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Lessons from Private Equity Any Company Can Use (Memo to the CEO)
Private equity firms are snapping up brand-name companies and assembling portfolios that make them immense global conglomerates. They're often able to maximize investor value far more successfully than traditional public companies.
How do PE firms become such powerhouses? Learn how, in Lessons from Private Equity Any Company Can Use. Bain chairman Orit Gadiesh and partner Hugh MacArthur use the concise, actionable format of a memo to lay out the five disciplines that PE firms use to attain their
· Invest with a thesis using a specific, appropriate 3-5-year goal
· Create a blueprint for change--a road map for initiatives that will generate the most value for your company within that time frame
· Measure only what matters--such as cash, key market intelligence, and critical operating data
· Hire, motivate, and retain hungry managers--people who think like owners
· Make equity sweat--by making cash scarce, and forcing managers to redeploy underperforming capital in productive directions
This is the PE formulate for unleashing a company's true potential.
How do PE firms become such powerhouses? Learn how, in Lessons from Private Equity Any Company Can Use. Bain chairman Orit Gadiesh and partner Hugh MacArthur use the concise, actionable format of a memo to lay out the five disciplines that PE firms use to attain their
· Invest with a thesis using a specific, appropriate 3-5-year goal
· Create a blueprint for change--a road map for initiatives that will generate the most value for your company within that time frame
· Measure only what matters--such as cash, key market intelligence, and critical operating data
· Hire, motivate, and retain hungry managers--people who think like owners
· Make equity sweat--by making cash scarce, and forcing managers to redeploy underperforming capital in productive directions
This is the PE formulate for unleashing a company's true potential.
Hardcover
First published January 1, 2008
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759 people want to read
About the author
Orit Gadiesh
8 books7 followersAs chairman of Bain & Company, Orit Gadiesh is one of the leaders in today's international strategy consulting industry and is widely recognized for her expertise in the implementation of change within the corporation.
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Displaying 1 - 30 of 40 reviews
October 2, 2017
Really not sure who the intended audience of this book is. It is an extremely short book and likely of little or no value to a CEO running a company. Written by two consultants from Bain Capital, the basic framework (written by consultants, hence...) gives five bullet mantras to be followed sequentially and the output should magically resemble the lean, mean beast that a successful private equity portfolio company looks like. Too full of gyan (or "globe"/ "gas" as MBA students call it) and of little practical value in my humble personal opinion. Not questioning the competence of writers (never cross swords with a consultant!), merely their wisdom in writing this book in the first place. Any CEO desirous of embarking on a career-defining initiative of transforming his/her company would definitely want more than sketches and outlines to base it on. Would have helped if the authors had chosen to write a much longer book with sufficient illustrations and case studies to demonstrate principles in action. Perhaps they could have come with a fictional company to which they apply their principles and take the reader all the way to the final product.
May 13, 2020
Orit Gadiesh has done an excellent work on preparing this concise and crispy clear recommendations package for the Private Equity practitioners. The examples she has used are quite interesting.
July 20, 2018
Here's a book that presents itself seemingly as a PE construction-kit of sorts. This might be akin to say solving all the worlds' political quandaries through one carefully crafted sports tournament (+where the deserved teams get the win, ex ante facto). Possible. It might then be practicable to solve all your professional doles by quickly flicking through the pages of one book.
March 24, 2021
Read this book a few years ago and really enjoyed it. Crisp and to the point with good business lessons. Below are my notes. More summaries like this can be found at www.libraryof.xyz
Hugh MacArthur and Orit Gadiesh, at Bain & Company, shows six techniques that owners and business leaders can apply to increase the value of their companies. These are: (1) defining the company’s full potential, (2) developing a change plan, (3) putting the plan to work, (4) using existing talent, (5) equity should be sweating and (6) creating a results-oriented culture.
OK IS NOT GOOD ENOUGH. MacArthur and Gadiesh say that many companies suffer from “satisfactory underperformance”. Where the result is completely okay and the owners as well as management are satisfied. But performing below capacity is not okay; shareholders receive less return from their investment, the company receives a lower value than possible and the management as well as employees receive lower remuneration than is possible. It is the management’s most important task to increase the value of the company.
