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So what exactly is private equity?

By Jonathan J. Ariel - posted Tuesday, 3 June 2008

The term private equity conjures up a wide array of images in the public’s mind. Most images tend to focus on a cabal of nefarious and mind-blowingly wealthy Wall Street suits, scheming in secret and salivating (like a pack of wolves) at the prospect of plundering untold riches from a hapless enterprise under their superior financial deliberation.

So exactly what is private equity? And given it has proven to be such a successful wealth generating vehicle, what drives its success?

PE refers to equity investments in companies that are not publicly listed. These investments are distinguished by their transformational, value-added and (very) actively managed shareholding.


PE firms generally make their money through one of three ways: an initial public offering, a sale or a merger of the company or a recapitalisation. Unlisted securities may be sold to (individual) investors or sold to a private equity consortium, which pools contributions from individual investors to build a capital fund.

In Australia the best known organisation owned by a PE firm is the retailer, Myer, which was unhinged from the Coles Myer juggernaut for $1.4 billion in June 2007 by PE titans TPG and its Asian investment arm, Newbridge Capital. In the United States, the most celebrated recent example of a firm bought by a PE firm, in this case Towerbrook Partners is high-end shoe maker, Jimmy Choo in February 2007.

In Lessons from Private Equity Any Company Can Use, Bain & Company’s Chairman, Orit Gadiesh and Partner, Hugh MacArthur, use the concise, dot point format of a memo to spell out the five disciplines that drive PE firms to create and retain their edge.

The book answers questions like: just how do PE firms maximise investor value far, far more successfully than traditional publicly listed companies? How can PE recruited managers create more value for shareholders? How can they give more opportunities (be it jobs, promotions or financial incentives) to staff? The book answers these questions by listing examples, including Crown Castle, an owner operator of wireless infrastructure that PE firm Berkshire Partners bought into, and in time sold, yielding Berkshire a ten fold return on its investment.

This short book (a mere 136 pages) outlines the steps undertaken by PE firms to create or unlock value in targeted acquisitions. It does not so much as celebrate PE firms per se, as it promotes the PE approach. For instance, it bellows that the first priority of every CEO must be to increase the value of the firm. While the authors don’t say so, they hint that many managers of publicly listed organisations have a host of other priorities. These include maintaining the status quo. The success however of the PE approach rests on directly rewarding all those staff that can help realise the PE dream of value maximisation.

The steps involved in creating value include:


The full potential
This involves studying the business and constantly reappraising its full potential. This mandates a focus on a handful of core initiatives, say between three and five. A splendid example of how such strategic behaviour was implemented is well illustrated by reflecting on a period of Mr Peter Brabeck-Letmathe’s time as CEO of Swiss multinational Nestlé.

Developing a blueprint for change
This is a road map for initiatives that will generate the most value for a company within a set period of time. The blueprint defines the key details that comprise the strategic plan: the who, what, where, when and how. The strategic plan is tasked with turning the core initiatives into measurable results.

Accelerate performance
Once priorities are set and mapped, the overriding goal becomes to accelerate the performance of the company. This involves driving organisational change around key initiatives by sculpting the firm to the blueprint, and matching key personnel to core initiatives.

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Lessons from Private Equity Any Company Can Use (Memo to the CEO) by Orit Gadiesh and Hugh Macarthur Harvard Business School Press (February 2008) (136 pages) $25.

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About the Author

Jonathan J. Ariel is an economist and financial analyst. He holds a MBA from the Australian Graduate School of Management. He can be contacted at

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