Steve Judge response to “What’s the point of private equity?”
What’s the point of private equity?
Name: Steve Judge
Company: Private Equity Growth Capital Council
What is the ideal objective of private equity in the American economy?
Private equity plays an important role in the American economy by pooling capital and efficiently allocating it to companies that need it. In nearly every investment it makes, the industry has a singular objective: To create value. This is the case for investments in promising companies that are poised for growth and expansion just as it is for investments in troubled companies badly in need of being turned around.
There is no question that the business model has evolved over time and the evolution has trended away from financial engineering and toward improving operations and increasing productivity. That is a good thing — the days of so-called “strip and flip” are long gone. According to a report by the Boston Consulting Group: “The days when private-equity firms could create value primarily through leverage are long over. … In the future, private equity’s ability to generate operational value will depend less on bottom-line improvements and more on a firm’s ability to develop and grow the business and improve the top line of its portfolio companies.”
Today, private equity firms create value by injecting fresh thinking, a new business strategy, managerial expertise, and a relentless focus on increasing things like sales and marketing, R&D, production, distribution or sourcing. When done correctly, private equity creates substantial value for a wide array of stakeholders, including the companies in which it invests, the employees at those companies, the communities in which the companies operate and the U.S. economy as a whole. In addition, the investment returns that private equity firms generate flow largely to average Americans through public and private pension funds, university endowments and charitable foundations.
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