13 Fascinating Things We Learned About Private Equity From Bloomberg's Huge New Feature

Bloomberg Businessweek cover

Photo: via Politico

Next week’s issue of Bloomberg Businessweek will feature a story on private equity firm Monomoy Capital called ‘My Week at Private Equity Boot Camp’ and it’s a monster — 5 pages of in depth access to the everyday workings of the firm. Brendan Greely, the reporter, participate in the action.This is rare for an industry as small, powerful and clandestine as private equity. Monomoy specialises in buying mid-sized manufacturers and improving their efficiency.

Anyway since the article itself is so long, we’ve broken it down into the most important firms for you. Obviously, private equity firms vary a ton from company to company, but this should give you a cool look at what the strive for in general.

Oh, and by the way, Greely ultimately did come to a conclusion about whether or not the industry is harmful, helpful, or downright useless to the economy. And contrary to what Bloomberg Businessweek’s menacing (and controversial) cover, Greely likes what Monomy does:

Practiced this way, private equity is not slash-and-burn liquidation, extracting money from capital. It’s not overleveraging, making profits off dividends paid out of unsustainable loans. Private equity, the way Monomoy does it, is a castle in the sand, a brief victory for order in the constant slide toward entropy.

To make company's more efficient, Monomoy holds 'boot camps' four times a year.

There are tons of tools the in the private equity tool box. Firms can send someone in as an advisor to a CEO, they can send in their own team to manage, etc.

Monomoy's 'boot camps' are intense two week efficiency training courses held four times a year. About 20 of the manager's of Monomoy's portfolio companies go to one manufacturing floor and suggest ways to make it more efficient.

Source: Bloomberg Businessweek

This bootcamp is being held at the Heat Transfer Products group

Based in Scottsboro Alabama, Heat Transfer Products Group designs and manufactures heat transfer components and equipment for refrigeration applications in the food service, food retail and other non-consumable markets.

Source: HTPG

That's where they apply a concept Monomoy borrowed from Toyota, 'kaizen' as their philosophy.

Kaizen means continuous improvement. Employees use it as a verb and a noun to describe what they do.

From Bloomberg Businessweek:

Stewart, Bray, and the rest of the operations team apologise for the system even as they ruthlessly carry it out. Their accents, their dress, their turns of phrase all say: We are going to upend your workday, but it happened to us once, too. We've swung a hammer. We like Wildcat basketball. It's going to be OK.

More wisdom from Japan — Seri, seiton, seiso, seiketsu, shitsuke.

When you apply the principles correctly, it just makes sense to get rid of some staff.

It's sad for the employees, but if a company becomes more efficient, some people just aren't needed as much.

In 2010, Monomoy cut 86 workers from HTPG's payroll in Scottsboro. Then a funny thing happened. A year of boot camps has helped the company beat industry lead times, the weeks that pass between sale and delivery. On-time delivery ran at 72 per cent before Monomoy bought the plant; so far for 2012 it's at 96 per cent.

The net loss at HTPG, by the way, was 75 people.

Source: Bloomberg Businessweek

But you can't make a company really profitable just by cutting staff. You need to cut costs.

From the article:

The partners at Monomoy are not saints, and people are expensive. But if you cut costs through head count alone--and not by improving operations--you have to just pray the economy goes your way. To survive, you cut people. To grow, you cut waste.

Source: Bloomberg Businessweek

A great CEO isn't everything either.

Japan gave Monomoy a philosophy about waste as well as efficiency — muda, mura, and muri.

That means there are three kinds of waste:

  1. movement that creates no value
  2. overburdening people or machines
  3. inconsistent production

'Muda, mura, and muri all add drag on capital just like a day's wages, but they hide on the plant floor.'

Source: Bloomberg Businessweek

At bootcamp, the tiniest waste of movement (muda) is scrutinized and eliminated.

Here's how Greely figured out how to make getting a 10 minutes fax faster, it took him 4 days:

We will install it (the fax machine) on the end of a row just inside the loading bay and rig it to a photo sensor and a rotating green light to summon the forklifts. I have discovered a muda: movement that creates no value, in this case movement between the office and the warehouse floor.

Source: Bloomberg Businessweek

Little adjustments can take burdens (mura) off of employees.

All Monomoy had to do to make one tall worker happier was elevate the keyboard on his computer so he wouldn't have to bend over while he stood and typed.

Source: Bloomberg Businessweek

All that said, there are a lot of stopwatches in this story.

  • I begin bird-dogging the fax machine in the warehouse office, pouncing when orders arrive from the plant. Paul Griffin, one of Lynch's forklift drivers, gets an order, and I follow him on a pick with my stopwatch.
  • Judy Lynch is driving a forklift, and I am trotting behind her. A plastic stopwatch hangs from my neck on a lanyard, and I am carrying a clipboard...

Source: Bloomberg Businessweek

Monomoy believes that in private equity, the money-making sweet spot isn't in chasing big deals.

One of Monomoy's CEOs believes that if we make companies efficient in the USA, we don't have to offshore.

Want to know about someone who transformed the PE industry...

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