In this era, cash is no longer king. Even in a recession, there is no guarantee that cash will ever reign supreme again due to the efficiency and influence of alternative payment mechanisms. Visa is not only the world leader in digital payments, but also the current gold standard of payment processing. With its processing networks providing secure payments around the world for over 200 countries, 44 million merchants and 17 thousand banks and financial institutions, Visa is positioned to grow along with ecommerce.

Within its industry, Visa maintains a secure hold on the market, with a 50.6 percent share, which is more than double its next closest rival, American Express, with 22.9 percent. Visa also has 328 million credit cards in circulation within the United States as of 2016, which is more than MasterCard, with 192 million, American Express, with 57.6 million and Discover, with 58 million, combined. There is a lack of potential usurpers in the market due to the high barriers to entry as a result of costs like infrastructure, getting the proper software and building an extensive merchant network that requires a large amount of capital.

Visa has also done a great job of maintaining its market lead by actively working alongside peers who utilize the Visa network. In July of 2016, Visa and PayPal announced a partnership that allows Visa debit customers to move money instantly through PayPal accounts while PayPal received incentives for the increased Visa card spending volumes. Visa also collaborates alongside IBM’s Watson through their Internet of Things (IoT) platform to reach thousands of IoT client companies. New options such as Apple Pay and Google Pay work on top of existing Visa networks and therefore, are simply not competition.

Unlike competitors such as American Express and Discover Financial Services, Visa is purely a payment facilitator and not a lender. While this difference may seem insignificant, it means that Visa is not exposed to the rising delinquency rates from “double dipping,” or collecting interest. on loaned interest, if the US or global economy falters. Because it is the transaction middleman, Visa can withstand recessions better than its peers due to the lack of lending risks. As a payment processor, Visa’s business appears to be far more stable.

Visa can be expected to continue to grow and Visa’s CFO claims that many governments are very interested in taking cash out of their economy. There is no doubt that a cashless future will provide speed, certainty, security, reliability and cost savings through the use of the Visa network rather than check or wire transfer. It is primed to be the leading credit card network for years to come.

Currently, Visa is in a perfect position. With regulations banning Visa in China recently lifted, Visa seems poised to target every corner of the world. While Visa relies on developed nations for the bulk of its revenue and profit, it operates in more than 200 countries worldwide. This diversification is beneficial in that Visa can somewhat circumvent the negative effects of a recession in the United States or any major developed country by leaning on the purchasing-dollar growth in emerging-market countries, which could be unaffected by a global slowdown.

In addition, Visa is a multi-platform company. While plastic cards are what Visa best known for, its services can also be seen on tablets, laptops and phones. Visa invested heavily in next-generation technology to appeal to a younger generation and this investment already seems to be paying off. Visa also continues to expand, as seen in its relatively recent buyout of Visa Europe. By expanding into Europe, Visa increased merchant reach by 40 billion, boosting its cards in worldwide circulation to around 3 billion and bringing its global payments volume to about $6.8 trillion annually. In addition, Visa’s recently released analysis of foreign travelers’ spending during the group stage of the 2018 FIFA World Cup found that roughly one in every five of the purchases with Visa used contactless payment technology, boding well for the future of Visa’s investment in the area. In the stadium themselves, the share of contactless payments was 54 percent.

Digital research firm eMarketer estimates that mobile payment apps that do not use a traditional financial institution — dubbed peer-to-peer payments systems — will process $120 billion in transactions this year, up 55 percent from the prior year. That figure is forecast to double by 2021. According to the Nilson Report, merchants paid card issuers $43.4 billion in Visa credit card interchange fees in 2017, up from $25.9 billion in 2012. This increase is largely due to the ongoing shift in consumers using cards to make more of their purchases and the introduction of more high-cost cards with generous reward programs.

This current economic environment has been beneficial to Visa as the relatively low interest rate has kept the federal funds target rate low and below its historic average, encouraging consumers to use their credit cards. As long as the Federal Reserve continues to keep interest rates relatively low, Visa will benefit. There are also other events that will provide a tailwind for Visa. The U.S. Supreme Court decision in favor of big card companies will help Visa continue to charge high fees and hinder upstart payment companies who might pose a threat to Visa.

