The Economic Case for Private Equity (and Some Concerns) -- pdf of Keynote Slides
Michael C. Jensen
Social Science Electronic Publishing (SSEP), Inc.; Harvard Business School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
November 27, 2007
Harvard NOM Working Paper No. 07-02
Swedish Institute for Financial Research Conference on The Economics of the Private Equity Market
Presented at the Harvard Business School Centennial Conference on Private Equity, New York City, Feb. 13, 2007; the Swedish Institute for Financial Research Conference on The Economics of the Private Equity Market, Stockholm, Sweden, Aug. 30, 2007; American Enterprise Institute Conference on The History, Impact, and Future of Private Equity Ownership, Governance, and Firm Performance, Washington, DC, Nov. 27, 2007.
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Private Equity funds have grown from a tiny part of the financial market in the early 1980s to an important global force today. Morgan Stanley estimated in 2007 that 2,700 Private equity funds represented 25% of global mergers and acquisition activity, 50% of leverage loan volume, 33% of the high yield bond market, and 33% of the initial public offerings market.
I present in these slides my belief, first argued in my 1989 Harvard Business Review paper entitled The Eclipse of the Public Corporation that Private Equity is best thought of as a new and powerful model of General Management. I also summarize some important characteristics of Private Equity that contribute to value creation, how Private Equity generally implements Strategic Value Accountability (what I have labelled the missing concept in corporate governance) much better than the public corporation, and how Private Equity avoids much of the out-of-integrity gaming and lying that dominates the relations between public firms and capital markets. I close by summarizing some growing problematical trends and practices that threaten the success of this new business model and the future of the Private Equity industry (in particular the threat posed by the proliferation of non-equity based fees charged by Private Equity firms, and the going public of the core management private equity company such as that by Fortress and Blackstone and the raising of permanent public capital to substitute for the non-permanent limited partnership capital such as that by KKR in Europe).
Number of Pages in PDF File: 34
Keywords: Private Equity, LBOs, MBOs, Buyouts, Strategic Value Accountability
JEL Classification: G34, M10
Date posted: February 15, 2007 ; Last revised: April 8, 2008