In the Introduction, Josh Kosman offers what he calls a “little primer” on how private equity firms operate, explaining that they “buy businesses the way that homebuyers acquire houses. They make a down payment and finance the rest. The financings are structured like balloon mortgages, with big payments due at some point in the future. The critical difference, however, is that while homeowners pay the mortgages on their houses, PE firms have the businesses they buy take out the loans, making them responsible for repayment. They typically try to resell the company or take it public before the loans come due.” It soon gets even more interesting. “As long as the PE firms could refinance, or turn around and sell off their holdings before the biggest loan payments came due, spectacular flameout bankruptcies could be avoided…PE firms would like to have us all think the reason they try so hard to raise earnings in their businesses [by `starving companies of operating and human capital'] is so that companies can use these profits to pay down the money they borrowed to finance their own acquisitions. But the records show that during the 2003-7 buyout rush, that wasn’t generally the case. Instead, they used the profits s a basis to borrow more money. The new loans, which were piled in top of the original debt taken on to finance the LBO, were used to issue dividends” to the (you guessed it) PE firms. What if all, most, or even only some of the companies collapse? No problem. The PE firms have incurred no debt while receiving dividends as well as substantial management fees. “Despite the credit crisis in 2009,” Kosman notes, “PE firms are sitting on roughly $450 billion in unspent capital and itching for more deals.” Of course they are. Given their resources, why wouldn’t they?
Kosman explains how and why PE firms “put their companies into crippling debt and, unlike entrepreneurs, who manage their businesses to succeed in the marketplace and grow, they manage their companies largely for short-term gains.” PE firms hurt their businesses competitively by limiting their growth, cutting jobs without reinvesting the savings, do not even generate good returns for their own investors. According to Kosman, they are “about to cause the Next Great Credit Crisis,” one that could leave about two million of the 7.5 million Americans who work at PE-owned companies unemployed, and more than one thousand businesses bankrupt. “Leadership is needed to rally opposition to close the tax loopholes that make this very damaging activity possible.”
Kosman provides a wealth of information (financial data and statistics as well as real-world situations) to support his observations, recommendations, and especially his accusations. After reading the book and then re-reading several key passages that I highlighted, I wish Kosman had included other perpectives on the issues he raises. For example, the thoughts of those who head the most active PE firms, of federal officials associated with relevant regulatory agencies, and of analysts who are best qualified to discuss PE firms. It seems that PE firms could play an important role in the process of what Charles Darwin characterizes as “natural selection,” one from which some businesses survive (and perhaps even thrive) while others do not. Kosman asserts that these firms must not be allowed “unnatural” advantages that corrupt free market competition. Whether or not his call for action results in any significant reforms of what he calls “tax loopholes” remains to be seen.
The Versatile Leader: Make the Most of Your Strengths – Without Overdoing It
Bob Kaplan with Rob Kaiser
Pfeiffer/John Wiley & Sons (2006)
Written in collaboration with Rob Kaiser, Kaplan has selected versatility as his “capstone concept” and notes several of its dominant characteristics. “”First, versatility is usually understood as a wide repertoire, along with the capacity to call appropriately on one capability or another…Second, versatility is defined as covering all of the two-sided bases that are deemed appropriate. The book is predicated on two major pairs [identified in Figure P.1. on Page xix in the Preface]…Third, being versatile in this sense departs in another way from the usual meaning of the word. It is not just having enough of both sides of every major pair but it is also not having, or more precisely not employing, too much of either side. Getting it right depends, however, on something that is not a foregone conclusion for leaders – having an accurate on how much they are deploying, neither too little nor too much.”
Kaplan then shifts his attention to the final characteristic. “Fourth, to employ pair-wise capabilities adeptly, two conditions have to be met. The individual must be evenhanded with each pair, when the tendency is to place too high a value on one side and to disparage the other. The second condition is that the leader be self-aware both about the way he or she behaves with respect to each pair and how he or she regards each pair.” The versatile leader, therefore, must develop a sufficient number capabilities and continuously strengthen them; he or she must understand the nature of each capability and possess the sound judgment required to know when to exercise which and to what extent; and he or she must, meanwhile, maintain (for lack of a better term) humility in combination with a sincere concern to serve those entrusted to his or her care.
As Kaplan makes crystal clear, versatile leaders are not creatures of expediency. They identify and focus on what is most important, then measure and reward what is most important, and meanwhile ensure that those for whom they are responsible do the same. Although they are versatile in terms of capabilities, they have steadfast, non-negotiable core values that they consistently demonstrate in their behavior. That is how they earn, preserve, and deserve their associates’ trust and respect. Versatile also leaders delight in others’ achievements and eagerly celebrate them. They think in terms of first-person plural pronouns. They are aggressive and tenacious but principled competitors.
Much has been written about how to establish and then sustain a “versatile” organization but as Kaplan so eloquently as well as compellingly explains, achieving that worthy objective depends almost entirely on first having developed a sufficient number of versatile leaders at all levels and in all areas.