Like every other company, Visa also has problems. While Visa seemingly has an impenetrable moat, blockchain disruptions loom. As of now, it’s hard to judge the exact nature of a potential threat to Visa from Bitcoin and other digital currencies, but given the astronomical rise in Bitcoin, Ethereum and other cryptocurrencies over the past year, Visa stock owners would be wise to take this into account. Blockchain-based payment systems offer several advantages over credit cards such as better security from hacks and lower marginal transaction costs. While it currently is not a threat due to the lack of credible oversight, regulation and slow transaction processing, blockchain technology could prove to be the future in a cashless world.

Despite potential road bumps in the future, Visa seems prepared to fully take advantage of a cashless future.

The election of Emmanuel Macron as President of France in May 2017 was a novel development in French political history that revolutionized the status quo. The young president’s promises to fundamentally transform France had many feeling hopeful and optimistic about the future. France’s economy was sluggish in 2016, with a high unemployment rate of 10.1 percent, with many hoping that a departure from the status quo might be France’s best chance at galvanizing its economy.


A year and a half later, it is safe to say that Macron has not disappointed. Macron’s unprecedented reforms, which his predecessors would likely have never dared to try and implement, are exactly what a struggling French economy needed.


There were two main problems with the French economy that Macron sought to address. The first is extremely high public spending. In 2016, government spending represented 56.57 percent of GDP. As a comparison, this number was just 35.42 percent in the United States and 38.99 percent in the United Kingdom. The French government dramatically overspending compared to other developed nations. Moreover, the French state was spending money it simply did not have, worsening the budget deficit.


The second problem is a very high unemployment rate, which stems from a stagnant labor market with extremely strict rules on working hours, hiring and firing workers. Luckily, Macron understands these two critical problems and is taking important steps to solve them.


Macron acted soon into its first term to address the first problem, that of overspending. In his first budget, Macron took steps to reduce the budget deficit to below 3 percent of GDP, the EU limit. For example, in a risky political move, despite having promised to increase military spending Macron cut military spending by €850 million. It was recently revealed that France’s budget deficit had fallen to 2.6 percent of GDP, the first time since 2007 that the deficit was under the EU’s limit.


Across the board, Macron’s government is reducing public spending through seemingly ubiquitous budget cuts. As an example, to great protest, Macron ended a program of state-assisted jobs. Then, in an address to both houses of parliament this past summer, Macron reaffirmed his plans to cut public spending. And, in August, French Prime Minister Edouard Philippe said that the Macron government would now target French welfare spending to combat the deficit problem.


Macron’s government has also effectively targeted the second major problem of the French economy, namely the high unemployment rate which exists as a result of a stagnant labor market. In sweeping reforms in the summer of 2017, Macron took many steps to loosen the labor market. He put more emphasis on in-house labor negotiations, meaning that workers and employers would now be able to negotiate labor agreements within their own firms instead of at a sector-level discussion. Moreover, he slashed red tape for firms with more than 50 employees. It used to be that once a firm reached its 50th employee, it would have to nominate workers’ representatives, and set up a works council and a health and safety committee. Macron’s plan combined these three groups into one, drastically lowering costs to firms. He also decided that a firm’s economic health can no longer be used as a reason to oppose the firing of workers, which it previously could. Macron even introduced a set scale for wrongful termination situations, meaning that the old process that could result in monumental payments is now gone.


These reforms have loosened the rules around hiring and firing, which was the main reason for the stagnant labor market. Of course, if a firm knows that should it hire someone, it will be extremely difficult to fire that person should they do a bad job, that firm will be much less likely to hire the person in the first place. By loosening the rules around hiring and firing, Macron is helping to galvanize the French economy by creating the conditions that will allow unemployment to decrease.