DEFINE THE COMPANY’s FULL POTENTIAL. To increase profits and stock market valuation, a leader must make strategic choices based on a clear picture of the company’s full potential. To do that, you have to start by building an objective fact base. To analyze demand, customers, competition, environmental trends and map how the company actually makes money. With that, you can determine the company’s true potential and based on that, initiate a few, usually 3-5, key initiatives to take the company there. No company can succeed when it divides its resources among too many initiatives.
DEVELOP A PLAN OR CHANGE. Management develops a plan for how the core initiatives will be implemented. The plan for change must be clear and feasible with emphasis on measurable measures. The plan should describe the whole process from start to end. Thereafter, the organization is shaped according to the plan and the execution is carefully monitored through set measurement values. The private equity companies then design incentive programs to get the management to think and act as owners. Often there is great inherent talent already in the organization, which is simply not motivated in the right way or given the right chances before. In addition, it is of great importance to put together an appropriate board.
EQUITY SHOULD BE SWEATING. To maximize a company’s potential, owners as well as management must be comfortable with financial leverage. This requires management to manage working capital aggressively and to have high discipline regarding investments. Assets or divisions that cannot deliver good returns should be sold or shut down. Free capital is then redistributed to more productive areas of use.
GEAR UP TO STRENGTHEN THE CASH FLOW. A higher debt / equity ratio helps to strengthen management’s focus and ensures that they see money as a scarce resource. If a typical PE company needs $100 for growth, they often finance the sum with $70 of debt and $30 of equity. Then they focus on cash generation, which they can use to either pay off the debt or invest in additional cash-generating projects.
CREATE A RESULT ORIENTED CULTURE. The goal is to create a result oriented and long-term oriented culture. Think out methods that prevent the management from going back to old ruts once they have reached the finish line. A high level of indebtedness also makes it difficult for management to become comfortable and relax.
FOCUS ON EBITDA. PE companies generally use EBITDA as a measure of cash flow. EBITDA will cover debt amortization and interest payments, working capital requirements for growth and investments for maintenance as well as growth. Say a company has $125 in EBITDA of which $50 is used for amortization and interest. Let’s further assume that working capital as a percentage of sales is 30% and that next year’s sales growth budget is $100. The growth thus requires an additional $30 in working capital. Then say the capex need is $10. In total, this business requires an additional $ 90 and has $ 125 in EBITDA to finance this with.
WORKING CAPITAL IS EASIEST TO MANAGE. The bank decides on the interest cost and the amortization rate. The nature of the business controls capex levels – it is possible to hold back for a year, but if you neglect the maintenance, reality will quickly catch up. However, management has control over, and may in the short-term influence, the business’s working capital needs. Working capital can – if managed efficiently – decrease without impairing operations. Say that the working capital requirement in the example above could be reduced to 20% of sales through better inventory management, receivables and accounts payable. That savings would increase cash generation from $35 to $45, equivalent to 29%, simply by changing internal procedures.
Hugh MacArthur and Orit Gadiesh, at Bain & Company, shows six techniques that owners and business leaders can apply to increase the value of their companies. These are: (1) defining the company’s full potential, (2) developing a change plan, (3) putting the plan to work, (4) using existing talent, (5) equity should be sweating and (6) creating a results-oriented culture.
OK IS NOT GOOD ENOUGH. MacArthur and Gadiesh say that many companies suffer from “satisfactory underperformance”. Where the result is completely okay and the owners as well as management are satisfied. But performing below capacity is not okay; shareholders receive less return from their investment, the company receives a lower value than possible and the management as well as employees receive lower remuneration than is possible. It is the management’s most important task to increase the value of the company.
DEFINE THE COMPANY’s FULL POTENTIAL. To increase profits and stock market valuation, a leader must make strategic choices based on a clear picture of the company’s full potential. To do that, you have to start by building an objective fact base. To analyze demand, customers, competition, environmental trends and map how the company actually makes money. With that, you can determine the company’s true potential and based on that, initiate a few, usually 3-5, key initiatives to take the company there. No company can succeed when it divides its resources among too many initiatives.
