The strategic secret of private equity

Strategic Direction

ISSN: 0258-0543

Article publication date: 18 January 2008

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Keywords

Citation

Barber, F. (2008), "The strategic secret of private equity", Strategic Direction, Vol. 24 No. 2. https://doi.org/10.1108/sd.2008.05624bad.003

Publisher

:

Emerald Group Publishing Limited

Copyright © 2008, Emerald Group Publishing Limited


The strategic secret of private equity

The strategic secret of private equity

Barber F., Goold M. Harvard Business Review, September 2007, Vol. 85 No. 9, Start page: 53, No. of pages: 9

Purpose – to analyze the returns on investment achieved by private equity firms. Design/methodology/approach – observes that such firms have a reputation for dramatically increasing the value of their investments. Lists some of the factors generally cited to explain this, but argues that the fundamental reason for the growth in private equity lies elsewhere. Attributes the success of private equity ownership to the standard practice of buying businesses, steering them through a transition of rapid performance improvement and then selling them, employing a combination of business and investment-portfolio management strategy. Points out that conglomerates that acquire unrelated businesses with potential for significant improvement are no longer fashionable, so reducing the level of competition faced by private equity firms. Suggests that at present public companies that acquire for the long-term miss opportunities that investors with shorter horizons are taking. Observes that they have shifted their attention away from value-creation acquisitions and concentrated instead on synergistic acquisitions. Offers two options for public companies wishing to compete more directly with private equity firms: either to adopt the buy-to-sell model, or to take a more flexible approach to business ownership in which a willingness to hold on to an acquisition for the long-term is balanced by a commitment to sell when corporate management feels that it can no longer add further value. Practical implications – includes a basic overview of the way that the private equity firms operate. Originality/value – seeks to explain why “buying to sell” can generate higher returns than “buying to keep”.ISSN: 0017-8012Reference: 36AY725

Keywords: Business development, Private equity, Return on investment, Strategic management

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