Macron’s reforms are paying off. French public spending has decreased. Business circles are happy with the multitude of reforms around the labor market. In the words of French telecoms billionaire Xavier Niel, Macron has “completely changed” France’s image. Macron’s reforms are undoubtedly addressing the problems at the core of the French economy.


The positive results of his pro-business actions are countless. German software company SAP has pledged to spend €2.5 billion in France over the next five years. Google will create 1,000 new jobs. Toyota will invest €300 million on a factory in France, adding 700 jobs along the way. A recent survey by Bain & Company and the US Chamber of Commerce found that 72 percent of US investors were optimistic about the prospects of the French economy, an increase from only 30 percent in 2016.


While protests against him are becoming commonplace and his approval ratings seem to be falling dramatically due to a perception in France by many that he is a ‘President of the Rich’, his reforms are clearly having positive effects for the French economy, from increased confidence to higher levels of investment. Macron will continue on this course, continuing to influence the French economy through a series of important reforms.

Founded in 2010, Start-up Chile was created as an ambitious program to turn Chile into the innovative hub of South America and attract world-class entrepreneurs. Fully supported by the Chilean Government, Start-Up Chile is an accelerator program that aims to transform Chile into the “Silicon Valley of Latin America.” To make Chile attractive to foreign entrepreneurs, the government provides promising young firms with $40,000 of equity free seed capital, a temporary one year visa to develop their project for six months, access to the most potent social and capital networks in the country as well as various other perks such as free office space. Every year, Startup Chile receives applicants from all over the world and many graduates from the world’s most prestigious education institutions including Harvard, MIT, Columbia and Oxford.

Start-Up Chile has garnered overwhelming praise from the press and social commentators. Stephen Keppel, an economist and writer who is currently Director of Empowerment Initiatives at Univision News, argued in an article in October 2013 that Start-Up Chile, is quite literally “changing the face of entrepreneurship in Latin America” and with it the Chilean culture and economy. In just three years, the program has attracted over 900 entrepreneurs from 37 countries, created 695 jobs and sparked 36 deals with Chilean investors. The Economist coined the term “Chilecon Valley” in 2012 and argued that Chile has successfully exploited Silicon Valley’s weak point by welcoming thousands of entrepreneurs who were turned down in the U.S. due to rigid immigration policies. Kauffman Foundation Vice President of Innovation Lesa Mitchel praised it as “ a unique model other regions of the world should emulate”.

A promotional video on Start-up Chile’s website spells out their mission “They arrive. They work. They connect. They leave and Chile stays connected”. Thus Chile is less interested in attracting the businesses as they are in fostering an “innovative spirit” that they hope will begin to permeate a typically risk averse Chilean culture. In return for the $40,000 in seed capital and the free visa, Start-Up Chile participants are required to engage with Chilean students and often end up mentoring and hiring Chileans. They are required to speak to local entrepreneurs, speak at events, and have held thousands of workshops. The program has engendered in Chile, a country heavily reliant on copper exports, a new spirit of innovation and creativity that the Chileans see as key to their economic future. “The influx of foreign innovators” Keppel argues, “has disrupted the status quo in Chile and introduced a new generation of entrepreneurs to opportunities in Latin America.”  By importing foreign entrepreneurs, the Chilean government hopes that they will inspire homegrown ones. “The idea is to fertilize the local landscape with new ideas and ambitious people” Vivek Wadwha, a visiting scholar at Berkeley argued. “This is a win-win. If all goes according to plan, we will have a thriving innovation hub in Chile-Silicon Valley South”.

Although retaining the entrepreneurs after the six months is not Start-up Chile’s primary concern, over 40% have in fact chosen to stay.  The pro-business government is partly responsible for the high retention rate. Chile has a low 20% corporate tax rate and has fostered a “summer camp environment” with a vibrant community and strong network support. Furthermore, as Europe and the United States continue to suffer from sluggish growth, Latin America, spearheaded by Chile, is becoming of greater and greater interest to foreign investors. Ariel Arrieta, cofounder of NXTP Labs, an acceleration program that provides seed capital, consulting, and training to technological startups, argues that Latin America holds enormous potential as an untapped market with astounding growth prospects. Improving market conditions coupled with a very young population, has created a thriving climate for technology startups and consequently has attracted the attention of many global analysts and early stage investors that hope to latch onto prominent startups.

