Monopoly on performance

By contrast, private equity shareholders – particularly those in topquartile firms – behave like owners. They understand the companies they own and drive them to restructure more quickly and invest more deeply. They also motivate their managers strictly on performance. That mindset, along with the levers that private equity has used successfully before, will likely play a key role in the plan to transform hrysler. Indeed, when private equity succeeds it presents an enormously compelling business model. Over the 35 years from 1969 to 2006, the top quartile US private equity funds had annual rates of return ranging from an average of 39% to well over 200% through good times and bad. It doesn’t always go according to plan, of course. And some boards are pushing back against the notion that private equity firms have some sort of magic dust. In April, British supermarket chain J Sainsbury resisted repeated offers from a consortium of Blackstone, TPG and Kohlberg Kravis Roberts & Co. because it felt management should be able to solve its own problems without taking on the massive debt involved in going private. Others have concluded the same thing.

All the same, active investing has set a new standard: PE is becoming an inescapable benchmark of global business performance for CEOs and boards of directors. That’s part of the lesson behind the Chrysler deal. Many boards are reviewing the “leveraged buyout case,” asking themselves, “What would we do differently if we were privately held?” No one business model holds a monopoly on performance or sustained profitability. Still, the results among the best private equity firms speak for themselves. A carefully planned private equity deal can be bolder, faster and more transformative while publicly listed companies are typically slower and must push that much harder to take the same level of risk. Until that changes, the private equity business model will keep growing – and more iconic brands are likely to follow Chrysler and see their destiny in private hands.


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Source : IIPM Editorial, 2008

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

PE funds to act like owners

The danger is that public funding will constrain the ability of PE funds to act like owners – that compliance with regulations and reporting requirements will slow down or stall PE’s fast attack. After all, that’s the advantage that today’s private equity players hold – and the reason Chrysler’s stake holders have decided to go private. According to analysis by Bain & Company, the global business consulting firm at which we work, private equity firms still control assets that are worth less than 3% of the assets held by the world’s public companies. What’s more, today’s private equity investors – pension funds, insurance companies, wealthy individuals and endowments – are by and large the same investors that own the most stock in public corporations. By the same token, the managers of PE-owned companies come from the same pool of talented executives than run the best public companies. Same investors, same management talent. So where does PE’s real advantage lie? If you boil it down to one thing, it is the behavior of shareholders. Public-company shareholders behave like, well, shareholders. They are largely passive and slow to react. Or they cast their vote by dumping their shares.

For Complete IIPM Article, Click on IIPM Article

Source : IIPM Editorial, 2008

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

Private equity funds are now rapidly pursuing public equity funds

Q: In mid-May, Alliance Data Systems joined the club of public companies going private, accepting Blackstone Group’s $6.4 billion bid. Around that time, Chrysler’s major stakeholders, including the United Auto Workers leadership, decided that the automaker’s best chance to turn around its business lies in working out its problems under private ownership. So why are the leaders in private equity moving in the opposite direction, tapping the public equity markets themselves? A: The answer, in one word, is differentiation. Money, after all, is rapidly becoming a commodity, and leading Private Equity (PE) funds are looking for ways to stand out even further from the crowd. Top funds want to do deals of almost any size on their own so they can apply their particular approach to improving company performance without dilution by a consortium of investors. Access to public equity also means that funds can be more nimble when pursuing deals in different parts of the world with different types of assets. In Japan, for instance, PE firms often need to structure deals with more debt products to secure capital. In India, minority equity stakes are the key to entry. In China and Brazil, the current focus is on infrastructure investments. Pursuing those opportunities involves a range of risk and return that reaches beyond the typical limited-partner agreements that private equity firms strike with institutional investors. For certain types of Initial Public Offerings (IPOs), going public gives PE firms evergreen sources of capital. They don’t need to waste time and precious human capital on fundraising, a time-consuming process that takes some of the vital players in a PE firm off the field every few years for months at a time. Finally, the leading funds have clearly developed their own brands. Taking a page from their own playbooks, they see ways to use their brands to raise more capital, extend their range and pursue more opportunities.

For Complete IIPM Article, Click on IIPM Article

Source : IIPM Editorial, 2008

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative