HBS Centennial Private Equity Conference

From New Business Spring 2007

On February 13-14 in New York City, HBS hosted a Private Equity Conference, the first in a series of events that will mark the School's 100th anniversary in 2008. More than 100 HBS alumni who are leading members of the industry, as well as HBS faculty experts, gathered to discuss the role of private equity in the global economy.

In his keynote speech, HBS professor emeritus Michael C. Jensen argued that private equity firms engage in a new form of general management-what he calls "strategic value accountability." He noted that when private equity investors purchase companies, there is greater alignment of management compensation and performance. Such firms have small, high quality boards whose compensation also depends on value creation, observed Jensen in his talk titled "The Economic Case for Private Equity."

A panel on "The Private Equity Industry: An External Perspective" inspired a lively debate among panelists GMO's Jeremy Grantham (MBA '66), McKinsey's Andreas Beroutsos (MBA '92), and Oak Hill Investment Management's Rick Hayes (MBA '90). The discussion was moderated by conference co-chair Professor Paul Gompers. One panelist presented a sober assessment of the prospects for returns on all asset classes, including private equity. He offered his view that the conditions that led to high rates of return for private equity are unlikely to continue. Another shared a more optimistic view that private equity will continue to perform well, and noted that the better corporate governance of the private equity model, as well as the discipline of higher debt, underpin this performance. Asserting that a bubble exists in buyouts, debt markets, and real estate, one member of the panel forecasted a difficult period ahead, although he was optimistic about the Asian market.

Exploring "The Future of the Private Equity Industry," Professor Bill Sahlman asked Baupost's Seth Klarman (MBA '82), The Carlyle Group's David Rubenstein, and Yale University's David Swensen to highlight the challenges and opportunities they saw in the industry. One panelist said he worries about increased competition in the private equity and hedge fund industries which will inevitably lower returns, while another noted his concern over the increasing fees charged by private equity firms. The panelists discussed the potential for increased government regulation of the industry as well as increased competition for deals from hedge funds and even pension funds.

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