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Minority stakes no reason for anxiety

PA Consulting Group
Financial Times
26 February 2008

Sir

Lina Siagol ('Strategy shift gives cause for concern', February 18), states that private equity firms are increasingly taking minority stakes, and suggests that this trend would have negative implications for their performance. I do not believe that this is necessarily true for some specific types of minority investment.

In our view, the key in taking minority stakes is for the stake to be attractively valued with a good margin of safety, and for that stake to enable the investor to have a significant influence on the company's future direction.

For example, telecommunications incumbents may well be strong candidates. Many still have a large, relatively passive shareholder in the government of the day - so an active minority investor with a stake sufficiently large to make them the second-largest shareholder might have more influence than would otherwise be the case. Further, the chances of increasing the value of the business are enhanced if the government is likely to dispose of its shareholding in the short to medium term.

So while we can agree that private equity firms should not act as managed equity funds, I believe the most incisive firms which make minority investments can still make a level of return that justifies their fees. After all, this is one of the investment strategies Berkshire Hathaway has pursued successfully in the past.


PA Consulting Group
London SW1W 9SR

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