DEVELOP A PLAN OR CHANGE. Management develops a plan for how the core initiatives will be implemented. The plan for change must be clear and feasible with emphasis on measurable measures. The plan should describe the whole process from start to end. Thereafter, the organization is shaped according to the plan and the execution is carefully monitored through set measurement values. The private equity companies then design incentive programs to get the management to think and act as owners. Often there is great inherent talent already in the organization, which is simply not motivated in the right way or given the right chances before. In addition, it is of great importance to put together an appropriate board.
EQUITY SHOULD BE SWEATING. To maximize a company’s potential, owners as well as management must be comfortable with financial leverage. This requires management to manage working capital aggressively and to have high discipline regarding investments. Assets or divisions that cannot deliver good returns should be sold or shut down. Free capital is then redistributed to more productive areas of use.
GEAR UP TO STRENGTHEN THE CASH FLOW. A higher debt / equity ratio helps to strengthen management’s focus and ensures that they see money as a scarce resource. If a typical PE company needs $100 for growth, they often finance the sum with $70 of debt and $30 of equity. Then they focus on cash generation, which they can use to either pay off the debt or invest in additional cash-generating projects.
CREATE A RESULT ORIENTED CULTURE. The goal is to create a result oriented and long-term oriented culture. Think out methods that prevent the management from going back to old ruts once they have reached the finish line. A high level of indebtedness also makes it difficult for management to become comfortable and relax.
FOCUS ON EBITDA. PE companies generally use EBITDA as a measure of cash flow. EBITDA will cover debt amortization and interest payments, working capital requirements for growth and investments for maintenance as well as growth. Say a company has $125 in EBITDA of which $50 is used for amortization and interest. Let’s further assume that working capital as a percentage of sales is 30% and that next year’s sales growth budget is $100. The growth thus requires an additional $30 in working capital. Then say the capex need is $10. In total, this business requires an additional $ 90 and has $ 125 in EBITDA to finance this with.
WORKING CAPITAL IS EASIEST TO MANAGE. The bank decides on the interest cost and the amortization rate. The nature of the business controls capex levels – it is possible to hold back for a year, but if you neglect the maintenance, reality will quickly catch up. However, management has control over, and may in the short-term influence, the business’s working capital needs. Working capital can – if managed efficiently – decrease without impairing operations. Say that the working capital requirement in the example above could be reduced to 20% of sales through better inventory management, receivables and accounts payable. That savings would increase cash generation from $35 to $45, equivalent to 29%, simply by changing internal procedures.
August 22, 2018
Does private equity owned companies have a superior management model than public owned companies? The writers of this book certainly like to think so. Israeli born strategy expert Orit Gadiesh is the chairwoman of the management consulting firm Bain & Company and Hugh MacArthur is the leader of the same firms’ - huge - global private equity practice. In this short book they describe the private equity (PE) management model and try to show how public companies can utilize the same techniques.
As the writers also state the successful PE funds of the 80’s and the 90’s had a relatively easy task. They bought a company, applied substantial amounts of leverage to it and did some restructuring. Pretty much irrespective of whether the restructuring was effective or not they earned huge amounts of money as equity prices in general were rising and the cost of borrowing in general was going down. Applying cheaper and cheaper leverage to a booming equity market made PE a super charged money machine. Myself, I would add the feedback loop of success that large PE companies ended up in as another critical factor. The successful PE fund often gets to see potential projects first and hence, have a very valuable “right of first refusal” and on top of that the usage of corporate executives on advisory boards gives the PE company almost an insider position in many industries. The last ten years the environment has been different as the stock market hasn’t automatically risen and lately the access to leverage has not been a given. This has done organic value creation in the companies owned much more critical.
As PE funds often own firms for 3 to 5 years before they exit this is also the basis for their management model which is structured like a medium term project work. The key parts of the project as described in this book are to 1) define the full potential of the company; 2) to develop a strategic plan to reach that full potential; 4) to accelerate corporate performance, build a result oriented corporate culture and utilize the right talent to execute the plan and finally to 4) use leverage, and the scarce resources that come from the cash drain from leverage, to bring discipline into the capital usage. This improvement project is then continually renewed to constantly try to move the goalposts further.
