Session 13: Alternative Asset Valuation Reading 49: Private Equity Valuation
LOS b: Explain how private equity firms align their interests with those of the managers of portfolio companies.
In a private conversation with his best friend, Harry Veeslay, CFA, makes the following statements:
Statement 1: |
Private equity (PE) firms generally focus on short-term results. For example, they frequently use restructuring of acquired companies in an effort to quickly divest them for a profit. |
Statement 2: |
PE firms also want to ensure that the interests of portfolio company managers and of limited partners are aligned. For example, they frequently tie manager compensation to firm performance and include tag-along, drag-along clauses to give management a stake in the firm under certain trigger events. |
With regard to Veeslay's statements:
Statement 1 is incorrect. PE firms tend to have a long-term, rather than short-term focus in their investment strategies, which often exceeds 10 years. Restructuring is generally a lengthy process and requires a long-term perspective.
Statement 2 is correct with regard to both manager compensation and the use of tag-along, drag-along clauses.
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