5 Tips for Small Business From Hedge Fund and Private Equity Magnates

Advice from hedge fund and private equity managers can resonate with all market players, whether investors, institutions, large or mid-size companies and small business. Here are five tips that can be applied to small business
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Power makers and breakers recently attended the CNBC Institutional Investor Delivering Alpha Conference in New York. Some of the attendees included Henry R. Kravis, Co-Chairman and Co-CEO of KKR, Robert S. Kapito, president of BlackRock Inc., Timothy Geithner, U.S. secretary of the Treasury and many others. The hedge fund managers and investors in attendance represented over $2.5 trillion in investible assets.

Timothy Geithner said "the fortunes of people in this room are tied to the fortunes of all Americans." In line with this, key topics discussed at the conference were the economy, taxes, unemployment, job creation and small business.

The comments and advice shared by the hedge fund and private equity managers can resonate with all market players whether investors, institutions, large or mid-size companies and small business.

Here are five tips that can be applied to small business:

1. Culture and shared values

Henry Kravis, Co-Chairman and Co-CEO of KKR, shared his views on his firm. He said "every employee at KKR is an owner. That is the only way to build lasting business." In speaking about his Co-Chairman and Co-CEO George Roberts, Mr. Kravis stated "he is my cousin, my best friend. We don't have arguments. I have known him since I was 4 years old and we have shared values."

In your small business, have you taken any time to step back and think about your employees and who is involved in managing the company? You may not know any of your business partner(s) or team since you were four years old, but have you invested time in having a sound relationship with them?

Have you developed a culture, environment and compensation structure where your employees feel valued and rewarded? Have you evaluated whether it makes sense or is appropriate to make your employees owners? In the nature and context of your business, have you developed an organization spirit and fabric where your team is committed to and vested in the success of the company?

The concept of "shared values" is not fluff. It speaks to common and mutual respect, understanding and integrity. This in turn impacts your business principles, objectives and practices.

2. Value driven pricing

Clifford Asness, managing and founding principal of AQR Capital Management, said "there is not enough Alpha to justify the high fees. How do we bridge this gap?" (Alpha refers to the return over and above an appropriate benchmark index or the return on the market.)

Every entrepreneur wants to make money and charge as much as possible for their product or service. Have you taken an objective view and thought about how your customers evaluate the value that you provide? Are your customers underwhelmed or not satisfied?

In this highly competitive world, over time, a customer will find alternatives if they are dissatisfied with the product or service, especially if they feel that they are over paying. Creating and building sticky customer relationships involves not only the quality and service that you provide, but there also being a mutually beneficial value exchange.

3. Local market understanding and local partners

Jim Leech, president and chief executive officer of the Ontario Teachers' Pension Plan said "we put people on the ground to understand what is happening in each market." Afsaneh Mashayekhi Beschloss, president and chief executive officer of the Rock Creek Group, echoed "having local partners and understanding is critical."

Small business does not only mean domestic business. Whether your small business serves clients in the immediate area where it is located, other cities throughout the country or other countries in the world, having and applying knowledge of market practices specific to each locale is a differentiator.

Each local ecosystem has its own written and unwritten rules. Learning and developing experience with the business and operating culture, as well as nuances of a region are critical inputs to analysis, decision-making and any market delivery strategy.

4. Business expansion strategy: fundamental understanding and alignment of interests

In thinking about investing in businesses, Henry Kravis, Co-Chairman and Co-CEO of KKR, shared his criteria as follows: Does the investment meet the brain trust within KKR? Does someone on the management team understand the business? Are our investors interested in that business?

As a business owner, you may consider growing your enterprise at different stages. Whether it is growing to scale, acquiring new customers, offering new products or expanding into new lines of business or geographic markets, there are many factors to consider.

Sometimes we can get caught up in excitement and optimism, and not execute a critical diligent and deliberate evaluation process. The criteria set forth by Mr. Kravis can help you get started.

5. Ethics and follow the laws of the land

"No company is too big to prosecute" said Preet Bharara, United States attorney, Southern District of New York, as he was interviewed at the conference. Preet Bharara shared how when he speaks to business people or recent MBA students, he is asked how close to "crossing the line" can one go? Mr. Bharara stressed the importance of following fair and sound business practices.

The risk to do anything else is just not worth it.

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