Private Equity's Lessons for the Rest of Us


A year ago, most of us couldn’t name a single asset in the Cerberus Capital Management portfolio. Today, we know them as the private equity firm that bought controlling interests in Chrysler, General Motor’s financing arm, and — as of this week — United Rentals, one of the world’s largest equipment rental companies.

In spite of some predictions to the contrary, private equity and leverage buyouts continue to flourish in the market, as eager investors buy up what they believe to be undervalued assets with the hope of whipping them into shape and reselling them in a few years’ time. In fact, the industry is so hot that a number of its key players are floating shares on the open market. So what are we to learn from the private equity boom? Quite a bit — according to two recent articles on Harvard Business Online.

In his Harvard Business Review article, “Private Equity’s Long View,” Walter Kiechel identifies several lessons behind private equity’s success, including a focus on cash flow, not on earnings reported for accounting purposes. He also notes PE managers are adept at identifying a strategy that favors the line of business in which their acquisition dominates its competitors, and are willing to sell off its other businesses.

In “What You Can Learn from the Private Equity School of Management,” Harvard Business professor Josh Lerner strikes a similar chord, also noting that PE managers demonstrate that compensation can indeed be effectively tied to performance and that debt can be a very powerful weapon, often preferable to equity — the financing vehicle of choice for most public companies.

Private equity is enjoying a pretty impressive run. Should public company leaders follow PE’s lead in how to manage organizations, or are we comparing apples and oranges?

Boom and Bust in Private Equity (Faculty Seminar Video) </

Aligning Financial and Customer Strategies (HBS Press Chapter)

You Have More Capital than You Think (HBR Article)
Direct from the C-Suite: Managing Through Mergers (Harvard Management Update Article)


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