Chapter 18 Answers
Chapter 18 – Private Equity Impact on Corporations
Q1. What are some measurable benefits from private equity ownership of corporations?
Private equity portfolio companies have slightly higher management practices scores. Private equity– owned company management quickly adopts merit-based hiring, firing, pay, and promotion practices. These companies have tough evaluation metrics, which are focused on both short-term and long-run objectives, and the metrics are well understood by employees and are linked to the company’s performance. Private equity– owned companies are also very good at operational management practices such as adoption of lean management, focusing on continuous improvement, and implementing comprehensive performance documentation processes.
Q2. What were the World Economic Forum’s principal conclusions regarding private equity firms?
World Economic Forum’s conclusions are that private equity firms do more than apply financial engineering to their target companies.
Research has demonstrated that private equity– owned companies have high scores on a wide range of management practices and, during the first two years after acquisition, productivity grows faster than at control companies.
In addition, the research demonstrates that productivity gains at private equity– owned companies are shared more with employees in the form of higher wages as compared to non– private equity– controlled companies.
Q3. What were the principal perceived benefits for the PE consortium’s acquisition of TXU?
It was perceived as a cash cow:
Enormous cash generator
$800 million in annual dividends to investors
Selling 20% ownership interest in a subsidiary was expected to generate $1 billion
Eliminate near-term CapEx in coal plants and ramp-up in nuclear
Q1. What are some measurable benefits from private equity ownership of corporations?
Private equity portfolio companies have slightly higher management practices scores. Private equity– owned company management quickly adopts merit-based hiring, firing, pay, and promotion practices. These companies have tough evaluation metrics, which are focused on both short-term and long-run objectives, and the metrics are well understood by employees and are linked to the company’s performance. Private equity– owned companies are also very good at operational management practices such as adoption of lean management, focusing on continuous improvement, and implementing comprehensive performance documentation processes.
Q2. What were the World Economic Forum’s principal conclusions regarding private equity firms?
World Economic Forum’s conclusions are that private equity firms do more than apply financial engineering to their target companies.
Research has demonstrated that private equity– owned companies have high scores on a wide range of management practices and, during the first two years after acquisition, productivity grows faster than at control companies.
In addition, the research demonstrates that productivity gains at private equity– owned companies are shared more with employees in the form of higher wages as compared to non– private equity– controlled companies.
Q3. What were the principal perceived benefits for the PE consortium’s acquisition of TXU?
It was perceived as a cash cow:
Enormous cash generator
$800 million in annual dividends to investors
Selling 20% ownership interest in a subsidiary was expected to generate $1 billion
Eliminate near-term CapEx in coal plants and ramp-up in nuclear