Private equity firms are better able to make the difficult choices necessary in a downturn, such as shutting down poorly performing businesses. That’s according to a report by the World Economic Forum, as reported in the Financial Times. The report was based on a study of thousands of companies from 1980 through 2005.
The report claims that private equity-owned companies come out on top in terms of their ability to manage operations, set objectives, and limit staff incentives, versus government, family and privately-held firms.
What’s more, in the two years after being acquired by a private equity firm, company productivity jumps on average by 9 percent, versus only 7 percent for comparable companies. Much of the improvement is from a PE firm enhancing operations or closing down poorly performing divisions. Overall, the report said private equity-owned companies were particularly good at adopting “lean manufacturing” practices, continuous improvement, and carefully documenting performance benchmarks. They were also faster to identify and seize opportunities to improve performance.
Thus, rather than destabilize big companies by using too much debt, as some critics claim, buy-out firms may in fact play a critical role in helping struggling industries, such as banks, survive this economic crisis.
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