Driving Organic Growth in Private Equity: A New Competitive Edge

Neil Goulet

Student thesis: Master thesis


Following the global financial crisis, the private equity industry, like many others, has struggled to rebound to its former scale and momentum. As many of the world’s developed economies struggle with weak fundamentals, those foundations of the private equity industry and business model which rely heavily on external macroeconomic factors, continue to shift. In order to understand what these shifts mean for the industry and how firms will have to adapt going forward, a thorough understanding of the private equity business model and current industry landscape is fundamental. The approach considered most effective to illustrate the fluidity of the private equity business model and the changing nature of the industry is a literary review. For reader engagement and understanding, this review is presented in three main bodies. Firstly, the mechanics and economics of the private equity industry are introduced and described. With a general understanding of how private equity firms operate and what differentiates buyout transactions from the different forms of private equity, a greater theoretical understanding of private equity will then be explored. The second part of the thesis applies several theoretical insights from Agency Theory, Capital Structure Theory, Free Cash Flow Economics and various other streams of corporate and private equity theory to illustrate the four main drivers of value in the private equity industry; financial engineering, governance engineering, operational engineering and multiple expansion. Part three highlights the developments in the PE industry over the last thirty years and identifies and describes the challenges currently faced by fund managers in the industry today. With an in-depth understanding of what drives value in the private equity industry, the implications for business model adaptations are presented. Volatile public and private markets and an uncertain economic landscape in the world’s largest developed PE markets characterize an industry environment in which the value-adding potential for financial engineering and expanding market multiples is limited. In a highly competitive industry, one in which investors have come to expect performance consistency, one underperforming fund can mean failure for a PE firm. Operational engineering is identified as the value creation driver with the greatest potential to deliver performance consistency. Building a repeatable and scalable organic growth strategy for portfolio companies has proven its value as a means for thriving throughout the inevitable ups and downs of an industry so closely tied to public and private markets and economies.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2012
Number of pages97