Value of Private Equity to its Portfolio Firms
The Management Practices study covered 4000 PE owned companies in the US, Europe and Asia which completed double blind surveys in the 2006 timeframe. A few things came out that are worth mentioning. First, these portfolio investment companies are better managed and have stronger operational processes than other peer companies. There was also a lack of a “long tail” of laggards for PE investment companies. This could be attributed to the fact that PE firms typically hire very experienced people to address those issues to ensure that their investment “performs”. While PE can sometimes be vilified by the press, they do create value with the companies that are purchased.
Based on the results of the first study, you could assume that Labor Productivity would increase as well. The analysis covered a different data set of US-based manufacturing PE investments from 1980-2005. The researchers found that in the first three years after acquisition, jobs were shed at a faster rate than peer companies, but jobs were added at a faster rate thereafter. This was termed “creative destruction” where the investment company shed resources in order to improve performance with better resources. The productivity bump happens in the first two years and is 72% attributed to stronger management practices. They also found that PE was also willing to make tough choices to sell underperforming assets which added to productivity increases.
What is interesting to me in regards to these results is that they missed the final PE flurry of 2007 and do not include data points from the current economic malaise we are in. Because the use of debt creates significant value on the upside and pulls harder on the downside, I would suspect some of these results could swing back to the median. Either way, I am a firm believer in developing management excellence and having the ability to objectively evaluate resources. It is not always easy to enact a program for both from the inside which is why PE steps in to help make those choices that result in a net positive impact for the global economy. What are your thoughts?
Based on the results of the first study, you could assume that Labor Productivity would increase as well. The analysis covered a different data set of US-based manufacturing PE investments from 1980-2005. The researchers found that in the first three years after acquisition, jobs were shed at a faster rate than peer companies, but jobs were added at a faster rate thereafter. This was termed “creative destruction” where the investment company shed resources in order to improve performance with better resources. The productivity bump happens in the first two years and is 72% attributed to stronger management practices. They also found that PE was also willing to make tough choices to sell underperforming assets which added to productivity increases.
What is interesting to me in regards to these results is that they missed the final PE flurry of 2007 and do not include data points from the current economic malaise we are in. Because the use of debt creates significant value on the upside and pulls harder on the downside, I would suspect some of these results could swing back to the median. Either way, I am a firm believer in developing management excellence and having the ability to objectively evaluate resources. It is not always easy to enact a program for both from the inside which is why PE steps in to help make those choices that result in a net positive impact for the global economy. What are your thoughts?
(*In full disclosure, Infosys is involved in WEF activities)
