The Money, Freedom, and Glamour of Private Equity

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The Money, Freedom, and Glamour of Private Equity

What do the fabled chief executives of top corporations do when they retire? Many golf, sail, or write their memoirs — but a growing number of them get involved in the lucrative world of private equity.

• Jack Welch, the former CEO of General Electric, evaluates buy-outs for the $6 billion private equity firm, Clayton, Dubilier & Rice.

• IBM’s former CEO, Lou Gerstner, is now chairman of the $35 billion Carlyle Group in Washington, which is also the business home of former U.S. President George H.W. Bush.

• Jacques Nasser, former CEO of Ford Motor Company, serves as chairman for Equity Partners, a $5 billion firm.

Similarly, the retired presidents or CEOs of Continental Airlines, Viacom, and the Target Corporation have all made the move to private equity.

In addition, the world of private equity and fast buy-outs is scooping up top management talent at mid-career. Furthermore, many of the top MBA stars graduating from the nation’s best business schools are joining private equity firms.

Why is this happening?

One answer is that the offers are simply too good to refuse. People like Jack Welch are obviously making enormous sums of money, but even the new MBA grads are making far more than they would anywhere else by choosing private equity firms.

In addition, top executives who have slaved to make their quarterly numbers for investors find themselves suddenly freed from this relentless treadmill by moving into the private equity sector. There, the rules and pressures are far less stringent.

A big part of the appeal, as the Trends editors predicted, is that they don’t have to worry about the Sarbanes-Oxley Act in the same way. By opting out of the publicly-held world, they can simply sidestep the SEC. They don’t have to disclose how much money they make. Moreover, they can build for the long term, instead of worrying about Wall Street analysts breathing down their necks.

Sometimes, drastic measures are needed to turn around a failing corporation and, in the private equity sector, CEOs can take those steps without worrying about protests from shareholders, activist hedge funds, or the public. For example, Bear Stearns Merchant Banking bought Lerner New York from The Limited, renamed it New York & Company, and remodeled or opened 260 new stores, doubling the number of venues.

In a public company, this would have been viewed as an outlandish expense. But in private equity, it’s seen as a necessary strategy to turn around a poorly performing company. And with private ownership, it’s possible to cut bureaucracy to the core and become much faster and more flexible at making decisions...

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