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 / Summer 2011 / Issue 63(originally published by Booz & Company)


The Next Winning Move in Private Equity

A Different Way of Funding Organic Growth

Investments in organic growth are often in R&D, sales-force expansion or restructuring, marketing, and advertising. These investments are often called revex (revenue expenditures) because they hit the income statement, whereas capex (capital expenditures) hit only the balance sheet.

In the chase for bottom-line growth, revex creates a dilemma for most companies: The more they invest in revex to grow the top line, the more their bottom line suffers in the short term (other things being equal). Conversely, the more they skimp on revex, the more their top-line growth will eventually suffer.

No company is ever perfectly efficient, so there are almost always ways to take out costs and reduce other investments in order to fund more productive revex. Often, however, these opportunities are difficult to see, and companies are thus faced with real tension.

Many leaders of public companies, such as Robert Walter when he was CEO of Cardinal Health, have addressed this tension by setting up a corporate investment account that their company’s business units could tap into to fund organic growth investments. In Walter’s case, this was a way of not letting the accounting for organic growth get in the way of the need to invest in growth.

PE firms face the same tension, even though they are privately held, which makes us think they may have to do something similar in the future. Perhaps an “organic growth investment charge” could be taken when the investment is made, creating a cash account that could be drawn upon over time for investing in organic growth with less short-term accounting impact on the bottom line.

— K.F., J.N.

Reprint No. 11208

Author Profiles:

  • Ken Favaro is a senior partner with Booz & Company based in New York. He leads the firm’s work in enterprise strategy and finance.
  • J. Neely is a Booz & Company partner based in Cleveland. He specializes in mergers and restructurings in the consumer products, retail, and industrial sectors.
  • Also contributing to this article was s+b contributing writer Rob Hertzberg.
  • For a podcast on this subject, in which author J. Neely explores the private equity industry in light of Carlyle Group's recent IPO announcement. visit:
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  1. Ken Favaro, Tim Romberger, and David Meer, “Five Rules for Retailing in a Recession,” Harvard Business Review, April 2009: An industry-specific analysis of the concept of headroom and the importance of organic growth.
  2. Steven Kaplan, “Private Equity: Past, Present and Future,” (PDF) University of Chicago Booth School of Business Publication, April 2009: A detailed and data-filled presentation on PE’s performance over the years, which also offers perspective on the industry’s success factors.
  3. Paul Leinwand and Cesare Mainardi, The Essential Advantage: How to Win with a Capabilities-Driven Strategy (Harvard Business Review Press, 2011): How matching strategic direction with an organization’s unique capabilities can lead to well-modulated growth.
  4. Justin Pettit, “Think Like Private Equity to Enhance Public Company Value,” (PDF) Financial Executive, November 2007: Six tactics that top executives can use.
  5. Peter Vayanos, Ahmed Youssef, Chady Zein, and Raymond Soueid,“Private Equity Comes of Age: Emerging Opportunities in the Middle East,” (PDF) Booz & Company white paper, October 2010: Why the key drivers for private equity in this region will include identifying sustainable investment ideas and creating value within portfolio companies.
  6. Rhea Wessel, “Bonderman Sees a Return of Big Private Equity Deals,” New York Times, March 3, 2011: TPG’s founder on the opportunities created by easier credit and IPOs in emerging markets.
  7. For a podcast by author J. Neely, in which he explores the private equity industry in light of Carlyle Group's recent IPO announcement, visit:
  8. For more on this topic, see the s+b website at:
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