Start-Up Chile’s detractors criticize the program for funding foreigners (although the program is also open to Chileans) and many note that it’s still too early to see any real benefits from this program to the Chilean people. That said, the Chilean government should be commended for taking such creative actions and attempting to carve out for itself a place in the global economic market. It would not hurt the United States government, plagued by inaction and stalemates, to take Chile as an example and learn some lessons.

Traditionally considered a catalyst for regeneration and growth, the Olympic Games certainly bring prestige and media attention to the host country. The conventional argument is that this increased visibility benefits the host nation by attracting additional foreign investment, creating jobs, and boosting tourism. However, preparing to host the Games in the first place is a massive undertaking that first requires considerable capital investment in upgraded infrastructure, athletic facilities, housing, telecommunications, security, and sanitation, as well as covering other operational expenses during the Games themselves.

For London, these expenditures have totaled upwards of $14.5 billion, which well exceed its initial $5 billion estimate. The phenomenon of runaway costs is not atypical for host countries historically, however. For the Olympics in Athens and Beijing, preliminary estimates amounted to $1.6 billion in both cases, but ended up costing $16 billion and $40 billion, respectively. Unfortunately for London, the years leading up to the 2012 Games have been marred by constant upward revisions on cost estimates, of which the Olympic Park’s Aquatics Center is a perfect example. Originally budgeted at $118 million, the facility ended up costing $434 million. Despite this, the London Games actually proved to be a leaner Olympic Games than in years past.

Given the tumultuous economic climate in which England finds itself, it is unsurprising that the London Games lacked much of the extravagance that defined the Games in Beijing. Facing its second recession in four years, faltering consumer and investor confidence, and a seemingly imminent eurozone crisis, England is desperate for an economic boost. Manufacturing has fallen at its fastest rate in more than three years, and the economy has contracted by 0.7% in just a few months, suggesting even greater hardships are still to come.

To make matters worse for England, due to the global economic downturn, private investors largely reneged on their commitments to fund various projects related to the Games. Lacking a sufficient pool of private financing, England’s government was forced to absorb even greater expenditures than it initially anticipated. By contributing to England’s rising budget deficit, such additional expenses have only exacerbated England’s current dismal fiscal situation.

To be fair, funding the Olympic Games always places a strenuous burden on the government budget, irrespective of the current economic conditions. This harsh reality is nowhere more obvious than in Montreal during the 1976 Olympic Games, where severe cost overruns necessitated the introduction of a tobacco tax to help pay off its debt. While London has not yet reached this extreme, the substantial unexpected costs incurred challenges the economic viability of hosting the Games in the first place.

Although the majority of costs incurred by England from hosting the Games consist of direct expenditures, a more subtle but equally important component quantifies what the country is sacrificing in order to host the Games. By funding Olympic endeavors, England’s scarce capital is diverted from potentially more productive uses. As a result, hosting the Olympics can conceivably translate into slower rates of economic growth than what could otherwise be achieved. This opportunity cost, as it is referred to in economics terms, continues even after the Games end, as the projects that would have been undertaken with these public funds still do not receive the proper amounts of resources to be completed.

Over the last two decades, the economic impact of hosting the Games on the host country has been quite mixed. Although Barcelona in 1992 and Atlanta in 1996 enjoyed continuous and meaningful economic growth following the Olympics, the last three host nations—Sydney in 2000, Athens in 2004 and Beijing in 2008—all failed to secure sufficient long-term benefits from the sporting event. In each of the three most recent cases, it became increasingly apparent following the Games that the anticipated future revenues failed to materialize and thus did not justify the large upfront costs.

