Up, up and away

As GPs stretch themselves across vaster geographies, travel will account for a larger portion of the expenses of running a private equity firm. A rather rudimentary but important set of questions arise from this – how much should be spent on travel, and who should pay for it? Further to this, it is well accepted that GP time is valuable, but valuable enough to warrant exclusive private jet travel paid for out of LP pockets?

Let's compare. The cost of charting a private jet to fly a deal team of five from New York to Hong Kong for a week's stay is roughly $300,000 (€233,000), not including the cost of food and beverage service. The price for that team to fly first class on a commercial airline for the same length of stay is $16,000, complete with the meals, toiletry kit and those nifty sleep socks.

Given the global nature of so many portfolios today, the sheer volume of flying argues for a more rational approach to travel.

The choice is made touchier by the issue of who pays for travel. In a 2005 survey of GPs, published by Dow Jones' Private Equity Analyst on terms and conditions, 60 percent of buyout teams said they bore their own traveling expenses, while the figure moves up to 80 percent in the case of venture firms. But many industry sources say the true state of the market is even more heavily weighed toward the GPs paying for their own travel. Sometimes in the case of broken deals, these costs may be charged to the partnership, but that's a fraction of the total miles traveled. These expenses often get billed to a given portfolio company or companies.

Spreading travel costs across the management fee and the portfolio companies may soften the blow, but it never dodges it. Just six excursions on that private jet for five swells to a bill of $1.8 million, which, if charged to a portfolio company, means a bite out of EBITDA.

Some GPs have tried to compromise in this area. An industry observer notes that one managing director uses a private jet frequently, paying out of pocket everything above the price of a first class ticket to the location; generous, but hardly a policy that all will adopt. Sourcing deals and raising funds can't be done effectively through only email or videoconference, so geographic expansion comes with a price tag, and executives concerned with optimizing costs will turn an eye towards the private jet debate. The principle of gravity, along with common sense, argues that the current boom will cease, and those new offices in emerging markets will need to be managed through a market slowdown.

Setting aside the benefits of hitting the ground refreshed, ostensibly from avoiding the vagaries of sharing a cabin with strangers, there are more substantial factors to consider when choosing which form of air travel to use. There is the issue of time. The long security lines, the check-in procedures and the tendency for airlines to delay flights all tack on hours to the process. For a conference or quarterly meeting, this may be suf-ficient, but when tackling a crisis with a portfolio company, or meeting prospective sellers, the people to be visited may not be so patient with the slings and arrows of commercial flight. But if a six hour delay wouldn't jeopardize the purpose of the trip, the major carrier could be the way to go.

Location should also be considered. The sample trip to Hong Kong assumed the team wasn't flying anywhere else within China- perhaps a location nestled far inside the mainland, where there may be few commercial flights. The jet offers clear advantages in this case, and given the remote locales for outsourced manufacturing, the jet may prove a frequent option, still. The week long trip by yak may be picturesque, but it's certainly not efficient. Still, for the flight to the firm's offices in Shanghai or Mumbai, the commercial airline may do, once again, according to the urgency of the visit.

In matters of convenience, reliability and comfort the private jet wins the argument, but given the global nature of so many portfolios today, the sheer volume of flying argues for a more rational, if not more conservative, approach to travel.