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Private Equity: Just an arbitrage or long-lasting value?

Just read this Fortune article on Private Equities. It is simply the best article I have read in a long time. And here's Basab Pradhan's very well-thought out comments on it.

The key focus of the Fortune article is to mention the advantages of a PE managed firm over a public company. My feel on these advantages are as follows:
1) More of the Top Manager/CEO skin in the game (asking them to invest significant part of his net worth into the business etc) --> This I guess makes him behave like an entrepreneur rather than a manager.
2) CEO pay is not under public scrutiny and so the company can pay x times what a public company pays, but most of it as a variable pay--> There are two kinds of people up the Corporate ladder. The kind who say "bhaut chal liya yaar. Ab toda aaram ho jaaye. (I have done a lot now let me relax a bit in life)" vs the guy who is still hungry. This high-variable pay attracts the latter kind of people and this helps promote growth.
3) Freedom to take tough decisions that may rattle a quarters earnings --> For those who have read Akio Morita's "Made in Japan", he must be turning in his grave and saying "Hey guys that was my idea!" :-)

So would these advantages last long or would the public companies adopt these and evolve? Is the PE industry then just another arbitrage-based industry?
Well I guess, if these things were so easy to copy, then since the public companies themselves are not all made up of fools, they would have figured it out long back. The degree of freedom of apublic company is limited by the structure they are in. So logically they will continue as they are, with just incremental evolution and I guess PE guys would keep making money for a long time to come...

Sunday, January 07, 2007
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