Private equity firms sometimes get a bad rap, criticized as plunderers or – perhaps most memorably – the “barbarians at the gate”. But in a region where many private sector companies are owned or operated by a holding company, family conglomerate or sovereign wealth fund, there are lessons to be learned from private equity, to both strengthen companies and advance government reform agendas.
Private equity firms adhere to a discipline that could benefit many private sector companies in the GCC. Although they may be influenced by a range of other metrics of a company’s success, from operating capacity to long-term revenues, private equity firms’ decisions ultimately come down to the bottom line: does this company generate enough cash?
By placing a priority on short-term value creation and cash generation, company owners can take best advantage of the opportunities offered in today’s economic landscape, while also establishing stronger foundations for the longer term. A focus on mobilization, business improvements and sustainability can help companies compete and succeed in this evolving – and sometimes challenging – macroeconomic environment. It is particularly imperative for consumer-facing sectors in Saudi Arabia, which have seen the cost of doing business increase by an average of 15 percent over the past three years.
Many shareholders in these companies’ ownership structures are already taking bold steps to adapt to these new realities, including by changing their boards and incentivizing portfolio professionals to be more involved in the assets, but there is room to do more.
A private equity mentality doesn’t just benefit the companies adopting it; it also advances regional government agendas, helping cut dependence on subsidies and creating and strengthening national champions. Stronger companies provide better opportunities for workers, in more sustainable positions.
Moreover, the success of an organization is directly correlated to better employee morale. A simple change in leadership mindset can build a stronger, healthier company, with better long-term prospects and a more engaged workforce.
So how to do it? For a start, owners need to conduct a thorough review of the financial robustness of their operating companies. Where it is not already, a visible and controllable cash management process needs to be put in place, and organizational incentives restructured to instill a cash culture. Cash flow maximization has two key benefits: it provides sufficient flexibility in day-to-day business, and it can be used as a strategic lever in pursuit of game-changing acquisitions.
With the right financial structures in place, owners need to take a closer look at governance and reporting structures, to really understand the value of their assets. What is the process for hiring and developing top talent? Could that process be improved? Are all the roles in the organization clearly delineated? Are any missing? Is there enough transparency in the organization? Are all departments working towards the same ultimate goals? Is the clear ownership of corporate priorities across the executive team?
Asking these questions, and addressing any “nos”, will help shift owners and companies towards a more results-oriented mindset, underpinned by strong structures and processes consistently implemented. Ultimately, the most important predicator of success is whether the individual responsible for each asset – or each company – is incentivized to create enterprise value. He or she must be able to focus not only on increasing shareholder value but also on maximiszing value for all stakeholders.
This is the core tenet of the private equity mindset, and the most valuable lesson for the GCC private sector. That’s why it’s at the heart of the comprehensive, fast and execution-oriented approach we at AlixPartners call a Proactive Transformation. Help employees understand – and get on board with – the rationale for measures that cut costs. Explain to suppliers that the company is entering a significant growth phase, and negotiate for the best prices with that in mind. Engage every stakeholder in the company’s purpose and mission.
Nimble management consultancies can help implement these strategies, but the first step needs to come from the owners. A simple shift in mindset can help build a stronger future for the GCC private sector, and everyone who interacts with it, from government agencies to individual consumers.
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