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PRIVATE EQUITY

3 Problems with the ‘Bain Capital’ Model

The traditional private equity model could use a makeover. Our goal: build a new model that creates more value for investors and management teams.

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Our firm, Avondale, has its roots in consulting and M&A advisory.  But for some time now, we have been pursuing an ambition to create a new type of strategic advisory firm.  Our goal is to transform the traditional consulting and private equity models into something that creates more value for investors and management teams.

A big part of our transformation involves developing a robust principal investment portfolio, which allows us, along with our investor partners, to participate side-by-side with the growing companies we work with, sharing in the financial upside and downside they experience.  We aim to partner with management teams and investors to create meaningful value, more value than they would otherwise be able to create.

Our ambition in this area stems from some beliefs we have about the traditional private equity model, which could use some improvement.  Here are some issues we have with the model that’s been in place for roughly the past 20 years.

1.  Most private equity groups have focused on creating attractive financing, rather than profitable growth, as a means of value creation.  The majority of PE shops relied on heavy debt leverage and aimed to “flip” companies by buying low and selling higher within a three to five-year period.

2.  Given the relatively short timeline, many private equity groups maximize short-term fixes and minimize investment in long-term growth.  This encourages heavy cost cutting and other balance sheet tactics, which have been thrust under the microscope during the GOP presidential campaign.

3.  Many private equity groups raise a 10-year fund, in which they retain investment control.  Investors are not able to pick and choose portfolio investments and not able to control the life of their investments.  In fact, some funds are forced to sell their portfolio companies to other private equity funds in order to liquidate the portfolio prior to expiration.

In our view, the now-dominant pioneers of modern private equity–Bain Capital, KKR, Blackstone, TPG, and Carlyle–have created real value over the past 20 years or more.  We do think, however, that the model is getting stale and there’s an opportunity to create something much better. Google didn’t radically alter the search engine, but it built something better than Yahoo’s offering and created a lot of value in doing so.

Other firms in our industry are pursuing similar paths to transform current PE models, but in many ways we are paddling through uncharted waters.  As we share some of our experiences along the way, we would welcome your feedback at karlandbill@avondalestrategicpartners.com. Given that many of you are attempting to create rapid growth for your own companies through industry transformation, we imagine you have some pretty good advice for us.

Last updated: Jan 31, 2012

KARL STARK AND BILL STEWART are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree.
@karlstark




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