What Do General Partners in Private Equity and Venture Capital Funds Bring to the Table: Intellectual Capital and Value Generation

Dr. Tamir Agmon is an invited contributor to The Business Thinker. He is a Professor of Financial Economics at the School of Business, Economics and Law at Gothenburg University in Sweden.

Much of the value in the world today is generated from intellectual capital (or intellectual assets). Intellectual capital is human made, based on ideas and is expressed as capabilities, systems, organizations, and other non-physical and intangible structures within firms that generate future cash flows. The growing industry of private equity funds and venture capital funds is one place where specific intellectual capital owned by the general partners is applied to generate value. The difference between physical (tangible) assets and intellectual (intangible) assets can be observed and measured in two dimensions; the past, how the asset was built using primary factors and labor, and the future, how the market evaluates the future stream of cash flows from an asset. The discussion of the difference between intellectual and physical assets is done in the paper in the context of an incomplete market with imperfect competition. Where the general partners of a private equity fund add intellectual capital to the existing assets in place in a target company, they do so in the expectations of generating additional value. The process by which additional value is generated by employing specific intellectual capital is demonstrated in the context of valuation model as practiced by private equity funds. Continue reading

Improving Trust for Leaders

Dr. Stewart L. Tubbs is a contributor to The Business Thinker magazine. He is the Darrell H. Cooper Professor of Leadership and Former Dean of the College of Business at Eastern Michigan University.

On April 10, 2010 Poland’s president Lech Kaczynski and 96 other top Polish officials were killed in a plane crash in Smolensk in western Russia. They were coming to commemorate the massacre of Polish military officers by the Russians in World War II. The massacre had been denied for decades byofficials in the former Soviet Union. The crash occurred in the thick fog, and despite strong warnings from the air traffic controllers not to land. Cockpit recordings confirmed that Gen. Andrzej Blasik, was in the cockpit with the door open. Although we may never know, there was speculation according to the Wall Street Journal and the New York Times,* that the Polish president ordered the pilot to land because he did not trust the Russians who had told the pilot to divert the landing to another airport.

In another case closer to home, the UAW elected Bob King as president to replace Ron Gettelfinger in June, 2010. According to the Detroit Free Press, one of the key issues facing King is to reduce 2,000 page labor agreements, which limit flexibility and retard productivity by spelling out every possible issue in great detail, and replacing them with briefer, more broad-based agreements. Tom Walsh, writes, “Trust and shared goals must replace adversarial relations. No other viable options remain.”

The common denominator in these two cases is that the lack of trust often leads to undesirable consequences. So what do we mean by trust? One definition from The Academy of Management Journal is, “A psychological state of individuals involving confident, positive expectations about the actions of another.”* Continue reading

How do You Manage a Company to Grow?

What can you learn from other CEO’s facing the dual challenges of maintaining growth and profitability? What issues are you likely to face and how can you best resolve them?

Management for growth is a complex process with many variables. It requires many changes – and much flexibility – along the way. I can speak from personal experience in building J.P, Industries, Inc. in just ten years to a Fortune 500 industrial corporation. I also want to share with you the results of a research study conducted by Dr. L.(Hendrickson) Uhlaner, formerly with Eastern Michigan University, under my guidance on the question of growth management and published in a book. Borrowing from the classical goal approach, firms depend on financial viability to survive and grow. A financially viable firm can pay its bills when they are due and operate at a profit, simple enough. But achieving financial viability is much more complicated than merely determining objectives for profit and production of goods and services and then setting out to achieve these goals. We must define the issues that we must manage in order to assure financial viability – these include market strategy, work flow, resource acquisition, human relations, resource allocation, public relations, and technical mastery. Continue reading