Like many investment advisors, private equity fund (“PEF”) managers exercise discretion to invest assets in conformity with the investment strategies stated in the fund’s private placement memorandum (“PPM”). The regulation of the fundraising process does not generally carry over to the regulation of the investment process, in the absence of actual fraud or failures to comply with self-imposed restrictions on investments in the PPM.
Private equity funds tend to regard portfolio investments as
- platform companies (to launch mergers and acquisitions for consolidation of an industry);
- rehabilitation opportunities (to replace incumbent managers and prudently grow the portfolio company before selling off); or
- market wave-riding opportunities (the next “best thing” since sliced bread).
If PEF managers regarded their portfolio companies as a series of supply chains, they might, through the application of supply chain dynamics, build even greater value. Savvy PEF managers are beginning to investigate the benefits and risks of different sourcing models for business process management. As they do, they will need to conduct appropriate due diligence and become familiar with the dynamics of outsourcing as a tool for growing a suite of portfolio investments.