I’m a big fan of Scandinavian thrillers, especially the original The Girl with the Dragon Tattoo. So when I walked into the auditorium at the London School of Economics, I had the strange feeling I was looking down at three lead actors from a Nordic noir drama.
The speakers were Ulf Axelson, Professor of Finance and Private Equity at LSE; Per Strömberg, Professor of Finance at Stockholm School of Economics and LSE; and Kurt Björklund, Founder and Executive Chairman of Permira, with roughly $50bn under management.
What followed was one of the clearest, data-driven explanations I’ve heard of why private equity (PE) ownership so often outperforms public equity, and where its limits lie.
Why Private Equity Outperforms: Start with the Data
The first half of the lecture was led by Per Strömberg and focused squarely on the evidence. Rather than starting with anecdotes or ideology, he began with productivity data across countries and firms.
In Germany, for example, fewer than 1% of firms accounted for roughly 65% of positive productivity growth over the period studied. Most firms contribute little. Some actively destroy value.
This matters because private equity does not rely on averages. Its entire model is built around identifying, creating, and scaling outliers.
The Mechanism: How PE Actually Creates Value
Strömberg argued that the performance gap between PE-owned and publicly listed companies is not primarily due to regulatory arbitrage or tax advantages, though those exist at the margin.
The core driver is active ownership.
Drawing on both academic literature and operating evidence, PE value creation can be grouped into three broad mechanisms:
1. Governance engineering
PE owners are not distant shareholders. They:
- Sit on boards
- Hire and fire management
- Set incentives tightly linked to value creation
- Intervene early when performance slips
This sharply reduces classic agency problems between owners and executives.
During my MBA at Northeastern, one of my finance professors specialised in corporate governance, and I conducted research on shareholder activism. One theme emerged repeatedly: public-company executives often optimise for personal incentives that diverge from shareholder value.
Below: PE-owned companies are rigorous in selecting customers that add value
PE ownership compresses that gap. In the same way that active shareholders hold senior leadership to account, Private Equity owners can step in to ensure the company is run as efficiently as possible.
Per explained that the productivity and efficiency gains of Private Equity ownership (according to him, 2-3% higher than Public Equity, according to Kurt, head of a PE firm, it is closer to 6-7% higher), can be divided into three key categories:
Three types of engineering/tools
1. Governance engineering – being an active owner of the company
2 . Financial engineering – reduce cost of capital
3. Become sector experts – can leverage networks to assist management
Well, that begs the question – why don’t other companies copy the behaviour of PE companies, to improve their performance?
According to Strömberg, this opens a “can of worms”.
First, PE performance may not be indefinitely sustainable. Funds have finite holding periods, typically six to seven years. Active ownership delivers diminishing returns once the biggest inefficiencies are removed.
Second, PE capital is more expensive. While leverage can be cheaper than equity, the cost of financial distress rises sharply as leverage increases.
PE is not a universal solvent. It is a precision tool, effective under specific conditions.
An Operator’s Perspective: Kurt Björklund of Permira
The second half of the session (unrecorded) shifted from data to practice. Kurt Björklund described himself not as a financier, but as a “financial entrepreneur” and "Sector disrupter".
His framing was revealing.
Public equity investors, he argued, suffer from information asymmetry. Even large shareholders rely on periodic disclosures and carefully curated narratives.
PE ownership, by contrast, is built on information abundance:
- Proprietary KPIs
- Weekly operational interaction
- Direct access to management and systems
Björklund was blunt: unlike asset managers such as BlackRock, he cannot afford to be wrong. Every investment must succeed. That forces extraordinary diligence and relentless focus post-acquisition.
He also warned about classic PE pitfalls:
- Buyer’s curse in auction processes
- Cyclicality of capital markets
- The temptation to “take your eye off the ball” during exit processes
“In my business,” he said, “only the paranoid survive.”
Disruption, People, and the Role of AI
One of the most charged parts of the discussion came during the Q&A, where students (from the LSE, Imperial, Oxford, and Berkeley, USA) repeatedly asked about AI and job security. There were also several questions from analysts at various Private Equity firms (many of whom were LSE alumni).
Björklund acknowledged the anxiety, but did little to soothe it.
He described investments in complex B2B businesses where agentic AI, and improved automation have reduced headcount by orders of magnitude, particularly in areas such as KYC and compliance.
In one example, automation reduced a team from 5,000 people to 500, while increasing profitability. Many in the organisation were conducting relatively complex tasks, which could nevertheless be performed more effectively with AI and Automation.
His view was unsentimental: there will always be jobs for the very best, and the traditional path: elite education, top investment banks, then PE, remains viable. But the middle is being hollowed out.
Interestingly, he noted that older employees often adopt AI more effectively than younger ones, attributing this to psychological barriers to AI in younger workers.
Perhaps it's also because you need deep experience of solving the problems, to ask AI the right questions? It's very easy to generate 'AI workslop' that drives no insight, and diminishes your credibility in the organisation. And that is no doubt from whence that fear emanates.
Joking aside, this was one of the best lectures I've seen, unique in that it presented top-level insights from both the academic and 'real-world' perspectives. I was deeply impressed.
No comments:
Post a Comment