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Even private equity firms need to worry about management disciplines to add growth and create value

As the financial markets continue their dizzying spiral into a never-never land of losses (did I see that UBS lost over $11 billion in the fourth quarter alone???) I’ve been interested to watch the response of LBO shops and hedge funds to the changing economic situation.  One of the more intriguing shifts, to me, is a recognition of management as—gasp—potentially important to enjoying good returns from their investments.  Indeed, in a recent column in the Wall Street Journal, the editors of, a financial commentary site, report on suggestions being made to those managing private equity firms.  Among the suggestions:

  • Greater focus on operational improvement.  This one is a hoot!  You mean, people actually have to learn to run companies to create value?  The columnists observe that “Every buyout firm claims to bring strategic focus, but it isn’t clear that many do.”
  • Don’t focus only on financial returns.Here, the need to think about the longer term and about opportunities in different kinds of markets (such as emerging markets, or with innovative products and services).  Intriguingly, it was long thought that the absence of short-term quarterly earnings pressure would allow LBO managers to function with longer time-frames.  This presumption is now being tested.

It has long struck me that the way we structure rewards and incentives to value creation in our society is skewed.  Taking a job and exercising your entrepreneurial talent in the financial sector has for some time now rewarded individuals much more richly than taking those same talents and investing them in the improvement of, say, a manufacturing company.  It would be a very interesting change to see value-creation through real growth, rather than through financial engineering, to once again take priority.  One can live in hope. 


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