Private Equity is broken

The classic Private Equity (PE) model is fundamentally flawed.

PE funds typically have lifecycles of around 7-10 years end to end, which can be broken down into 3 phases:

The first few years are spent fundraising; sourcing funds from a variety investors.

This is followed by the investment period where the raised capital is deployed into the fund’s investments; deals are completed and operational improvements are made. This typically lasts for 3-5 years (5 being the average holding time for a PE backed company).

In the final stretch, PE investors will look to crystalise their returns by selling on their partner businesses to trade or another PE firm.

We believe this model creates two massive perverse incentives:

If you don’t get the money out the door in the first couple of years post-raise, you have to hand it back to the investors. This drives poor investment decisions, as PE firms panic buy towards the end of the capital deployment period.

There is extreme time pressure from investors to return funds (with a hefty profit) resulting in PE managers becoming driven by increasingly tight deadlines, typically measured by Internal Rates of Return (IRR). The means that less time can be spend working with partner businesses, improving operations and adding genuine business value and more efforts are committed to short-term deal engineering.

This is why we decided to set up differently at Fordhouse. Our core belief is in creating value through sustainable operational improvement rather than financial engineering. We are not working to a fund timetable, so we can take as much time as we need to focus on operating and growing solid businesses that will thrive in the long-term. It is also why we partner with a smaller number of businesses than most acquirers: we believe in quality not quantity.