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MoF Issue 12

MoF Issue 12

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Published by: qween on Jul 28, 2008
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McKinsey on 
Private equity’s new challenge1
A changed competitive landscape calls for a different business model.
A new era in corporate governance reform6
Directors and investors want deeper change. Executives shouldget ready for it.
Can banks grow beyond M&A?10
banks will need to look beyond mergers for growth. Better earningswill have to be won from improved value propositions and productivity.
Internal rate of return: A cautionary tale16
Tempted by a project with a high internal rate of return? Better checkthose interim cash flows again.
Taming postmerger IT integration20
Lessons from the
-heavy banking sector can bring balance to thiscritical task.
Perspectives onCorporate Financeand Strategy
Number 12, Summer2004
McKinsey & Company is an international management-consulting firm serving corporate and governmentinstitutions from 85 offices in 47 countries.
Editorial Board:
Richard Dobbs, Marc Goedhart, Keiko Honda, Bill Javetski, Timothy Koller,Robert McNish, Dennis Swinford
Editorial Contact:
Dennis Swinford
External Relations Director:
Joan Horrvich
Design and Layout:
Kim Bartko
Kimberly Davenport (United States), Susan Cocker (Europe), Jialan Guo (Asia)Copyright © 2004 McKinsey & Company. All rights reserved.Cover images, left to right: © Alberto Ruggieri/Image Bank/Getty Images; Digital Vision/Getty Images; BrunoBudrovic/Spots Illustration/Images.com; Kurt Vargö/Stock Illustration Source/Images.com; Todd Davidson/ Illustration Works/Getty ImagesThis publication is not intended to be used as the basis for trading in the shares of any company or for undertakingany other complex or significant financial transaction without consulting appropriate professional advisers.No part of this publication may be copied or redistributed in any form without the prior written consent ofMcKinsey & Company.
McKinsey on Finance
is a quarterly publication written by experts and practitioners in McKinsey & Company’sCorporate Finance & Strategy Practice. It offers readers insights into value-creating strategies and the translation ofthose strategies into performance. This and archive issues of
McKinsey on Finance
are available online athttp://www.corporatefinance.mckinsey.com.
For more than two decades,
buyoutfunds—or nonventure private equityfunds—have been an important force inglobal corporate finance and restructuring.Top-quartile funds, in particular, haveturned in consistently strong performances,generating attractive returns for theirinvestors (Exhibit 1). In the 1980s thesector led a revolution in value creation andcorporate restructuring that continues toreenergize economies in the developed and,increasingly, the developing world. Viewedfrom corporate suites, buyout players havealternately been willing acquirers of underperforming businesses, formidablecompetitors, and, under the rightcircumstances, valued partners. Storiedfirms such as Clayton, Dubilier & Rice,Kohlberg Kravis Roberts, and TheBlackstone Group may be emblematic ofthesector, but its ranks also include many otherprivate limited partnerships, investmentbanks, and public-investment vehicles thatfollow a similar business model.That model, however, may soon look quitedifferent. A convergence ofmarket forceshas altered the competitive landscape inwhich private equity firms have thrived.More and more, they are encounteringheavier competition for opportunities toinvest, often against new competitors. Therise ofthe auction sales process is erodingthe buyout players’ ability to gainprivileged access to investments from theironce-legendary networks ofrelationships.The creative financial-engineering skillsonce guarded by a few top practitionershave become commodities, and a tougherstock market has worked against playerslooking to purchase, restructure, and thenquickly sell a company. Taken together,these changes threaten to lower medianreturns over the next five to ten years,compared with the public equity markets,and could make standout performanceconsiderably more difficult.Ofcourse, as long as there are attractivebuyout opportunities—and there will be,particularly in the European industries thatare restructuring and in less financiallydeveloped markets—the top buyout fundmanagers will continue to generate attractivereturns for investors. But the most successful
Private equity’snew challenge
A changed competitive landscape calls for adifferent business model.
Private equity’s new challenge
Neil W. C. Harper and Antoon Schneider 
exhibit 1
Private performance
for investments initiated from
; excludesreturns for investments initiated in more recent years, as substantialportion of returns are still unrealized.
-year forward rolling average of returns for investments initiatedfrom
.Source: Thomson Financial; McKinsey analysis
Comparison of private equity funds with public equity market: averageannual net returns to investors, 1986–2003, %19.0Overall average
Private equity
23.0Minimum returnfor top quartile
Public equity
EuropeUnited States

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