- December 23, 2017
- Category: Competitive research, Economics
Author: Praveen Malhotra
Given the momentum of change, strategic planning horizons have become significantly shorter. The primary purpose of a business is value creation. The pursuit of this takes up innumerable hours in boardrooms around the world. While certain organizations are exceptionally adept at adjusting their business to create and sustain value over time, most struggle to keep up.
In this context, organizations can draw learnings from the private equity (PE) ecosystem. Returns on private equity continue to outperform the public markets globally, both in the short term as well as long term. Some of the top PE firms have been able to generate three-tofive times on their investments within a period of five-seven years.
PE firms undeniably enjoy a number of natural advantages over public companies when it comes to building high-growth, profitable and value-creating businesses. A built-in platform for change, tightly aligned ownership and compensation frameworks, and fewer institutional loyalties are some of the key dimensions that clearly stand out.
The largest difference between a PE portfolio company and a public company is governance. In the PE model, the boards play a large role in developing business strategy and roadmap, actively engage with, support and monitor the executive team. They make active interventions when required. The boards at public companies are relatively passive and, at best, provide a peripheral support in defining the strategy.
Another key differentiator is in performance management. PE portfolio companies focus relentlessly on levers of value creation and the key performance indicators (KPIs) have a strong focus on efficient capital utilization and optimization, active cost management, speed of scalability and maximizing profitability.
Most PE boards devote 40-50 days a year to hands-on sessions. In contrast, public company boards meet once a quarter and the performance scrutiny is more macro than micro.