Economic Purpose and How Value is Created

class="textPage">The question of why there is a market for private equity is an important one. Why should a buyout create value? To answer to this question we need to examine what processes a PE firm performs that he is able to increase cash flow and make money in the long term. We are going to outline 3 methods of value creation.

class="textPage">It is interesting that in the 1980’s the main strategy was hostile takeovers and breaking up conglomerates where the sum of parts was greater than the parts as a whole, in the early 1990’s the popular strategy was corporate restructuring and improving operating performance, in the late 1990’s the growth LBO was a common method where they concentrated on expanding sales. Today most buyouts use all four strategies. In this section I assume that private equity also includes LBO’s.