Elias Sabo on how risk gets misplaced under the typical PE model

Private equity often places an undue level of risk on those involved with that company, according to Elias Sabo, co-founder of the publicly traded Compass Diversified.

“When you think of traditional private equity, it’s the partners and the investors who get rich, but who takes all the risks?” Sabo said. “It’s the community where it operates. It’s the employees who are employed there. It’s the vendors. All of those groups of constituents will never participate in the upside.

“We believe that model is upside down in that it creates risks for those who shouldn’t have those risks and economic incentives for those really at the top of the chain.

“When you overleverage a business, we think it constrains the ability to make the right operating decision,” Sabo said. “That model works really well in a rising multiples environment.

“Our model is set up to endure changes in multiples and changes in interest rates environment much better because we aren’t set up to use a lot of leverage. Our model is better for times when you don’t have everincreasing asset prices.

“We think our model aligns better with where we think corporate values are going.”