Private Equity/Entrepreneurship

In an HBS working paper William A. Sahlman conludes that the root cause of the financial crisis can be found in a broken corporate governance system and shortcomings of the regulatory system. He states that managers and boards of failed firms did not pay enough attention to incentives, risk management and control, accounting, human capital and culture.

I have the impression that this is often not the case at private equity run companies as I observe that many of them have balanced incentive system and are forced by their investors to have good reporting in place. This is probably why private equity has performed not so badly over the past years, as demonstrated in an HBS paper. It will though be interesting to see how private equity run firms will get out of the financial crisis.

Private Equity and Industry Performance, HBS Working Paper No. 10-045, Shai Bernstein, Josh Lerner, Morten Sørensen and Per Strömberg, December 2009

Paper abstract:

"The growth of the private equity industry has spurred concerns about its potential impact on the economy more generally. This analysis looks across nations and industries to assess the impact of private equity on industry performance. Industries where PE funds have invested in the past five years have grown more quickly in terms of productivity and employment. There are few significant differences between industries with limited and high private equity activity. It is hard to find support for claims that economic activity in industries with private equity backing is more exposed to aggregate shocks. The results using lagged private equity investments suggest that the results are not driven by reverse causality. These patterns are not driven solely by common law nations such as the United Kingdom and United States, but also hold in Continental Europe."

Related:

Find here an article which deals in depth with what can be learnt from private equity boards:

MarketObservation: 12/27/07 Learning from private equity boards

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