This is a rather thin book and it cannot give justice to the management work PE companies do but what strikes the reader is the almost trivial nature of the advice given. Everything is common sense topics that any management book would bring up. In that respect the text is somewhat of a disappointment. The CEO of a public company probably doesn’t find much he didn’t already knew. Most of the text is probably written in 2007, a time when Steven Schwartzman of Blackstone and Henry Kravitz of KKR were the rulers of the world, and there is a certain smug tone in the writing. However, even if the management practices hardly are novel I would say that they still are in short supply in many organisations. Having clear targets, alignment of interests, accountability and focus on value creation is not necessarily how one would describe most companies. Perhaps the value of the PE model rather lies in all the factors surrounding the model. The boost that a spun-off company get when they are relived from corporate overhead, the explicit mandate to focus on the mid-term instead of being locked in into yearly budgets or quarterly results and on top of that the substantial economic rewards if you succeed. These later factors are perhaps in a way also part of the PE-model, if not of the PE management model, and should not be frowned upon.
The reader that tries to understand the work of PE companies will learn very little from this text. Better instead to read a proper management classic such as for example Build to Last etc.
As the writers also state the successful PE funds of the 80’s and the 90’s had a relatively easy task. They bought a company, applied substantial amounts of leverage to it and did some restructuring. Pretty much irrespective of whether the restructuring was effective or not they earned huge amounts of money as equity prices in general were rising and the cost of borrowing in general was going down. Applying cheaper and cheaper leverage to a booming equity market made PE a super charged money machine. Myself, I would add the feedback loop of success that large PE companies ended up in as another critical factor. The successful PE fund often gets to see potential projects first and hence, have a very valuable “right of first refusal” and on top of that the usage of corporate executives on advisory boards gives the PE company almost an insider position in many industries. The last ten years the environment has been different as the stock market hasn’t automatically risen and lately the access to leverage has not been a given. This has done organic value creation in the companies owned much more critical.
As PE funds often own firms for 3 to 5 years before they exit this is also the basis for their management model which is structured like a medium term project work. The key parts of the project as described in this book are to 1) define the full potential of the company; 2) to develop a strategic plan to reach that full potential; 4) to accelerate corporate performance, build a result oriented corporate culture and utilize the right talent to execute the plan and finally to 4) use leverage, and the scarce resources that come from the cash drain from leverage, to bring discipline into the capital usage. This improvement project is then continually renewed to constantly try to move the goalposts further.
This is a rather thin book and it cannot give justice to the management work PE companies do but what strikes the reader is the almost trivial nature of the advice given. Everything is common sense topics that any management book would bring up. In that respect the text is somewhat of a disappointment. The CEO of a public company probably doesn’t find much he didn’t already knew. Most of the text is probably written in 2007, a time when Steven Schwartzman of Blackstone and Henry Kravitz of KKR were the rulers of the world, and there is a certain smug tone in the writing. However, even if the management practices hardly are novel I would say that they still are in short supply in many organisations. Having clear targets, alignment of interests, accountability and focus on value creation is not necessarily how one would describe most companies. Perhaps the value of the PE model rather lies in all the factors surrounding the model. The boost that a spun-off company get when they are relived from corporate overhead, the explicit mandate to focus on the mid-term instead of being locked in into yearly budgets or quarterly results and on top of that the substantial economic rewards if you succeed. These later factors are perhaps in a way also part of the PE-model, if not of the PE management model, and should not be frowned upon.
The reader that tries to understand the work of PE companies will learn very little from this text. Better instead to read a proper management classic such as for example Build to Last etc.
February 14, 2022
Thanks to Grant McClure for turning me on to this one. Short, sweet, and meaty, this book/memo lays out the core tenets of value creation for leading PE shops as seen through the eyes of PE consultants at Bain.
The six-bullet skeleton is as follows:
* Define the full potential
* Develop the blueprint
* Accelerate performance
* Harness the talent
* Make equity sweat
* Foster a results-oriented mindset
As the bullets may allude, I would put this book in the category of "refresher" more than "paradigm-shifter" but don't discount the value of a good, concise refresh. Most of the tactics offered by Gadiesh and MacArthur will fall into the category of things you know you should be doing but probably are not. I like a refresher that takes an afternoon instead of a weekend. Furthermore, at a mere 120 pgs., this book was more practical and tangible than I expected. Brief case studies help illustrate at a high level the process by which these tactics have been successfully enacted.
