01 Mar 2008
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Lessons from Private Equity


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A recent Harvard Business Review article headlined “If Private Equity Sized Up Your Business” gave many leaders of public companies a thoughtful pause: Why can’t we provide our shareholders with the generally superior returns generated by private equity firms? The answer is delivered in Lessons from Private Equity Any Company Can Use (HBS Press, 2008) by Bain & Co. chair Orit Gadiesh (MBA ’77) and Bain partner Hugh MacArthur.

The authors argue that many business practices used by the best PE firms are the management arsenals of many public companies — strategic due diligence, blueprints for action, tying compensation to performance — but they are not applied with sufficient consistency, rigor, or thoroughness.

In short, what PE firms bring to the table is a relentless focus on results, report Gadiesh and MacArthur. If public company executives do the same, they will improve operational performance, increase equity value, and maximize their company’s full potential, all to the delight of shareholders.

The book details best practices of PE firms in six areas:

  • Defining the full potential of your company
  • Developing a road map to get to that potential
  • Accelerating current organizational performance
  • Harnessing and rewarding top talent
  • Leveraging cash as productively as possible
  • Fostering a results-oriented mindset.

The starting point for public company executives is to assume the mantle of a possible acquirer and to develop a clear picture of its full potential.

They need to step out of the twelve- to eighteen-month budget-planning cycle and ask, “Which handful of key initiatives, either undertaken from scratch or reinvigorated, will have enormous impact three to five years down the road?”

PE managers can also teach you the value of managing cash. Most PE-acquired firms are capitalized with 70 percent debt, compared with the 40 percent average of U.S. public companies. Thus PE managers know how, in the authors’ words, to “make equity sweat.”

“Most PE firms ask a very specific and focused version of the following question: ‘If I put a dollar into this capital project, am I going to get three dollars back out?’ Public company managers who apply the same analysis with working capital and cash expenditures will be rewarded way beyond a productive balance sheet,” the authors write.

True, it’s difficult for public company CEOs to push beyond the gravity imposed by quarterly earnings expec-tations. But if you and your investors want PE-like returns, one of the best ways to do that is to act more like a PE manager.

— Sean Silverthorne

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