Understanding Private Equity: Operating Strategies and Management Approaches

Topic: Insights Reading Time: 7 min

The term “private equity” (PE) often surfaces in financial discussions, especially when businesses change ownership or undergo significant restructuring. But private equity isn’t a one-size-fits-all concept. While it involves investing in companies, the strategies, management styles, and approaches that PEs employ can differ vastly. Some firms focus on growth, others on turnaround efforts or buyouts, and many PE firms operate in diverse ways depending on their expertise and goals.

In this article, we’ll break down the different operating strategies that private equity firms adopt, the various management styles they apply to their portfolio companies, and provide real-world examples to clarify each approach. We’ll also explore why some PE firms specialize in particular sectors or strategies, while others take a more generalist approach.

What is Private Equity?

At its core, private equity refers to investment firms that buy and manage private companies—or take public companies private—with the aim of increasing their value before selling them for a profit. PE firms generally pool funds from institutional investors, such as pension funds, insurance companies, and high-net-worth individuals, to create large investment funds. These funds are then used to acquire or invest in companies with the intention of generating high returns over a set period, usually ranging from five to seven years.

While private equity is primarily associated with buyouts, there are numerous ways that PE firms can create value. Each firm often adopts its own specific operating strategy and management approach, depending on the types of businesses they invest in and their ultimate financial objectives.

Different Private Equity Operating Strategies

Private equity firms can employ several distinct operating strategies. These approaches are tailored based on the firm’s goals, investment philosophy, and market opportunities. Below are some of the most common strategies.

1. Buyout Strategy

The buyout strategy is perhaps the most well-known approach in private equity. It involves acquiring a majority stake or full control of a company, often using a significant amount of debt (leveraged buyouts or LBOs). The goal here is to enhance the company’s operational efficiency, restructure its financials, or improve its strategic positioning to ultimately sell the company at a higher valuation.

Example: KKR (Kohlberg Kravis Roberts)

KKR is one of the pioneers in the buyout strategy. In 1989, KKR acquired RJR Nabisco in a leveraged buyout deal valued at $31.4 billion—the largest in history at the time. KKR focused on operational improvements and restructuring to eventually sell portions of the company for profit.

2. Growth Equity

Growth equity is a strategy focused on investing in companies that are past their startup phase but require capital to expand. Unlike buyouts, growth equity investments typically don’t involve taking full control of the company. Instead, the private equity firm takes a minority stake in a high-growth company to support scaling efforts such as new product launches, geographic expansion, or technological upgrades.

Example: General Atlantic

General Atlantic is a prime example of a private equity firm that specializes in growth equity. The firm invested in Uber during its early growth phase, helping the company expand its market presence and technological capabilities without assuming full control.

3. Turnaround Strategy

In contrast to growth-focused strategies, the turnaround strategy targets distressed or underperforming companies. These firms are acquired at a low cost with the intention of fixing operational inefficiencies, reducing debt, or overhauling management. Turnaround PE firms often install new management teams and implement stringent cost-cutting measures to stabilize the business.

Example: Cerberus Capital Management

Cerberus is a specialist in turnaround strategies. In 2007, it acquired Chrysler, which was struggling at the time, in hopes of revamping the automaker. Although the outcome was mixed, Cerberus is well-known for taking on high-risk, distressed assets with the potential for recovery.

4. Venture Capital within Private Equity

Though venture capital is often seen as a distinct investment category, many private equity firms have VC arms that focus on early-stage companies. These investments involve higher risk but potentially massive rewards if the company succeeds. Unlike traditional buyouts or growth equity investments, VC tends to focus on smaller companies with innovative technologies or business models that need capital to grow.

Example: Sequoia Capital

Sequoia Capital is one of the leading venture capital firms in the world, having invested in companies like Apple, Google, and Airbnb. Sequoia’s strategy has been to invest in early-stage startups that show high potential for technological disruption.

5. Sector-Specific Focus

While private equity firms can invest across various sectors, some firms specialize in a particular industry, leveraging their deep expertise in that field to maximize returns. Sector-focused strategies are more common in industries like healthcare, technology, energy, or real estate, where specialized knowledge can offer a competitive edge.

Example: Energy Capital Partners

Energy Capital Partners is a private equity firm that focuses exclusively on the energy sector. This narrow focus allows the firm to leverage deep industry knowledge, creating value by investing in power generation, renewables, and midstream infrastructure.

Management Approaches in Private Equity

While the strategy employed by a private equity firm is important, equally significant is how the firm manages the company after acquisition. Management approaches can range from hands-on, active involvement to a more passive, advisory role.

1. Active Management

Some private equity firms adopt an active management style, deeply involving themselves in the day-to-day operations of the portfolio company. These firms usually appoint board members, bring in new leadership, and directly influence operational decisions.

Example: Blackstone

Blackstone often takes an active management role in its portfolio companies. When it acquired Hilton Hotels in 2007, it worked closely with the management team to restructure the company’s debt and expand its international presence, leading to a successful public offering in 2013.

2. Passive Management

In contrast to active management, passive PE firms take a more hands-off approach. They provide capital and strategic guidance but leave the company’s original management team in place to run the operations. This is more common in growth equity and minority investment scenarios.

Example: Warburg Pincus

Warburg Pincus is known for its passive management style. It provides capital and strategic insights to its portfolio companies but typically refrains from day-to-day operational involvement, focusing instead on long-term growth.

3. Hybrid Approach

Some PE firms adopt a hybrid approach, where they actively manage certain aspects of the business—like restructuring the financials—while leaving other operations to the existing management. This flexible approach allows for targeted interventions without overwhelming the company with changes.

Example: The Carlyle Group

Carlyle is known for employing a hybrid management style. In some of its acquisitions, it will actively restructure the financial side of the business while leaving the operational side to the existing management team.

Why Specialization Matters in Private Equity

The diversity in operating strategies and management styles among private equity firms is vast, but there is often an advantage to specialization. Focusing on a specific strategy or sector allows private equity firms to leverage deep expertise, build valuable networks, and understand the nuances of the industry or strategy they are focused on. This specialization increases the likelihood of success, as the firm’s management team brings a wealth of knowledge and experience to the table.

At the same time, some firms opt for a more generalist approach, diversifying their investments across sectors and strategies to spread risk. This broader strategy can be advantageous during times of economic uncertainty or when opportunities in specific sectors are limited.

Conclusion

Private equity is far more than just buyouts and leveraged deals. PE firms employ a variety of operating strategies and management approaches tailored to the companies they acquire and the markets they operate in. From buyouts to growth equity, venture capital to turnarounds, each strategy offers its own risks and rewards. Similarly, the management approach—whether active, passive, or hybrid—greatly influences the success of a private equity investment.

As private equity continues to evolve, the question remains: which strategies and management styles will dominate in the future? Will sector-focused specialization become the norm, or will generalist approaches continue to hold sway? Share your thoughts in the comments below!