Read a recent article in The McKinsey Quarterly examining the drivers of success in private equity. Although the article starts out examining why certain PE firms do better than others, the study actually identified the drivers of success in specific deals.
The sample is relatively small (11 "leading" PE firms and 60 deals) but the results aren't that far away from what one would normally expect, so I expect increasing the sample size wouldn't make that big a difference.
One thing that would be interesting to know is whether these deals all took place during roughly the same period. Has performance been different for deals that took place before 2000 and deals that took place after 2000? (I presume exits have happened only recently.)
One interesting tidbit:
The main source of value in nearly two-thirds of the deals in our sample was company outperformance. Market or sector increases accounted for the rest. Outperformance, which generated a risk-adjusted return twice that of market or sector growth, was the least variable source of value.
The article ends with:
These research findings pinpoint the practices that distinguish great deals from good ones. The five steps are, in the main, uncontroversial. They are applied inconsistently, however, and their implementation seems to depend on the individual partner's beliefs and skills. A standard active-ownership process that applies and develops best practices is the next step for the private equity industry.
An interesting point. So the (relatively) young PE industry will begin moving towards benchmarked practices and a level of maturity comparable to other more established industries. I wonder how this will play out in Asia.
- Will best practices quickly make their way into Asian PE given that the industry is very young here and has few bad habits to shed?
- Or are there too few experienced PE investors here who can transfer best practices into their Asian operations? McKinsey's article makes the point that it is not firm-wide best practices that lead to above average deals, it is good practices followed by individual partners within a firm.
- Or another reason people might not bother with instituting good active-ownership strategies within their firms could be if their target markets start heating up, and partners spend more time chasing new deals than managing their existing portfolio. But I don't see this happening.
Link: The McKinsey Quarterly: Why some private equity firms do better than others
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