Why should I emulate Private Equity investors?

There is significant evidence that common Private Equity behaviors drive outstanding returns for their investors.  The IRR (Internal Rate of Return) of a typical Private Equity fund is roughly double that of the typical S&P 500 fund. According to a 2005 McKinsey study of successful PE funds, about two thirds of these returns are generated through improvements in portfolio company performance vs. general market appreciation, financial "engineering" or arbitrage. So, they are driving great returns by improving performance - why not do that for yourself?
As I noted in my earlier post, most successful PE firms (of the LBO "flavor") are relatively long term investors who partner with existing management teams.  So, what did the PE investors do that you couldn't do?  If we are honest, the answer is probably "nothing".  Rather, they did what you "wouldn't" do - from an investor perspective.  Of the several high level behaviors that entrepreneur ownership often find difficult to exhibit there is one that truly stands out:

The investor role v. the management role:

Successful Private Equity investors understand the need to segregate their role as "investor" from the "management" role.  This is the most fundamental enabling behavior of the PE investor.  Yet, this is often a most difficult behavior for a typical founder/owner to emulate.  The PE investor is able to step back from the business and make brutally rational decisions regarding the management of the company and key investments required to fuel innovation and growth.  Small and mid-tier companies often get "stuck" when they are faced with resource constraints in their effort to fuel growth, or the management team does not possess the "professional management" capabilities that are essential to maintain a successful high growth business.  Founder/owner inertia when faced with the need to make hard decisions regarding resource allocation or the management team often grows from their inability to maintain separation of their investor/management roles.  This, in turn, gets in the way of other essential investor behaviors that are second nature to PE investors.
We will discuss those in future postings.