In the aftermath of Klaussner’s sudden shutdown, social media is full of commentary blaming the once-venerable company’s demise on its private-equity ownership. As mentioned in this space last week, it’s not entirely clear which decisions leading to the company’s demise can be laid at the feet of its parent company and which were the result of actions taken by the company’s industry-facing management.
It is, however, reasonable to assume that if the PE firm disagreed with the choices that led to Klaussner’s closing, it had the ability to intercede and change them. This leads us back to the issue so many people in the industry have with PE ownership of furniture companies, which is a visible track record of success that would get any baseball player sent to the minors.
It’s important to point out that not all private-equity-owned companies in the industry end up shutting down. In fact, there are companies that have delivered continued success under successive PE ownership. So it can be done. It just seems that too often that is not the case. That could be for a couple of reasons.
First, there’s the matter of visibility. There’s nothing more visible than a company that goes out of business and costs hundreds of people their jobs. When a company is successful, no one really talks about their ownership. The focus is on what they create, sell and build.
When a failed company is privately owned by an individual or a family, the blame falls on the actions of a specific person or group of people who are typically known to customers and compatriots in the industry. No one blames the practice of “family ownership” as general cause. Yet we can all point to family-owned businesses that closed down.
When a PE-owned company fails, it’s rare that the PE executives are known outside the company’s management. To the outside world, the person to blame is the person in charge, and that name is always the same: “private equity.”
The other reason PE is viewed with suspicion is inherent to the business model. The mandate of a private-equity firm is to deliver returns to its investors over the life of a given fund, often in the five-year range. If a fund’s investors get a good return over that period, it doesn’t matter much whether or not the purchased company is stronger, weaker or even in business as long as investors get their payout. The purchased company is a means to an end.
Growing the company long term, providing jobs to local families, delivering great customer experience are largely outside the parameters of the exercise. The PE firm’s ability to raise future funds is also likely to be enhanced by the returns it delivers, not by the long-term well-being of its current or former investments.
Where that does come into play is when that PE firm looks to make future acquisitions in an industry that’s been burned. Ever notice that some firms seem to bounce from industry to industry? For anyone considering private equity as an exit option, that might be something to consider as we head into what is likely to be a very active coming year of merger and acquisition activity.