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Mon, 30-Mar-2009 Driving Growth: How Private Equity Investments Strengthen American Companies report by the Private Equity Council provides an overview of how private equity firms drive growth and create value in the companies in which they invest. The report refers to American companies, however, these principles would apply and be useful in any country at any portfolio company. Given the major changes in the financial landscape and the global economic crisis, the days of driving a majority of growth in enterprise value through financial engineering and leverage are long gone. Private equity firms must primarily focus on improving and enhancing portfolio companies to drive enterprise value growth and ultimately investment returns. Please see a copy of the report below or directly download here.
For illustration purposes of the value-add from private equity, there are case studies of U.S. companies such as Burger King, Sungard and Autozone in the report. Most importantly, the report covers key principles on how private equity ownership permanently strengthens companies and increases enterprise value. The key principles (as abstracted from the report) are as follows:
Four Cs of Private Equity
- CAPABILITIES
- Private equity works very closely with portfolio companies, especially post-investment. Private equity owners often act strategically to infuse their own talent into the companies they acquire. The lead partner on a transaction often will spend half or more of his or her time working with the portfolio company management team for the first few months after its acquisition. The private equity owner helps management design and execute near-term improvements and develop a detailed multi-year business plan. In the crucial time immediately after acquisition, private equity owners work with portfolio company management to stabilize the business and set it on a higher performance trajectory. Read More »
Tue, 24-Mar-2009 Globalization of Alternative Investments Working Papers Volume 2: The Global Economic Impact of Private Equity Report 2009 report published by the World Economic Forum dated January 2009 provides insight into the global economic impact of private equity. See a copy of the report below or directly download it here.
The key areas covered:
- Do Private Equity-owned Firms have Better Management Practices?
- Private Equity, Jobs and Productivity
- Leveraged Buyouts – Evidence from French Deals
- What Drives Private Equity Activity and Success Globally?
Key Findings
- Management Practices Study. Study of management practices across 4,000 private equity-owned and other firms in a sample of medium size manufacturing firms in 12 countries in Asia, Europe and the US. Key findings:
- Private equity-owned firms are on average the best-managed ownership group. They are significantly better managed across a wide range of management practices than government-, family- and privately owned firms.
- Private equity-owned firms have strong operational management practices. Private equity-owned firms have strong people management practices in that they adopt merit-based hiring, firing, pay and promotions practices and have tough evaluation metrics, which are integrated across the short and long run, that are well understood by the employees and linked to performance. Private equity-owned are better still at operational management practices that include modern lean manufacturing practices, using continuous improvements and comprehensive performance documentation process. This suggests private equity ownership is associated with broad-based improvements across a wide range of management practices.
- Most private equity-owned firms are well managed. The high average levels of management practices in these firms are due to the lack of any “tail” of very badly managed firms under their ownership (that is, very few private equity firms are really badly managed). Read More »
Tue, 17-Mar-2009 A new Roland Berger Strategy Consultants study titled Increasing The Value of portfolio companies by improving their performance was released in March 2009. The study is a survey of 56 private equity executives in Europe, Switzerland, Russia and the USA. The study shows that the importance of operational performance improvement is rising as attractive acquisitions and sound exits have become more difficult during this period of the financial crisis. A copy of the report is provided below or can be directly downloaded here.
Key Findings
- Private equity firms hold their investments longer and focus more on operational performance improvement.
- Private equity firms use more professional management levers to increase the value of their investments.
- Private equity firms seek high-impact representation in their management. Nearly all private equity firms assign one single team for the entire investment lifecycle – this team is also responsible for performance improvement.
Key Takeaways
- 100-Day Plans. Nearly all private equity firms (86%) draw up 100-day plans for their investments. “Private equity firms with a large-cap focus are increasingly professionalizing their support capabilities for operational performance improvement,” says Thomas Rinn, Partner in Roland Berger’s Operations Strategy Competence Center. Read More »
Mon, 16-Mar-2009 Lessons from Private Equity Any Company Can Use (Memo to the CEO)
The book Lessons from Private Equity Any Company Can Use (Memo to the CEO) by Hugh Macarthur, Head of Bain & Company‘s Global Private Equity Practice and Orit Gadiesh, Chairman of Bain & Company, was published in February 2008 and provides a good concise overview of certain disciplines and best practices that Bain has researched and analyzed from their consulting projects with the top private equity firms in the world. As a result of these winning formulations of discipline and best practices, the top 25% of U.S. private equity funds raised between 1969 to 2006 have earned internal rates of return of 36% on average through good times and bad.
The global economic slowdown and credit crunch will definitely impact private equity and there will be some significant challenges. However, this book provides applicable concepts and lessons that could aid companies in managing their organization for the recession and maximize value through company improvements.
The 6 private equity lessons:
- Define full potential. Top private equity firms generate high returns primarily by creating operating value. They start by building an objective fact base. They scrutinize demand, customers, competition, environmental trends and the details of how money is actually made. Only then do they pursue a few core initiatives to reach full potential. Read More »
Mon, 9-Feb-2009 Private equity veteran Henry Kravis, Founder and Senior Partner of Kohlberg Kravis Roberts & Co, believes market economies would benefit greatly by adopting private equity’s method of linking management compensation with a firm’s long-term financial performance. He states that buyout firms empower managers at their portfolio companies to invest and become part owners, something that could help correct unjustifiable levels of executive pay.
Henry Kravis quotes:
- “The model that we use when managing companies could stabilise the economy worldwide. Aligning interests is key: the real payday comes when our managers sell their stock – stock in which they have invested their own money.”
- “That makes a big difference. If a person only receives stock options in a company, then he himself risks nothing.”
- “Secondly, companies and managers will have to pay more attention to all stakeholders in firms, in other words not just the owners but the employees, customers and the company overall as well.”
- “The companies we buy, we hold in our portfolios for seven years on average. Many exchange-listed companies 60 to 80 percent of the stock changes hands in a year, so we are more long-term oriented than most shareholders.”
- “I can certify that 85 percent of our profits can be traced back to operational improvements, while only 15 percent stem from rising corporate valuations in the market.” He dismisses the notion that the industry billions generated from its investments stemmed mainly from a rise in asset values.
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