Montagu at 50 - Lessons from the Past Five Decades
By Jason Gatenby, CEO of Montagu Private Equity
London | 26 October 2018
Nineteen sixty-eight was a year of political and cultural upheaval and technological triumph. The Vietnam War was at a critical point. Martin Luther King Jr. was assassinated. The Prague Spring flowered and was subdued. We listened to the White Album and watched 2001: A Space Odyssey. Boeing launched the 747 and Apollo 8 sent a manned mission around the dark side of the moon.
For Montagu Private Equity, 1968 holds extra significance—for it was also the year the firm launched. Midland Montagu Industrial Finance, as we were known then, was incorporated on Sept. 4, 1968, to provide risk capital to small, British businesses. The reward for taking this risk was in the value of the equity stakes Montagu invested in these companies.
In the half century since, both Montagu and the European private-equity industry as a whole, have changed enormously. But as we mark our milestone anniversary, we reflect on some of the things that have helped us navigate the past 50 years.
Leverage and cyclicality don’t mix
It is near impossible to call an economic cycle—there are few people who have successfully done that with precision. Accepting this limitation on our forecasting ability has meant we have tended, instead, to be rather careful in how we deploy our investors’ money, and we have had to ensure the businesses we own are ready to weather a potential downturn at any moment. In part, that means not overloading them with debt. For us, it has also meant concentrating on buying companies that are less prone to economic cycles; that is, businesses that offer something people need rather than something they desire. It is more than a decade since Montagu made a loss-making investment.
The importance of urgency
There are no prizes for hanging around in business, and sometimes that means taking a more pragmatic approach. Changing things usually means delay, and that isn’t necessarily the best way to deliver a successful deal: sometimes it is about making the most of what you have. If you are thinking of changing a portfolio company chief executive, you may well spend a year identifying a likely candidate and they might not be available for six months or more. They have to learn your business; that’s probably another year. Then it’s another 12 or 18 months to implement their changes, the results of which probably won’t show up for yet another year. To us, that’s an unacceptably long time and there may be better ways to deliver change.
Do things in parallel
No matter how good the business is that you invest in—and we try to buy companies that perform well—it is imperative to try to further improve those businesses. We have worked hard at Montagu over the past 12 years to develop an operational support team to help our portfolio companies and implement improvement programmes in parallel, rather than in sequence, to accelerate change. Most management teams have limited bandwidth: There is only so much they can do at any one time and they have a lot of things landing on their desk all the time. As a firm, we have decades of collective experience of delivering change that we can bring to bear to help our companies work through big projects simultaneously.
Alignment of interests
I believe that this simple maxim has been the driving principle behind the private-equity industry’s spectacular success over the past few decades and the reason why increasing numbers of investors and management teams are drawn to it. Our ability to incentivise the key decision-makers of the businesses we back with equity in those businesses, combined with our own returns being generated via co-investment programmes and carried interest, means we have complete alignment with our investors. The most crucial element in the whole arrangement is that all parties are only paid when the gains are realised.
Leave your ego at the door
Of course, things don’t always run smoothly in any given business, and one thing we have tried to do is create an environment where bad news is accepted. It is hard for executives to provide accurate and timely information if they feel that information reflects badly on them. People need to be able to feel that if they have a problem, they are able to share it. The alternative is very dangerous in an environment where there is pressure and leverage. Collective experience is a far better route to tackling most issues, rather than having an individual trying to solve things on their own. The corporate memory is truly valuable in these moments. We have also found it to be the case that the best chief executives are the ones who are able to accept help.
These principles have stood our firm in good stead. Even as the industry continues to evolve and expand, we hope that sticking to these will ensure we continue to deliver for our investors for the next 50 years.