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Private Equity Could Use a Little Disruption

Posted by on July 7, 2015

Lazy Cash Flow

I didn’t go to B school. I was far too eager to “get out and start doing it,” building businesses, doing deals. I don’t think I missed anything with that decision, and as I sometimes contemplated returning to school during my career, I’m pretty sure I would have ended up like Rodney Dangerfield in “Back to School” and been more of a hindrance than a help to those actually interested in listening to a professor who had spent his entire career in academia and never built a company. Oh well.

If you have read my posts here or on LinkedIn from time to time, you know I’m kind of unhappy with the private equity industry and what they are doing to some of America’s great companies through the process of overpaying and then trying to increase value in any manner they are able – which usually ends up being at the expense of the acquisition itself.

America’s companies have become the greatest in the world through brilliant ideas, product launches, innovative production techniques and, for the most part, taking care of their workers.

Private equity acquisitions have none of these ambitions or tenets. They operate by one principal, and one principal only, increasing the value of company for gain to pocket down the road. Once the target gain is realized, the company is dumped into the public market, or scooped up by another private equity group at an value even more stupid than the previous acquisition.

And how does the typical private equity deal increase value? The lazy ways: tossing another company into the mix and buying cash flow, slashing personnel, cutting back on products and R&D, or spinning real property to reduce the (implied) cost of the deal. Or knocking off having unlimited breadsticks.


Wouldn’t it be great if the role of private equity was to create value by building the companies themselves, instead of just tinkering with the P/L?

There was a quote (roughly) in a movie in the past few years which was “the industry of America has become moving money from one place to another and getting paid for the movement.”

That pretty much describes how I look at private equity.

I’d love to see a fund start or revise their mission to be “taking good companies and making them great” or some such.

Private equity (and venture capital) are always looking for concepts that are “disruptors.” Someone should look at disrupting both of those segments.

Wouldn’t be great if there were companies acquired by private equity (or VCs) that became some of the most admired companies in America? That other companies looked up to and thought “why can’t we be like that?”

It’s not so terribly hard to build a company like that. Rule 1: Take care of your employees the best you can. Rule 2: Follow rule 1 and there will not have to be any other rules, everything else will fall into line.

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