Lessons from Private Equity Any Company Can Use

Make Equity Sweat

Almost every business needs capital to grow. How do the best PE players think about equity, and what can you learn from that perspective? Simply stated, they embrace leverage as a relatively cheap capital structure. If they need $100 for growth, they (typically) finance that sum with $70 of debt and $30 of equity. Then they focus on generating cash, which they can use to either (1) pay down debt or (2) invest in productive ways. This, in turn, means that PE firms and their portfolio companies aggressively manage their capital—working capital, capital expenditures, fixed assets—forcing the business to be as efficient as possible: making it sweat. They focus intensively on their balance sheet.

Most traditional corporations take ...