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Dan Carter

Terrific post.

I would add to your list: far longer fund raising time frames.

US Limited Partner

Much more focus on quarterly valuations.

Dedicated teams within private equity managers who just focus on testing and validating portfolio valuations.

Bobby G

I think limited partners will want to see teams with more operational skills (former senior execs, consulting) and less financial skills (former Goldman analysts)

Fred W

Smaller funds, smaller funds, smaller funds.

This will have implications for things like deal size, mgmt fee income, PE team size


Great post. Private equity will absolutely have to refocus on building value in their portfolio companies by making them better businesses that trade buyers or the public markets will be gagging to buy once they've gone through the journey. Particularly in the mid-market, this will include all the old fashioned things:

- Growth through acquisitions and organic means
- Improving the management team - changing out underperformers, adding key positions
- Strengthening corporate procedures such as OH&S, environmental policies etc.
- Improving processes such as achieving purchasing scale, performing customer profitability analysis, etc.
- Bolstering the board with value-added NEDs
- Improving the management information system
- Resetting/refocusing strategy

That said, I still believe that the PE model has some advantages because the above can be achieved in a shorter timeframe in a PE environment relative to a corporate or family-owned environment.


Yes, the scenario presented looks like a plausible picture of the future. However, as former manager and academic, I foresee that deeper involvement of GPs in portfolio operations will likely accomplish little. Here is why:

The “science” of managing operations (i.e. manipulating people), from both academic and practical standpoints, consists of three areas:
1) a vast sea of anecdotal advice of varying degree of usefulness and harmfulness;
2) plenty of often misused statistics; and
3) a few, but typically misunderstood fundamental issues (if you’ve hardly heard/thought of them, you are in the 99% percent of all professionals.)

The fundamentals, when understood correctly, can help sorting out the wheat from the chaff among the anecdotes and the stats. Yet I see little attention to fundamentals either in ivory towers or in the real world of management.

Now, please tell me how GPs - deal-makers, ex-analysts, bean-counters and kings of compound interest - will be helpful in sorting out this management mess? They don’t know the anecdotes, they’ve forgotten the statistics, and, like most “operating partners” who at least know the anecdotes and sometimes know the stats, they never thought of the fundamentals. (A little more on fundamentals is in my blab in the Financial Times www.ft.com/cms/s/0/be236268-700d-11de-b835-00144feabdc0.html)

With this in mind, I expect no real benefit from GPs breathing down the necks of CEOs. Therefore, the higher limit (50%) of the suggested die-off of PE firms is likely to be closest to the future reality than suggested.

...Which is actually sad. PE shops are the best-suited financial entities for transforming not just their portfolio companies, but the world around them. Had they gotten the management issues right (which isn’t terribly difficult if you get the fundamentals), the PE pros would see twice the profit in half the time, and would be greeted everywhere like Gandhis, Mandelas and Lincolns with the Midas touch...

Alas, “the masters of the universe” would rather bake in hell than ask for directions to PE heaven.



You state that many/most GPs lack the capabilities necessary to improve operating performance in their portfolio companies. I wouldn't dispute this, though in fact there are plenty of ex McKinsey, BCG, Bain execs in private equity firms sitting alongside the ex-Goldman bankers.

But I do disagree with your statement that they would "rather bake in hell" than ask for help. There is a very clear increase in the number of "Operating Partners" being hired by firms (Capstone being an extreme version) which refutes your somewhat theatrical argument. In fact I suspect that virtually every mid-size PE firm has already or is considering hiring an Operating Partner.


Dear US LP,

Sorry, I just discovered your rebuttal. I am glad you challenged me, I really do. But, with all respect, I can’t agree with your argument. First, lack of GP curiosity about better solutions comes from my own experience with them. Second, while these days many GPs are in love with operating partners, it is actually bad for them. Okay, you deserve an explanation on the last one.

Operating partners (e.g. management generals like Bob Nardelli) are hard-core managers. Yet, if you carefully read my post, they too don't know or care about the fundamentals of management. Worse: they further pollute the appropriately profit-centered world of the PE industry with the mindset that is simplistically centered on managerial trickery.

Lets re-check the latter statement with one management fundamental: the Principal-Agent theory. The first goal of the Principal (GP and especially LP) is profit. The first goal of the Middleman (Manager) is his personal survival as an appointed "leader", with its greater status and personal gain. Milking more profit for the GP out of Agents (widget-making employees who do make money) comes second. Moreover, the employees (Agents) care mostly about their own promotions into management ranks and/or higher pay, but both benefits are firmly in the hands of the Managers - Middlemen (usually a whole chain of them), with different personal agendas. So, guess who among shop employees puts as their first priority the higher profit for the GPs and LPs like you? - Right, nobody.

Now, what if employees-agents could bring more profit for GPs-principals without any intermediation of managers-middlemen? - “Neah, impossible!" - you'd hear even from GPs with McKenzie/BCG/Bain credentials... Well, wrong. Decades of my own management experience and research tell me exactly the opposite. But don't trust me, look at one cute example:

By any parameter the best unit in the General Electric Aviation division is their Durham engine assembly plant. For most intents and purposes, there workers supervise themselves: the whole plant has about 200 employees and only one (1) supervisor and even that supervisor simply manages "up" – i.e. manages his/her own managers. Again, they beat hands down all workers at other plants who are supervised not just by your garden variety managers, but by the famed GE ones!

Nice, isn't it? Some silly guy might even expect that, seeing the outstanding performance at Durham, GE brass would spread Durham know-how throughout the company. After all, it would clearly raise shareholders' returns, although displacing hundreds or thousands of managers. But no, no such luck for the shareholders: GE brass marvels at the Durham performance... and turns away. To them, being an appointed "leader" comes first, firing yourself to make more money for your principal comes last. Actually, if I were in their place, I would have every incentive to sabotage managerless performance systems and treat the examples from Durham, W.L. Gore, Semco SA and other perennially successful companies as aberrations that can't possibly work in my particular division/company/industry, etc.

Now, please tell me how having a bunch of hard-core managers (OPs) at the center of private equity firms is going to change all this? Have you ever heard any OP saying that, to produce bumper profit, you need performance systems devoid of managers? Did he also mention that employees really love such systems? Finally, can you foresee Bob Nardellis firing all the managers below and then themselves, since with a good performance system any GP – not only a McKinsey grad - can easily do what an OP is supposed to accomplish and then some?

Hence my lament that, if only GP/LPs knew management fundamentals, they'd be so much better off. But even in long conversations that I periodically have with them I only hear their blind insistence on manager-centered solutions, and they never fail to be incurious about what the "PE heaven" might envolve and how to get there... Is it any wonder they are heading toward mass extinction? Mille pardons for the theatrics, btw. Please, tell me if I'm wrong. Best wishes, anvoro@gmail.com

Andrei Babnikov

You can also forget about the huge dividend payments 3 months after the acquisitions close. In the good old days of 2007, sponsors could get almost all of their capital back in a mere 6 months time. I doubt any banks will want to finance incremental dividends for a time to come.


where do you see the secondary market going?


LP's growing demand for greater transparency and more frequent reporting - combined with the pending US federal tax on carry - may ultimately push the 2/20 model into extinction. GP operating costs will certainly reflect these "new" ramped up pressures to perform. More fun on the horizon for lawyers, accountants and IT professionals.

The banker

No more recaps. It will be a cold day in hell that the banks let PE firms gear up portfolio companies to take cash off the table . . . too many horror stories


I met with a banker today who told me that recaps are absolutely back on the table now . . . amazing how quickly the pendulum swings!!

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