Having established the source of both the direct and indirect costs of hosting, one can now consider the potential for long-term benefits in order to ultimately decide whether sustaining the costs is justified. The primary factor underlying whether the Olympics will deliver future benefits or become an economic flop is the ability to smoothly transition from the Olympics to normal operations. For host cities like Athens that failed to achieve this, a rather lackluster residual legacy persisted following the Games. The current state of Athens’ athletic facilities is a constant reminder of the lofty expectations that never came to fruition. Because its infrastructure was constructed specifically for the Games without regard for post-Games integration, the overcapacity that has since ensued has led to severe underutilization of 21 of Athens’ 22 once world-class facilities. Most of its stadiums are in a state of disrepair, its Olympic village is a ghost town, and the government cannot afford the 60 million euros per year necessary to operate and maintain its facilities. By contrast, Salt Lake City, Utah, the host of the 2002 Winter Olympic Games, continued to enjoy higher volumes of skiers in future years following the games, because of its ability to find long term public uses for its Olympic venues.

London, now acutely aware of this issue, is determined to learn from Athens’ mistakes in order to ensure long-term feasibility and optimize the economic legacy of the Olympics. In an unprecedented move, the UK established a committee in 2009 to focus exclusively on post-Olympics development. London has designed venues that are more suitable for hosting events long after the Olympic Games have passed, by concentrating on portability and adaptability. For instance, its main stadium, which seats 80,000 people, has an upper tier that will be dismantled after the two-week sporting event. By relying on temporary as opposed to permanent installations, London will likely avoid the problems of excess capacity faced by Sydney, Beijing, and most prominently, Athens. Now with a more manageable capacity of 25,000, the core stadium becomes more usable for hosting smaller sporting events, concerts, and commercial events in the future.

Along similar lines, ensuring that any and all benefits are distributed among the city’s population is an important consideration. The 2012 Olympics has been coined “The Regeneration Games,” because of London’s mission to achieve urban renewal in the previously neglected neighborhoods of East London. Featuring 250 acres of open space, state-of-the-art athletic facilities, and the Athletes’ village, the newly built 500-acre Olympic Park in East London embodies the transformation of the urban landscape. To facilitate the integration of the eastern and western parts of the city, London spent billions of dollars on a new rail line that will connect the traditionally affluent West London with the poorer Eastern half. Additionally, developers have already opened the largest urban shopping center in Europe in East London, as well as various commercial spaces, housing, schools, libraries, and community centers.

Throughout the entire process, though, London must be wary of simply attracting wealthy outsiders. Instead, London should seek to raise the standard of living of East London’s poorer constituents by stressing affordability. For this reason, the city of London also has plans to build over 11,000 affordable homes in the region, in addition to its plans to convert the Athletes’ Village into 2,800 affordable apartments following the Games. For these plans to succeed, the government must actively promote continued regeneration in the region even after the Games are completed and the impetus has weakened, through encouraging job creation, improved health, and steady economic development.

Sustaining meaningful, long-lasting economic growth is also largely contingent upon maintaining increased levels of foreign investment beyond the short-term outlook of the Games. To do so, London has made an effort to attract increasing foreign capital as well as foreign direct investment—both public and private—by targeting companies based in China, India, and the United States. In fact, London has plans to host exhibitions and conferences designated to increase visibility and promote British businesses abroad. Its active promotion has already begun to pay dividends, as foreign companies, including Jaguar, Nissan, and a transportation contractor have recently announced over $8 billion in investment over the near term, including a $7 billion contract to build 92 inner-city trains.

The People’s Republic of China cannot continue to enjoy the same economic prosperity it has enjoyed in the past through its manufacturing-export-driven economy in the next decade. Instead, it must focus its attention on improving domestic consumption of goods and services.

Export-driven economic growth has had an important place in Chinese history. During the imperial era, the Silk Road brought silk and other “exotic” goods from China to the western world. The Silk Trade brought such prosperity to the Chinese empire such that the palace mandated execution for any individual that revealed the process for silk-making.

