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Private Equity Can Make Firms More Innovative

Harvard Business Review

If you ask someone who works in finance (as I had to) about PE and innovation, he or she will likely tell you that PE sponsors aren’t looking for the next big thing—they’re looking for companies that are dominant in a market, aren’t risky, and have a predictable and steady stream of cash to pay back debt. The authors found that three years after an LBO, PE-backed firms had filed 40% more high-quality patent applications than regular firms.

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Private Equity’s New Phase

Harvard Business

This phase was loosely called leverage buy out (LBO) from about 1979 to 1990 and included over 2,000 LBOs. These “buy, fix, manage, and then sell” PE firms were essentially umbrella holding companies while the acquired firms would become better managed before returning to the public market. KKR, BlackRock, Blackstone) became publicly traded holding companies exploiting capital markets to expand their reach.

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When Talent Started Driving Economic Growth

Harvard Business Review

In 1976, the famous LBO firm KKR was formed and starting charging its clients 2% of assets under management and 20% of the upside they created for their clients, opening the door to massive wealth accumulation for high-flying fund management talent. I came out of a standard Keynesian economics education at Harvard College in 1979. It was remarkably closed: from what I could tell, we read Chicago economists , from whom the supply-side movement arose, exclusively to mock them.

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