The Economic Case for Private Equity (and Some Concerns) -- pdf of Keynote Slides

34 Pages Posted: 15 Feb 2007 Last revised: 8 Apr 2008

See all articles by Michael C. Jensen

Michael C. Jensen

Harvard Business School; SSRN; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit

Date Written: November 27, 2007

Abstract

Presented at the Harvard Business School Centennial Conference on Private Equity, New York City, Feb. 13, 2007; the Swedish Institute for Financial Research Conference on The Economics of the Private Equity Market, Stockholm, Sweden, Aug. 30, 2007; American Enterprise Institute Conference on The History, Impact, and Future of Private Equity Ownership, Governance, and Firm Performance, Washington, DC, Nov. 27, 2007.

Note: SSRN is experimenting with enabling the distribution of different types of files: slides, spreadsheets, video, etc. We are interested in our users desires to distribute files that go beyond word processing text files. You can communicate with me on these issues via my email address below. We invite you to submit your own presentation slides.

Private Equity funds have grown from a tiny part of the financial market in the early 1980s to an important global force today. Morgan Stanley estimated in 2007 that 2,700 Private equity funds represented 25% of global mergers and acquisition activity, 50% of leverage loan volume, 33% of the high yield bond market, and 33% of the initial public offerings market.

I present in these slides my belief, first argued in my 1989 Harvard Business Review paper entitled The Eclipse of the Public Corporation that Private Equity is best thought of as a new and powerful model of General Management. I also summarize some important characteristics of Private Equity that contribute to value creation, how Private Equity generally implements Strategic Value Accountability (what I have labelled the missing concept in corporate governance) much better than the public corporation, and how Private Equity avoids much of the out-of-integrity gaming and lying that dominates the relations between public firms and capital markets. I close by summarizing some growing problematical trends and practices that threaten the success of this new business model and the future of the Private Equity industry (in particular the threat posed by the proliferation of non-equity based fees charged by Private Equity firms, and the going public of the core management private equity company such as that by Fortress and Blackstone and the raising of permanent public capital to substitute for the non-permanent limited partnership capital such as that by KKR in Europe).

Keywords: Private Equity, LBOs, MBOs, Buyouts, Strategic Value Accountability

JEL Classification: G34, M10

Suggested Citation

Jensen, Michael C., The Economic Case for Private Equity (and Some Concerns) -- pdf of Keynote Slides (November 27, 2007). Harvard NOM Working Paper No. 07-02, Swedish Institute for Financial Research Conference on The Economics of the Private Equity Market, Available at SSRN: https://ssrn.com/abstract=963530 or http://dx.doi.org/10.2139/ssrn.963530

Michael C. Jensen (Contact Author)

Harvard Business School ( email )

Soldiers Field
Negotiations, Organizations & Markets
Boston, MA 02163
United States

HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=6484

SSRN ( email )

United States

HOME PAGE: http://ssrn.com/author=9

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Harvard University - Accounting & Control Unit ( email )

Soldiers Field
Boston, MA 02163
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
8,749
Abstract Views
27,578
Rank
1,294
PlumX Metrics