EN CASA DE HERRERO, CUCHILLO DE PALO : ORGANISATIONAL BARRIERS TO THE SURVIVAL OF PRIVATE EQUITY FIRMS AND WHAT WE CAN LEARN FOR PARTNERSHIPS AS A WHOLE

Abstract

We tend to conceive professional firms and partnerships as permanent organisations, assigning to them an expectation of limitless life. We do the same with corporations, but in this latter case, the physical endowments which are separated from those of their members warrant the assumption to some extent. Partnerships, at a certain point may look like permanent organisations but not be so; just like tadpoles and frogs. The organism is there and is similar, but they are not exactly the same.
Private equity firms are one such type of partnership that can look like a different animal depending on the stage they are in. They can be at times project and in more developed stages, full-blown organisations. They initially consist of partnerships of executives who raise third-party money with the objective of acquiring large stakes in private companies (and sometimes large blocks of publicly-traded ones, without the aim of trading them in the open market) to improve their outlook and sell them at a gain.
Although they have enjoyed years of approval in the 1990s and others of public reprieve following the 2008 meltdown, private equity managers have been widely considered to add shareholder value; in addition, the impact they cause in the industries in which they invest has been generally assessed as positively. They achieve this by bringing institutionalisation, reliability and accountability to the companies they manage. However, demographic and industry structural factors impair their ability to do unto their own firms, as they do to others, reducing the survivability of private equity firms. This results in a mortality pattern in which, unlike the ones observed for corporations, ageing is not necessarily a sign of survival.
This dissertation identifies two key aspects that characterise the process by which private equity firms emerge and die. At their outset, firms rely significantly on the network and other endowments of their founding partners; external constraints and opacity leads these latter to maintain political and economic power concentrated in them, extracting value and precluding the institutionalisation and creation of organisational capital required to turn the firms into adaptable organisms.
In the absence of organisational studies in the field of private equity, this study consisted of a systematic exploratory exercise. It started by observing the demographic trends of private equity firms and where they did not match received knowledge. It then involved a qualitative exercise of seeking explanations in insights received from years of personal observation. Turning experience and insight into scientific conclusions implied identifying potential variables, seeking data to construct non-existing databases and painstaking tabulation. Armed with these, quantitative analysis enabled generalisations to prove the formulated hypotheses.
The findings herein simultaneously provide an answer to some of the issues above and open the gate to a deeper foray into the organisational dynamics of the “half-baked” nature of partnerships in organisational terms.