(Excerpts from Private Equity Interview with Hasit Vibhakar)

Most Private Equity Managing Partners finds deplorable, are the many cases of still employed C level executives, given pay raises despite shrinking corporate profits. In the Private equity world our firm or any other PE firm have a specific compensation model on how we compensate our portfolio company CEO’s. It’s simple we pay for success, this process works very well in the private equity space. I wish more public company boards would adopt such a model in paying public company CEO’s.

The difference is not in the amount. CEO’s and executives of private equity backed businesses often can make enormous amounts, Vibhakar means several times more then the larger public company CEO, that is if the investment pans out.

The key item is “if”. Private equity executives such as Hasit Vibhakar collect only when the business is sold. Moreover, our shareholders demand that we invest in our companies so we have our own money at risk. More then 90% of the compensation our management teams get at our companies is driven by the performance of the equity value.

The big numbers such (PE) Private Equity Executives such as Hasit Vibhakar make are all based on how the investment does. Hasit Vibhakar made it clear that the alignment of management’s interests and our interests is pretty absolute. In short, Private Equity firms such as the one Hasit Vibhakar runs take seriously the principal to which many public companies pay only lip service, that compensation should reflect results for shareholders.

Hasit Vibhakar comments on the model behind private and public. For a talented CEO, heading a (PE) Private Equity backed business can be far from enriching than guiding a public enterprise. Sponsors are happy to share generously with the people who help them sustain returns that outpace the stock market. Hasit Vibhakar who runs a Private Equity firm knows where managers once viewed (PE) firms with suspicion, today having your company bought out or even being hired to run a PE backed enterprise is viewed as a plum opportunity.

In order to maximize and make the entire program a success Hasit Vibhakar stated that at the same time, sponsors are giving their managers a bigger piece of the action as the competition for talent has heated up. It is not uncommon (on the big deals) to see a CEO that may be awarded up to a quarter 25% of the upside.

Hasit Vibhakar stated that some very opportunistic CEO’s have seen huge gains for their investment. He did not explain the process but stated that a $ 20 million dollar personal investment by a CEO can yield $ 200 million for that executive in 3-5 years. The downside is of course that the investment only breaks even, and then the CEO’s equity incentives would be worthless. The worst scenario would be if the business collapses, the CEO would be out of his own money ($20 million in the example) he risked. Hasit Vibhakar quickly stated that despite the risks, it’s easy to see why CEO’s of public companies would embrace such a challenge. In the PE world, you loose out if you don’t perform.

On the other hand, you have the opportunity to increase shareholder wealth and your own net worth in a way you couldn’t in the public company world. Hasit Vibhakar went on to comment that those worlds diverge in significant ways, and not only with respect to compensation. Every element of PE ownership, from the target company balance sheet to management incentives and how owners and managers interact, is geared to maximize a sponsor’s profit within 3-5 year time frame.

Hasit Vibhakar mentioned that they compel a CEO to think like a risk-taking owner and not a salary drawing bureaucrat. Hasit Vibhakar did not discuss the keys to his firms’ success in such a short period but explained that in practice, each sponsor has their own preferred and perfected compensation formula. All such formulas offer sensible remedies to public companies’ worst pay practices. In PE you never see such pay practices where if a CEO is asked to leave that they walk away with a windfall. There is no speedy vesting, most loose their unvested options and stock awards.

Hasit Vibhakar states that there is a different mindset. Public companies and their boards spend other peoples money – that of the shareholders. In PE world members dominate the board. Hasit Vibhakar goes on to state that; At a PE owned business, the board members, sponsors, and senior executives they hire – are all stockholders with their own money at risk. Vibhakar explains that we are all pulling for the same goal of elevating profits and scoring a big gain. Management and the Sponsor jointly develop the value building plan. In a PE backed company the shareholders call the shots, period.

The last question of the interview asked Hasit Vibhakar as follows: Will PE firms feel pressure to meet public companies in the middle and offer more corporate like terms if they find themselves competing for the same top talent?

Hasit Vibhakar (pause) comments, Not Likely, It’s a fundamental value of our industry that when we get our money, management gets its money. I don’t see that changing, ever. But then again there are no guarantees.

About Hasit Vibhakar

Hasit Vibhakar is a Managing Partner at a Private Equity Firm providing equity & debt financing to early stage companies. We specialize in capital deal flow and investment banking globally. A proven leader in seed stage venture investing. We support entrepreneurs in early stage companies with strategic advice, access and capital.

Source: Republic Research Institute (RRI)

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