The main takeaway for me came from the first bullet on defining the full potential. When evaluating investments, it can be easy to underwrite a base case performance that would generate acceptable returns, a very different exercise than evaluating the "full potential" of the business. Of course, any full potential forecasts must be tempered by downside scenarios. However, in increasingly competitive auctions, an ability to see beyond a standard 20% IRR return profile is becoming a must.
4.6/5.0
The six-bullet skeleton is as follows:
* Define the full potential
* Develop the blueprint
* Accelerate performance
* Harness the talent
* Make equity sweat
* Foster a results-oriented mindset
As the bullets may allude, I would put this book in the category of "refresher" more than "paradigm-shifter" but don't discount the value of a good, concise refresh. Most of the tactics offered by Gadiesh and MacArthur will fall into the category of things you know you should be doing but probably are not. I like a refresher that takes an afternoon instead of a weekend. Furthermore, at a mere 120 pgs., this book was more practical and tangible than I expected. Brief case studies help illustrate at a high level the process by which these tactics have been successfully enacted.
The main takeaway for me came from the first bullet on defining the full potential. When evaluating investments, it can be easy to underwrite a base case performance that would generate acceptable returns, a very different exercise than evaluating the "full potential" of the business. Of course, any full potential forecasts must be tempered by downside scenarios. However, in increasingly competitive auctions, an ability to see beyond a standard 20% IRR return profile is becoming a must.
4.6/5.0
June 8, 2020
The authors present an generic problem-solving methodology similar to the one presented by AG Lafley in Playing to Win. I especially enjoyed the section about "make equity sweat". PE companies are often personated as revenue and profit hungry actors. However, the authors explain how most PE companies focus on cash management and working capital to fulfill the potential of their portfolio companies. The recommended tips for "making equity sweet" are:
- Use debt service and leverage the company. But make sure the current ratio covers the principal and interest payments. By leveraging the portfolio company, shares are not diluted. More, the scarcity shares increase the equity value when the company grows.
- Reduce working capital requirements. This can be achieved by reducing inventory (DII), reducing days sales outstanding (DSO) for accounts receivable or increasing days payable outstanding (DPO) for accounts payable. Efficient inventory management can be achieved by reduced customisation of products, improved production proccesses or increased product margins.
- High emphasis on growth for capital expenditure. Excess cash from reduced working capital requirements and down-payed debt need to be invested in growth generating investments which strenghten the competitive capabilities of the company.
- Use debt service and leverage the company. But make sure the current ratio covers the principal and interest payments. By leveraging the portfolio company, shares are not diluted. More, the scarcity shares increase the equity value when the company grows.
- Reduce working capital requirements. This can be achieved by reducing inventory (DII), reducing days sales outstanding (DSO) for accounts receivable or increasing days payable outstanding (DPO) for accounts payable. Efficient inventory management can be achieved by reduced customisation of products, improved production proccesses or increased product margins.
- High emphasis on growth for capital expenditure. Excess cash from reduced working capital requirements and down-payed debt need to be invested in growth generating investments which strenghten the competitive capabilities of the company.
December 30, 2018
I often talk about all the great internship experiences I had while I was in college. One such experience was my first exposure to true blue private equity. I had worked at early stage venture funds, but PE was a different beast all together, or so I learned as I started working for Cicero Group’s private equity practice. My manager at the time, Spencer Nelson, gave me this little book, which he’d gotten from Randy Shumway. This was my first exposure to how to think like an investor.
I read most of it during my internship, but never finished it all the way through. This year, I came across it and committed to reading it. I’m working at a PE fund, figured it couldn’t hurt. And I appreciated the insight it offered.
I read most of it during my internship, but never finished it all the way through. This year, I came across it and committed to reading it. I’m working at a PE fund, figured it couldn’t hurt. And I appreciated the insight it offered.
January 21, 2023
This book either needed to be much longer or much shorter. With its current 120-ish pages, it is essentially a painfully obvious five-point action plan with "case studies" interspersed here and there. The authors should have either reduced it to an actual "memo" (i.e., five pages and some bullet points) or made it three or four times as long and actually gone in depth on some of these topics.
