The private equity business stands at a crossroads as the industry pioneers eye retirement and the need to go public, as the top firms struggle to diversify, and as returns to limited partners continue to flag.

The Golden Era has passed. What does the future hold? 

There are lots of opinions out there. But it would appear that the only true solution is to somehow revitalize the core leveraged buyout itself. That's what the industry was built on, and in some ways all the other issues matter less. If the LBO is passé, so is the industry. 

An interesting glimpse of the future comes from Booz & Company senior partner Ken Favaro, who thinks he has the answer: organic growth enhancement. This is a solution for much of corporate America, frankly. But the stakes are especially high at private equity firm portfolio companies. 

Favaro argues that in some ways the industry has become a victim of its own success. The top firms brought near-scientific methods to financial and operational engineering that in a sense commoditized the process. There's not a lot of real differentiation out there, though many in the industry would disagree. They are all expert, and they have all hired top managers. But in the end, they were all relying on their financial wizardry and their cost-cutting savvy. The future will demand more. 

In Favaro's view, the winning firms will be those that crack the organic growth nut. Many private equity firms already recognize this challenge, which on its surface is a no-brainer. There have been some successes with this. Favaro points to the KKR deal for Dollar General. And one would hope that all managers of portfolio companies are attuned to organic growth possibilities. 

But perhaps it is time to build processes around it. "This will require adding new capabilities at the PE firms themselves, rebalancing their engagement with portfolio companies toward organic growth, and making organic growth 'net free,' meaning that it is funded out of each portfolio company's own current costs and investment with no hit to the firm's short-term earnings." 

It may make some sense for the PE firm to get more systematic about how it uncovers opportunities, related to the sales force, or pricing policies, or myriad other variables. This might require some changes to the private equity business model. For example, would it make sense to impose an "organic growth investment charge" when the deal is made to fund future growth? And would it make sense to lengthen the life of a fund to account for the fact that organic growth driven deals may take longer to pay off? These are interesting issues raised by Favaro's team.

This all sounds good in response to the tough times in which we live. But is it also fair to say that a rising stock market will cover once again a raft of other shortcomings. If the market was to recover, returns would surely start to creep back up. If the market ever starts discriminating again, we would hope those who have cracked the organic nut would draw the most interest. That would be fine, though it may not be enough to return the industry to its Golden Era.