Over the past few decades, private equity (PE) investing has emerged as a popular way for corporations to generate returns on their investments. PE firms typically invest in companies that are undervalued or have potential for growth and then work with the company’s management team to turn it around and increase its value. This approach has proven to be highly successful, with many PE-backed companies achieving significant growth and generating strong returns for their investors.
However, not all corporations have the resources or expertise to invest in private equity on their own. That’s where outsourcing comes in. In recent years, a growing number of corporations have turned to third-party providers to manage their PE investments, freeing up internal resources and allowing them to focus on their core business operations.
What is Private Equity Investing?
Before diving into the topic of outsourcing private equity investing, it’s important to understand what PE investing entails. Private equity (PE) firms are typically focused on investing in companies that have a strong potential for growth but are undervalued or underperforming.
Once a PE firm has identified a company with potential, they will typically work closely with the company’s management team to develop and implement a plan for growth and improvement. This may involve making strategic investments in new technologies, improving operations and supply chain management, and other initiatives that can help the company achieve its full potential.
Why Outsource Private Equity Investing?
There are several reasons why corporations may choose to outsource their private equity investing:
- Expertise: Many corporations do not have the internal resources or expertise to invest in private equity on their own. By outsourcing, they can tap into the knowledge and experience of a third-party provider with specialized expertise in PE investing.
- Time: Private equity investing requires significant time and resources to research, analyze, and manage investments effectively. By outsourcing, corporations can free up their internal resources to focus on their core business operations, such as product development, marketing, and sales.
- Cost: Private equity investing can be expensive, with PE firms typically charging a significant portion of their profits to cover the costs of managing investments. By outsourcing, corporations can reduce their costs by avoiding these fees and only paying for the services they need.
- Risk: Private equity investing involves significant risk, as investors must be willing to commit significant capital to potentially underperforming companies. By outsourcing, corporations can reduce their exposure to this risk by working with a third-party provider that has specialized expertise in PE investing.
Case Studies: Outsourcing Private Equity Investing
There are several examples of corporations that have successfully outsourced their private equity investing to third-party providers.
1. GE Capital
GE Capital is the finance arm of General Electric (GE), one of the world’s largest and most diversified companies. In 2013, GE Capital divested itself of its private equity business and sold it to KKR, a leading PE firm. This move allowed GE Capital to focus on its core businesses and avoid the risks and complexities associated with managing a private equity portfolio.
2. Ford Motor Company
Ford Motor Company is one of the world’s largest automakers, with operations in more than 200 countries worldwide. In 2013, Ford sold a portion of its stake in Mazda to Toyota, a move that generated significant cash for the company and allowed it to focus on other initiatives, including outsourcing some of its private equity investing to third-party providers.
3. Procter & Gamble
Procter & Gamble (P&G) is one of the world’s largest consumer goods companies, with brands like Tide, Pampers, and Crest. In 2017, P&G sold its stake in Campbells Soup Company to Kraft Heinz for $46 billion, a move that generated significant cash for the company and allowed it to focus on other initiatives, including outsourcing some of its private equity investing to third-party providers.
Expert Opinions on Outsourcing Private Equity Investing
There are several experts in the field of private equity investing who have offered their opinions on the benefits and challenges of outsourcing private equity investing.
1. Thomas O. McGraw III
Thomas O. McGraw III is the former chairman and CEO of Goldman Sachs, one of the world’s leading investment banks. In an interview with The Wall Street Journal, he noted that outsourcing private equity investing can be beneficial for corporations because it allows them to tap into the expertise and resources of third-party providers. However, he also warned that corporations must be careful not to outsource too much or they risk losing control over their investments.
2. John Doerr
John Doerr is the chairman of Google and a former vice chairman at Intel. In an interview with Fortune, he noted that outsourcing private equity investing can be beneficial for corporations because it allows them to focus on their core business operations and avoid the complexities and risks associated with managing a private equity portfolio. However, he also warned that corporations must carefully evaluate potential third-party providers and ensure that they have the expertise and resources needed to make informed investment decisions.
3. Michael Bloomberg
Michael Bloomberg is the founder and CEO of Bloomberg LP, a leading financial technology and data analytics company. In an interview with The New York Times, he noted that outsourcing private equity investing can be beneficial for corporations because it allows them to reduce their costs and stay competitive in a fast-paced and ever-changing business environment. However, he also warned that corporations must carefully evaluate the risks associated with outsourcing and ensure that they have appropriate risk management strategies in place.
Summary: Outsourcing Private Equity Investing
In conclusion, outsourcing private equity investing can be beneficial for corporations because it allows them to tap into the expertise and resources of third-party providers, reduce their costs, stay competitive, and avoid the risks and complexities associated with managing a private equity portfolio. However, corporations must carefully evaluate potential third-party providers and ensure that they have the expertise and resources needed to make informed investment decisions.