Since then, China has gone through economic and political turmoil, culminating in the rule of Mao Zedong in the second half of the twentieth century. Deng Xiaoping’s subsequent ascension to the role of “paramount leader” saw economic liberalisation, bringing great wealth and prosperity to the regions that participated in a new manufacturing-export-driven economy.

China experienced a steadily high GDP growth rate over the past 30 years due to foreign investment, lifting many peasants out of poverty and bringing luxuries unimaginable to the previously poor populations in the country.

Through careful economic planning, China has become one of the dominant exporters of consumer goods in the world. Its GDP per capita has risen from a mere $439 in 1950 to over $3000 today.

However, in the recent decade, China’s socioeconomic condition, as well as the global economic downturn in 2008, has necessitated action on part of China’s leaders to change the direction of the nation’s economic planning away from its current method of growth.

China’s success in building consistently high-performing manufacturing-export-driven economy is because of its comparative advantage in the provision of labor.

Due to its large population, China can provide cheaper manufacturing for products ranging from iPods to t-shirts.

However, with the implementation of its One-Child Policy for population control, China’s capability to produce at a cheaper rate has slowly declined. The population growth rate decreased from 1.5% in 1980 to 0.6% at present.

Although annual net population growth is considerable, China faces a rapidly aging population because of the One-Child Policy, and thus there will be a decline in the labour force available for manufacturing-intensive jobs over the coming years.

Furthermore, the standard of living in China has risen dramatically over the past decade, in-line with the growth in per-capita GDP. Labour is no longer as cheap as it was before, and workers in China now make three times as much as workers in Pakistan and Vietnam. There is a shortage of workers in some regions, and some producers have found themselves hiring recruiters to go into the countryside, offering improved benefits and higher salaries to entice workers to join their factory.

In addition, there is a wealth gap between the coastal regions of China, which have seen rapid urban growth and development of infrastructure such as high-speed railways, and the inland, rural areas of China, many of which are still without electricity. The GDP per capita difference between the richest province and the poorest is ten-fold. There is a lack of affordable health care and social security in China, and combined with poor infrastructure in rural areas, social instability is clawing at the central government.

Faced with these issues, it is imperative that China’s government focus its efforts on developing itself internally and encouraging domestic consumption. With a three trillion US dollar currency reserve[v], the government is well-positioned to spend vast sums of money on civil infrastructure, such as electricity and communications delivery. If modern technologies available in cities were brought to the rural areas of China, there would be a change towards a more domestically-driven economy.

China should also increase individual household consumption.  Currently, China’s household savings rate is over 30%, dramatically higher than those of many other nations[vi]. This is due to the lack of social security and the need for Chinese men to own a house in order to marry.

Although Chinese people do consume tremendous amounts of luxury goods, they fear economic uncertainty, and especially with the lack of a government safety net, Chinese households tend to save more money for emergencies, and to provide for elderly family members.

At the same time, there is a low savings interest rate paid by banks, since they are state-run, which cannot keep pace with inflation. These factors combined make the life of the average Chinese citizen less pleasurable than beforee.

The changes facing China’s economy are of potentially great benefit to the standard of living for the Chinese people – better-developed domestic infrastructure would improve the quality of life for millions of peasants living without modern amenities in the countryside, while government incentives for consumption of non-essential goods could provide an opportunity for many Chinese families to acquire new products and live a wealthier lifestyle.

With the nadir of the recession behind them, the biggest private equity (PE) firms, since early 2010, have made numerous strategic shifts in their business. Since its emergence as a high-profile asset class, private equity has evolved in direct response to discovering new means of creating value: financial engineering in the 1980s and operational enhancement in the 1990s. Today, these approaches are standard across all the best firms and no longer offer the competitive advantage they once did. Moreover, gone are the days when top tier PE firms were returning in excess of 20 percent through their traditional core business, the leveraged buyout (LBO). In fact, buyout returns are down, have been (even before the financial crisis), and seem unlikely to rebound anytime soon. Given Blackstone, KKR, and Apollo Management’s recent shift toward public ownership of their PE Firms as well as portfolio diversification away from the LBO and into credit investing, real estate, advisory services, and proprietary trading, PE firms have apparently noticed…but the question remains: What necessary innovation in private equity’s value creation model is next?

