The entire PE investment model depends upon improving the acquired asset class and increasing its long-term value. If the private equity firm fails to do that, it loses its own money, its investors lose their money, and its ability to raise future funds is undermined.
Given these strong incentives, how does private equity create value?
The essence of private equity is the alignment of the interests and incentives of management with that of the owners. In a public company, the owners — shareholders — are largely separate from the management of a company. Private equity eliminates this disconnect. PE firms often require company management to invest their own money into the company so they have a vested interest in its success.
This provides a sharper focus on how capital is allocated across the business — without the constant pressure of delivering quarterly results to public shareholders. Everyone has a shared objective: grow the company’s value. Thus, they can make business decisions solely focused on that goal, rather than satisfying external constituencies, such as analysts, traders, stock brokers, and the media.
By better aligning the interests of owners and managers and by instituting a nimbler operating style that fosters greater innovation and long-term investment, private equity owners are leaders in spurring improved productivity and competitiveness, driving growth and creating value.
