Friday, May 7, 2010

The PE Governance Model and its Implications

PE promises a new governance model that is more ruthless, hard-nosed and realistic when compared to traditional governance models (family-owned, professional managers controlled by a Board of Directors - public or private). Although I have to take it with a pinch of salt as I believe that too much pressure can destroy team fabric, there is some truth to what is being said here.

PE firms are anything if not efficient. The pressure brought on by debt forces them to a discipline not seen in other private or public firms as it forces them to monitor their dealings closely. In absence of the sword of debt hanging on their heads, as will be the case with PE firms going public, it will be interesting to see if the PE model holds. Further, ignoring the human element of business can be a dangerous mistake, especially because humans can vote in elections and can influence. Hence, I am not surprised why PE firms seem to be the favourite punching bag in the current financial crisis. Step on a few feet, make some enemies and wait for them to get even. Personally, I think it is an excellent model capable of delivering value due to its meritocratic and impersonal approach. But it is likely to make them more enemies, something that may be responsible for that talks about PE firms being punished for a crime they never did. PE firms need a strategy to re-package (but not change) their governance style, I say.

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