Aidan Jobe Sea


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Principles for Private Equity

Private Equity as an industry has matured into something crowded and often unimaginative. While its massive growth and segmentation reflects an industry reaching its potential, these trends also present an opportunity to re-imagine private equity's role in shaping the future. As a first step, I believe a next-generation private equity fund must adopt three principles:

a) Create lasting value in portfolio companies.

b) Be truly open and innovative in finding new channels of deal origination.

c) Never pay more for an acquisition than you have to.

Yes, these may seem intuitive and obvious, but the truth is that even the best private equity funds have trouble meeting all three objectives. To restate them more practically:

a) Mitigate risk by creating lasting value. Come prepared with an absolutely solid business plan and the expertise to execute it. Do not focus on generating returns through financial engineering. Use minimal leverage. Publicize the fund's positive impact. Leaving companies better than you found them is not only great business, it is also the most positive expression of capitalism.

b) Do not rely on investment banks and non-exclusive service providers for deal origination. A deal that is extensively shopped is always more expensive and the management teams know this. New tools exist for finding information across companies, industries, and geography. Funds that take truly innovative steps in their origination process will enjoy the most proprietary access.

c) Pursue alternatives to buyouts! The biggest reason investment banks have a stranglehold on deals is that so many funds use the same takeover mechanism. Even without a multi-bidder auction, buyouts force funds to pay substantially more than shareholders would have sold for individually, and their simplicity comes at the expense of transactional efficiency. Better takeover mechanisms exist, and it is up to funds to take a leap of faith and try them.

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Principles for Private Equity

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