Top Private-Equity Firms Outperform Public and Private Rivals

Joint Study of BCG and the IESE Business School Finds Best Private-Equity Firms Distinguished by Sustained Superior Performance Over Time

BOSTON, MA--(Marketwire - February 21, 2008) - Despite the current turmoil in global credit markets, private equity is here to stay and will continue to be an important source of capital, according to a new report from The Boston Consulting Group (BCG) and the IESE Business School of the University of Navarra in Spain.

The sector's focus is shifting from creating value through leverage to creating it through operational improvement and growth, making the sector less dependent on credit. Tighter credit and the higher cost of debt (which is still only at levels reached in 2005, when private equity was already booming) will, therefore, affect the sector less than many observers suggest. And although private equity on average does not outperform the public capital markets on a risk-adjusted basis, the best private-equity firms consistently "beat the fade" -- that is, they avoid the reversion to average returns which, over time, afflicts the vast majority of investment opportunities.

"Over time, the value creation performance of the vast majority of public companies fades toward the market average," said Heino Meerkatt, the global topic leader for private-equity consulting in BCG's Corporate Development practice and a coauthor of "The Advantage of Persistence: How the Best Private-Equity Firms 'Beat the Fade.'" "Not so with private equity. We found that the performance of the top-quartile funds barely faded over the time period we studied. This suggests that the best private-equity firms consistently outperform both public companies and their private-equity competitors -- and, thus, represent an advantaged investment vehicle." As a result, new money continues to flow into the sector, both from traditional pension funds and from government-owned sovereign wealth funds looking for higher returns.

Traditional structural factors such as size, scale, and diversification do not explain private equity's success: "The best private-equity firms can generate above-average returns whether they are big or small, diversified or focused, global or regional," said coauthor Heinrich Liechtenstein, assistant professor of financial management at the IESE Business School. The report argues that the source of this superior performance is, rather, a set of distinctive organizational capabilities that differentiate the top private-equity performers from both their public and private rivals. Three capabilities, in particular, are especially important:

--  Networked Access. Extensive networking with industry insiders in the
    sectors where the private-equity firms operate
--  Domain Expertise. Industry-specific knowledge
--  Fast Operational Improvement. The capacity to quickly implement
    improvements that turn around their portfolio companies

"The day when private equity created value primarily by exploiting leverage is long over," said Meerkatt. "The best private-equity firms create superior value through organizational capabilities that allow them to identify the best deals, bid competitively, and then transform the performance of their portfolio companies."

The report highlights two possible scenarios for the sector's future. "The capabilities of the top performers will become the source of long-term competitive advantage and drive the consolidation of the sector," said Liechtenstein. "Or public companies and other private-equity firms will learn how to copy those capabilities. In that case, they will simply define a new and higher standard of performance and stimulate a new round in the global competition for capital."

"The Advantage of Persistence" is the first product of an ongoing joint research project on the performance of the private-equity sector conducted by BCG and the IESE Business School. The report is based on extensive analysis of a variety of data sources, including a unique BCG-IESE database of some 1,750 private-equity deals that took place between 2000 and 2006.

For more information, please contact Eric Gregoire at + 1 617 854 4570 or or to download a copy of the report, please go to

About The Boston Consulting Group

The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 66 offices in 38 countries. For more information, please visit

About the IESE Business School

The IESE Business School of the University of Navarra is one of the world's top ten business schools and has pioneered executive education in Europe since its founding in 1958 in Barcelona. In 1964 IESE introduced Europe's first full-time MBA program and, subsequently, the world's first bilingual program in two of the most important languages of business, English and Spanish. IESE distinguishes itself in its general-management approach, extensive use of the case method, international outreach, and emphasis on placing people at the heart of managerial decision making. With a truly global outlook, IESE currently runs executive-education programs on four continents.

Contact Information: Media Contact: Eric Gregoire The Boston Consulting Group +1 617 850 3783