My last post described Karl Popper’s cycle that explains how scientists spot anomalies in existing theory, formulate a working hypothesis, submit it to rigorous testing, then revisit their hypothesis in light of new information. Entrepreneurs, it turns out, can exploit opportunities much like scientists pursue knowledge, by spotting a gap in the market, formulating a business plan to fill that gap, and then running experiments in the market, and revise their plan in light of new information.
- Notice a gap in the market. In the first step, the entrepreneur or manager notices an anomaly in the market that may point to a potential opportunity. Typical anomalies include a product that shouldn’t sell but do or customers using a product in an unexpected way. Consider Noodles & Company, a chain of
This Friday, the London Business School Private Equity and Venture Capital Club hosts its annual Private Equity Conference. I will moderate the closing panel discussion called “Value Creation: Overtaking Leverage?” that will explore how buyout firms can create value not by piling on debt, but by improving the operating performance of their portfolio companies. This is a particularly topical issue right now, as debt has become more expensive, financing terms more onerous, and market conditions more challenging for portfolio firms.
In preparation for the panel, I have reviewed recent research–largely by financial economists–on private equity, operational improvement, and value creation. Recent papers provide some very helpful, and in some cases surprising, insights into how late-stage private equity firms add value. Below is a selective review of papers that bear on a set of questions related to how leveraged buyout firms create economic value through operational improvements. (For comprehensive reviews of private equity trends, see papers by Cumming et al. and Kaplan and Stromberg).
- Do leveraged buyout firms create economic value? Excluding fees, leveraged buyout firms