structure of the bank. I was hired as the bank’s first CPO – a sign of progress but also a sign of how much the bank had been neglected.
Purchasing, when I arrived, was decentralised. The procurement unit stored office supplies and marketing materials, held an inventory worth more than €1 million and even had a library. Procurement was everything but procurement. Total third party spend topped hundreds of millions of euros and we had more suppliers than employees. The cost base had to be optimised and quickly.
A vision for procurement’s future was developed, which was to procure services and products to provide best value to the bank. As part of this, a simple policy was put in place that any spend above €10,000 with a given supplier, product or service in a 12-month period must be signed off by procurement. Once the value of procurement was demonstrated, we made it mandatory that all business must be competitively tendered through procurement.
But the most important component of building a successful business - the people – was also given time and attention, despite the generally held opinion that PE-run companies ignore staff needs in favour of cost cutting.
Role matrices and proper training plans were introduced. Engagement of key stakeholders was also undertaken and satisfaction surveys have shown we are making progress. Success is actively marketed. Any department head outside procurement who saves more than €500,000 joins a “Million Euro Club”. They are rewarded with a certificate and a gift to illustrate the company’s appreciation.
Two years into the procurement transformation, the efforts are bearing fruit. The bank now enjoys a cost income ratio in the 60s. A competent sourcing team is in place, the bank has moved on to its second CPO and there is a focus on innovation and progress, not merely on meeting needs. Whereas other banks were forced to make cuts when the recession hit, measures put in place by PE meant we were already lean, fit and well prepared for the downturn.
Rafeh Masood (rafehz@gmail.com) is the former CPO of BAWAG PSK and currently acting as an adviser to the bank