Presumably the authors are both very good at their jobs and could provide real advice if they wanted to do so. I suspect that this book was ghostwritten extrapolation on more or less exactly what I mentioned above: a five-page memo that the authors threw together in their spare time.
You can give this book a hard pass.
Presumably the authors are both very good at their jobs and could provide real advice if they wanted to do so. I suspect that this book was ghostwritten extrapolation on more or less exactly what I mentioned above: a five-page memo that the authors threw together in their spare time.
You can give this book a hard pass.
March 25, 2020
The book by BAIN consultants is to some extent, self serving via the recomendation of PMO, benchmarking etc. Some points however is that 3-5 year fund horizon does not allow for misfires-hence PE firms tend to be very demanding and bite the bullet fast. other interesting mental models are 'full potential realization', as also hiring tips.
June 10, 2019
Great learnings. Key success factor is attention to details and focus on critical issues
Great learning. Key success factor is attention to details, focus on key things and intensity and rigour of implementation in a timely manner
Great learning. Key success factor is attention to details, focus on key things and intensity and rigour of implementation in a timely manner
March 25, 2021
Some good lessons inside which can apply to business leadership as well as fundamental analysis of businesses. I particularly liked the section on “Making Equity Sweat” which was succinct in explaining why it’s so important to focus on cash return on capital.
July 18, 2021
Fantastic short and straight to the point with Less fluff
Fantastic book with very valid points and good examples.
Define the blueprint
Define full potential.
Make equity sweat
Also some other very valid main points and thoughts regarding the board.
Fantastic book with very valid points and good examples.
Define the blueprint
Define full potential.
Make equity sweat
Also some other very valid main points and thoughts regarding the board.
January 23, 2022
Short book with some interesting case studies. Lots of the points are quite obvious, but the authors have some interesting thoughts on management teams underestimating the right amount of debt in a business. They also do a good job explaining how PE firms define full potential for an investment.
February 8, 2023
Short, to the point, and chock full of good tips and insights. My kind of book. A must read if you are in the private equity world either on the PE side or the portfolio company side. Should be mandatory reading for those groups actually. A good read even if you are not in the PE world.
February 16, 2018
Good and a quick read
The book was a quick read. Offering high-level suggestions on the pe modus operandi that can easily be adopted and understood
The book was a quick read. Offering high-level suggestions on the pe modus operandi that can easily be adopted and understood
March 17, 2018
Boring, stuffy, irrelevant to business today (2018). I had to read it for work.
March 26, 2019
Fairly easy read that doesn’t tell you much about PE at all, but emphasises a few key points about running a large organisation. Worth skipping.
November 19, 2019
Excellent teachings every manager should be aware of in order to create and increase value.
The only drawback is that it is too short to provide enough depth for each lesson.
The only drawback is that it is too short to provide enough depth for each lesson.
October 25, 2020
A quick, actionable and easy to read book - crystallizing the essence of corporate strategy for CEOs, from the lens of consultants (authors are from Bain & Co).
February 7, 2022
Kind of superficial …
June 2, 2022
Clear, concise, and strong book about business management's next step. Helps put a grand framework into perspective before one gets into finite detail.
February 20, 2023
Obvious things, the difficulty is in how to make them happening.
Read
March 4, 2024Poor book
The summary can be found in the last chapter
The summary can be found in the last chapter
May 10, 2024
An interesting framework for utilizing a PE mindset to unlock the full potential of your business.
August 7, 2024
Great read. Short and to the point, it provides an eye-opening framework to business leaders across industries who are seeking the right path to growth.
February 15, 2025
Op zich prima boek. Wel voor meer corporate omgevingen, maar even goed wel met goede inzichten. Was ook wel een pitch om hen in te zetten voor strategic due diligence en program office.
April 29, 2025
Very enjoyable short book that boils PE down to its purest form in a way that can be applied to smaller businesses
June 5, 2025
4.3 - good ceo lessons (im excited for lens class if u can’t tell)
September 6, 2016
Short book with some decent advise. However, didn't feel exceptional in any way and was fairly repetitive.
Displaying 1 - 30 of 40 reviews