The classic Private Equity (PE) model is fundamentally flawed and Fordhouse represents a new, better approach to direct investment.
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 portfolio 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 portfolio 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 work with a small group of investors who have a long-term view and afford us 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 work with a smaller number of investments than the median private investor: we believe in quality not quantity.
Longer term and evergreen funds are beginning to catch the attention of investors, and we think that this great. Building and investing in businesses takes time and patience rather than short term punts. This shift to the next generation of direct investment firms like Fordhouse will yield companies with more resilience, vision and impact, and investors with greater returns on their invested capital.