FINANCIAL MANAGEMENT The Strategic Secret of Private Equity by Felix Barber and Michael Goold FROM THE SEPTEMBER 2007 ISSUE P rivate equity. The very term continues to evoke admiration, envy, and0in the hearts of many public company CEOs0fear. In recent years, private equity firms have pocketed huge0and controversial0sums, while stalking ever larger acquisition targets. Indeed, the global value of private equity buyouts bigger than $ƹ billion grew from $ƺǀ billion in ƺƸƸƸ to $ƽƸƺ billion in ƺƸƸƾ, according to Dealogic, a firm that tracks acquisitions. Despite the private equity environment4s becoming more challenging amid rising interest rates and greater government scrutiny, that figure reached $ƽƸƹ billion in just the first half of ƺƸƸƿ. Private equity firms4 reputation for dramatically increasing the value of their investments has helped fuel this growth. Their ability to achieve high returns is typically attributed to a number of factors: high-powered incentives both for private equity portfolio managers and for the operating managers of businesses in the portfolio; the aggressive use of debt, which provides financing and tax advantages; a determined focus on cash flow and margin improvement; and freedom from restrictive public company regulations.