In the 1980s, private equity developed its first innovation: financial engineering, or the idea of buying companies with debt, taking them private, and then, in theory, reselling them after a few years with a rate of return enhanced by leverage. According to Henry Silverman, chief operating officer of Apollo Management, this strategy can be explained simply: “If I have 10 cents, borrow 90 cents, buy your tie for a dollar, and sell it to Joe for $1.05, I didn’t make a nickel; I made a 50 percent return on my investment.” By the 1990s, however, financial engineering had become commonplace across competent PE firms; as a result, PE firms looked for another innovation and found operational enhancement. This strategy seeks to increase the value of portfolio companies by reducing cost in any form, whether that involves process improvements, outsourcing, or restructuring.

Success in private equity hinges on a firm’s capabilities in fund raising, deal making, and adding value to its investments. These capabilities are inextricably linked such that the strength of each depends on that of the other two. That is, if a firm has more ways to add value, it will naturally discover more investment opportunities. Winning more investments means a better track record, which, in turn, helps in fund raising. As firms have matched each other’s ability to add value via the two aforementioned innovations, the question remains, “What’s next?” The answer, though seemingly apparent, will distinguish the winners from the losers in the near future: PE firms must be able to spur organic growth in their portfolio companies—that is, the ability to systematically expand or increase the revenue of companies they already own (using internal resources) through increasing their customer base, output per customer, etc. Indeed, this requires PE firms to hold a deeply rooted knowledge of the customers, their behavior, and their wants and needs per industry.

The next critical question then, is how PE firms can improve their ability to engineer organic growth without changing the firm’s structure and limiting flexibility. The answer comes in three parts: adding new growth capabilities, making growth in their portfolio companies the primary focus, and finding ways to make this growth net free.

Adding growth capabilities involves enhancing pricing ability as well as improving sales-force practices. According to the McKinsey Quarterly’s article “Freeing up the sales force for selling,” “Most sales reps spend less than half of their time actually selling.” KKR’s acquisition of Dollar General, a chain of variety stores, illustrates just how PE Firms can add these growth capabilities. When KKR helped take Dollar General private in 2007, its enterprise value stood at $7.3 billion; today, now public, Dollar General has an enterprise value in excess of $12 billion. What changed? When KKR first acquired Dollar General, its management based its decision about which products to put on shelves by simply looking at the profit margin of individual items. Although their logic aligns with common sensical thought, KKR suggested that, given Dollar General’s niche as a place to pick up a few small items (not to do major shopping), management should instead look at dollars of margin per linear foot, “a common measure in food retailing that takes into account not only how much profit a given product generates per dollar of sales, but how quickly the product sells.” This strategy prompted Dollar General to start carrying milk and other basic products as well as offering Coca-Cola in addition to the Pepsi they once were limited to. Ultimately, the “right” products maximized foot traffic among customers and increased revenue exponentially.

With constant attention to eliminating costs, how can PE firms make growth in their portfolio companies a primary focus? One way is to keep in mind the concept of “headroom” as a structure for determining available growth in a market. Headroom equals the market share that a company does NOT have minus the market share that it will NOT get. Headroom essentially outlines which customers can be targeted to switch from rival companies to their own, and what it would take to have those customers make the switch. Thinking along these lines will naturally improve coordination within the company. The last challenging aspect of this innovation involves adding growth capabilities and making growth a primary focus net free—cash invested in these initiatives must come from internal resources of the portfolio company. Doing so, will further align incentives throughout this process of spurring organic growth.

Still, as organic growth increasingly becomes important in private equity, the previous means of value creation will undoubtedly remain important. Nevertheless, as this third innovation truly makes headway, without a strategy for spurring organic growth in portfolio companies, PE firms will become less and less competitive in fund raising and deal making. Ultimately, this means returning to their role of being in the solutions business—promoting growth through real improvements in portfolio companies and increasing overall profitability in the process.