Today, some private equity portfolios are among the world's largest conglomerates. Texas Pacific Group, for example, owns or has recently divested major stakes in more than 50 businesses worldwide, in industries as diverse as food, film, fashion and financial services.

What's less understood is how PE fund directors may invigorate their portfolio companies. Today's versions of the 1980s' "Masters of the Universe" are now intent on running big corporations, not just breaking them up. With near-record sums of money bidding up deal prices—global buyout funds raised about $200 billion in 2005, up 50% from a year earlier—PE firms know they can no longer count on the magic of leverage to deliver quick returns. Instead, they are donning the mantle of owner-activists who realize they have to accomplish more in less time than the next highest bidder.

This new activist mindset serves their ultimate goal of achieving fast, predictable gains. Numbers are hard to get, given private ownership, but there are strong indications that the best-run companies under PE ownership outperform publicly held corporations by a significant margin. How? Unlike conglomerates of yore, they avoid the mistake of managing their portfolios for synergies. Rather, today's PE investors forge bonds with management teams that align the interests of managers and the shareholders they work for, addressing one of the longest-running conundrums in business: the "agency gap."

Our experience with more than 2,000 buyout deals reveals a pattern used by the most effective funds to put owners and managers on the same page. Today's private equity leaders apply a three-part formula aimed at more than doubling an acquisition's equity value in three to five years. They don't rely just on financial instincts; they immediately flesh out a thesis for how a business will make money by developing a detailed strategic and operational blueprint. They hone a repeatable process, importing disciplines for rapid change that have worked elsewhere, and they live by the "80/100 rule," meaning that an 80% solution that is good to go beats a theoretical 100% solution. They also make capital work hard, rethinking how resources are allocated and quickly redeploying underperforming assets.

Blueprint the path to value

Most successful buyout firms are masters at spotting hidden value. Before the deal has closed, they begin to create a three- to five-year blueprint that identifies opportunities and maps out a sequence of milestones. Consider Berkshire Partners LLC's 2001 purchase of Carter's Inc. Berkshire bought the children's clothier for $6 a share knowing that to grow profits Carter's needed to sell more clothes and expand into mass-market channels. The blueprint showed how: by placing its products in Wal-Mart Stores Inc. and Target Corp., cutting costs and streamlining distribution. By 2003, when the company went public at $24 a share, Carter's earnings had tripled. Its stock is now trading above $60, and Carter's recently acquired OshKosh B'Gosh. Our analysis shows that dealmakers who use a blueprinting process in the first year outperform others by a two-to-one margin, measured on cash return.

Take an 80/100 approach to execution

Leading PE funds use their conglomerate breadth to apply tested techniques across companies they own, drawing on a range of experience that quickens judgment without compromising execution. They act once they have an 80% fix that is 100% ready to implement. The directors at Newbridge Capital Group, the Asian investment arm of TPG and Blum Capital Partners LP, are deft at avoiding 'analysis paralysis.' Newbridge applied the 80/100 approach to reinvent Korea First Bank, once a pre-eminent lender to South Korea's industrial giants. After the bank fell victim to the Asian currency crisis, Newbridge scooped up a 51% stake from government receivers. From January 2000 to the following spring, the Newbridge-Korea First team developed a plan to transform Korea First into a retail bank. Over the next three years, Korea First re-engineered its branch network, created a cross-selling culture, designed and outsourced a centralized back office and launched an Internet banking strategy. In early 2005, Standard Chartered Bank plc, the big U.K. banking group, purchased Korea First for $3.25 billion, netting Newbridge a nearly four-fold return.

Make equity sweat

The average private equity firm finances about 60% of its assets with debt, versus 40% at a typical public company. Scarce cash forces managers to redeploy underperforming capital and choose wisely. DLJ Merchant Banking, Credit Suisse Group's private equity arm, squeezed costs when it purchased Mueller Water Products, an old-line maker of high-pressure valves, in 1999 from Tyco International Ltd. for $938 million. Closing uncompetitive foundries and innovating leaner manufacturing methods freed up cash for acquisitions that helped boost revenue from $865 million in 2001 to $1.05 billion in 2004. Walter Industries Inc. purchased Mueller for $1.91 billion in October.

Even companies that don't have a private equity investor can apply these lessons. Indeed, executives who embrace the activist-owner approach improve the odds that they will end up being masters of their own destinies. n

Chris Bierly in Boston, Geoffrey Cullinan in London and Sunny Yi in Seoul are all partners in Bain & Company's global private equity practice.