In this insightful discussion, Eric Zinterhofer, founding partner of Searchlight Capital Partners, dives into the reasons behind the recent growth of private equity.
He explores the fundamental tradeoff between public and private equity, the appeal of private companies for talented management teams, and the role of active shareholders in driving balanced performance.
Tradeoff Between Public and Private Equity
The fundamental tradeoff between public and private equity lies in the balance of risk and returns.
A manager with a significant stake in the company can lead to better management and returns, but also comes with a higher risk due to concentrated wealth.
Publicly traded companies offer diversification but may lack effective monitoring and management due to the absence of a major stakeholder.
Role of Private Equity Funds
Private equity funds have emerged as a solution to the tradeoff between diversification and effective monitoring.
They allow investors to enjoy the benefits of diversification while benefiting from the monitoring and management provided by the fund’s general partners.
However, the question of who monitors the monitors arises, indicating limitations in the system.
Why on earth, if you’re the most talented management team in your industry, would you want to be the CEO of a small public company? You’d much rather be in a private company if you’re confident in your capabilities. – Eric Zinterhofer\
Growth Factors of Private Equity
The growth of private equity can be attributed to factors such as the lower attractiveness of small public companies due to lower multiples and liquidity, higher regulatory costs, and the presence of active, smart shareholders in private companies which drives more effective decision-making and long-term value creation.
