The past year's economic upheaval ended private equity's long "golden age" of debt-fueled mega-deals and big returns. 

Private Equity activity in Australia slowed considerably in fiscal 2009, with firms raising only $1.3 billion, 77 per cent less than the sum they raised a year earlier.

Still, turbulent times create once-in-a-career opportunities and risks. Bain & Company research has found that actions taken during downturns result in more dramatic gains or losses for companies than any other time. Recognizing this, many firms are aggressively maneuvering to tap potential new sources of growth. But piecemeal moves dictated by expediency usually lack a strong strategic rationale and end up being poorly executed.

Instead, PE firms need to create sustainable value just as the most successful ones do in their portfolio companies-by defining a clear strategy for competing effectively in their markets and then developing a focused blueprint for delivering it. Firms that emerge with differentiated strategies will be able to answer five questions:

1. Where should we play in order to win?

Over the past decade, the private equity universe has expanded, creating a complex new set of investment decisions. Over half of the biggest PE firms now are active across multiple asset classes and more than 80 percent invest in regions beyond their home base.

But diversification alone is not a winning strategy. Our analysis has found little correlation between the number of asset classes or geographies in which a firm invests and its overall performance. Successful firms take a disciplined approach. They evaluate each opportunity's economic attractiveness and competitive intensity. In parallel, they assess their firm's ability to leverage its strengths, such as an in-depth knowledge of select industry sectors or a network of relationships and strategic partners.

Then, for each asset class and region they choose, they carefully define their investment "sweet spot"-preferred deals based on factors such as industry sector, size, degree of control and investment thesis. Many leading firms are becoming intelligent risk-takers by specialising in a handful of industry sectors.

2. What's our unique proposition to investors that will enable us to raise new funds?

In recent surveys, traditional PE investors overwhelmingly said they plan to maintain or increase their target allocation to PE funds over the coming year. But firms seeking new capital from familiar sources must reckon with significant new realities.

The industry faces a huge capital overhang-some $1.1 trillion in uncalled commitments from earlier funding rounds. That will test firms' ability to attract new funds from investors who are pressed to meet prior pledges. PE distributions are sparse from investments already made, but not yet monetized, curtailing limited partners' (LP) ability to make new commitments.

Fund-raisers need to sharpen their differentiation from their competitors. Research has found that, by choosing the basis of comparison that most favors them, more than two-thirds of PE funds are able to produce numbers showing they generate top-quartile results for their investors. But LPs no longer will fall for creative math that masks poor returns. Many are applying a common set of metrics to evaluate PE funds' performance consistently. LPs also tell Bain that they are culling their general partner relationships, focusing on a stable of core partners. To secure new investments, firms will need a well-honed strategy, a proven, repeatable formula, and solid results to back it up.

3. How do we elevate our investment and ownership capabilities?

One way a firm can differentiate itself: build skills that add value across the entire investment cycle from deal sourcing to exit. Sector specialization enables firms to mobilize proprietary insights about sector trends and tap networks of industry insiders to give them an edge in screening and winning the best deals.

Instead of paying only lip service to hands-on value creation, leading firms are activist owners with a robust, repeatable engagement model. Immediately following an acquisition, they craft a blueprint that defines the business's full potential, prioritizes three to five critical initiatives to reach its target equity value, and sets milestones for hitting it. An early-warning system tracks key metrics and alerts them when targets are missed for quick intervention.

In a survey of its clients, Bain has found that deal returns were 3.6 times the original investment on average in situations where early post-acquisition work was undertaken, well over the industry average of 1.4 times.

4. What role does the center need to play to support the firm's strategy?

Running a PE firm has never required more sophisticated investor communications, sharper strategic planning and better management of the firm's brand, talent and knowledge.

Thoughtful firms are recasting their administrative centers to perform a role we call "strategic architect." They coordinate overall direction setting, recruit and train top talent, foster the sharing of insights across investment teams and take the lead in fundraising and managing investor relations. Strategic architects at one leading firm assessed more than 60 central support services and found opportunities to cut costs, upgrade, delegate or contract out more than half of them.

5. How do we become a high-performance organization?

Too often, PE firms have tolerated convoluted reporting structures, ambiguous career paths and ad hoc decision making. To an extent this is normal; it is a function of how firms have grown. Today, inattention to strengthening the firm's organization and culture can be a serious shortcoming. LPs tell us that, second only to a firm's performance, their most important criterion in selecting a firm is the cohesiveness of its teams.

Bain has found that high performers share four key operational traits. First, they set clear priorities for creating value and consistently communicate them. Second, they put the right people in the right jobs and focus them on the right objectives through incentives that reward performance. Third, they adhere to formal decision rules and assign specific roles. Finally, they link robust decision-making procedures to well-tuned business processes for effective execution. Together, these qualities forge a unique organizational identity made up of people who think like owners and are wired to win.

Leading PE firms already know how to create winning results in their portfolio companies. They now need to apply these skills to themselves.

Tim O'Connor, Andrew Tymms and Simon Henderson are partners with Bain & Company and are members of the firm's Private Equity Group. They are based in Bain's Boston, London and Sydney offices, respectively.