Private equity firms get a bad rap. Overall, they are painted as sharks eager to buy and sell while doing as little as possible. Here are five other misconceptions that can be debunked so more companies can benefit from the sound advice and expertise these firms provide.
Misconception No. 1: Every Private Equity Firm Is the Same.
To differentiate themselves, private equity firms focus on a specialized area of the market or type of company. This niche expertise means that a private equity firm can identify trends and opportunities based on their institutional knowledge. For example, one firm might work with a retail operation and represent multinational companies. Then, another focuses on family-owned businesses in manufacturing. Matching a company’s unique needs with a specialized private equity firm could provide a competitive advantage in terms of uncovering and moving into new markets or potential products or services.
A common theme across private equity firms is the focus on providing a specific value for those companies in their portfolios. Private equity firm Bain & Company noted in its 2018 Global Private Equity report, “Top firms are honing their leadership assessment skills, getting better at identifying the right team early and filling roles with fit-for-purpose talent from the C-suite to the front line. They are recognizing the importance of generating top-line growth by building world-class commercial capabilities at their portfolio companies. They are also fighting through the hype to sort out how digital technology can both transform the due diligence process and help companies create value during the holding period.”
Misconception No. 2: Private Equity Firms Are All Fancy Financial Footwork.
In reality, a private equity firm drives operational improvement. Plus, the principals have a wealth of knowledge that they put to work to generate capital gains. They can offer numerous examples where this expertise, network, and depth of funding has produced quantifiable results. Private equity firm KBS Corporate stated, “BVCA’s Guide to Private Equity states that private equity backed companies have been shown to grow faster than other businesses; a 2012 study by The Boston Consulting Group provided supported this, by finding that more than two thirds of private equity deals resulted in the company’s annual profits growing by at least 20%.”
Therefore, that expertise can become valuable as part of their overall company involvement. In directing a company’s success, they can offer recommendations about where to cut costs or when it makes sense to add talent. This advice can help speed organizational development, ramp up revenue, and increase returns.
Misconception No. 3: A Private Equity Firm Will Micromanage a Company.
Because of their stake, it’s easy to assume a firm will become too involved. However, their focus is about balance and trust. Private equity firms want to guide a company toward success. Yet, they respect the existing management has a vision and the ability to execute it.
Martin Stein, Founder and Managing director of Blackford Capital, a national private equity firm, explained, “Good governance, therefore, is a critical aspect to any organization’s long-term success. It not only holds CEOs accountable to a higher standard and sets a range of governing controls, but also enables that organization to weather transitions and maintain an upward trajectory. Good governance is an investment —sometimes a big one — in thoughtful decision-making.”
Misconception No. 4: Private Equity Firms Only Care About Big Buyouts.
Although every investment firm wants to make a significant return, private equity firms are more excited about being involved with a company that has the potential to disrupt a business segment. This means identifying investments where they can get involved in solving today’s critical social and environmental issues.
For example, private equity firm KKR’s state of the firm address noted, “We work to evolve alongside the societies where we invest and support solutions to the critical challenges we share. We have found investment opportunities that deliver strong returns by addressing concerns such as food safety, education and learning, and next-generation energy. Additionally, we have identified value-enhancing opportunities that add to our bottom line by optimizing environmental, social, and governance (ESG) issues.”
Additionally, how private equity firms choose to spend their investment has been expanded to focus on sustainability issues to ensure that the growth strategies created are aligned with social responsibility and the long-term care of the environment. The Carlye Group has gone as far as to hire a Chief Sustainability Officer and create policies that guide the firm’s investment strategy toward spending money on these companies that is directed at a smaller carbon footprint or greater energy efficiency.
Misconception No. 5: Private Equity Firms Have Tunnel Vision for the Exit Strategy.
Whether you are an investor or a founder, it’s important to have an exit strategy. Involvement cannot go on forever because there are other goals to achieve. However, private equity firms still want to do what’s best for the business. This intent can maximize the mutual benefit.
There are numerous ways that a private equity firm can exit from a business. First, a company founder can repurchase their stake and gain control over business again. Second, another firm or company can buy the stake. Finally, the business can undertake an initial public offering where the private equity firm sells its stake when that happens.
With so many exit strategies available, many options yield the best value for the business. This means they don’t have to default to the same exit strategy for every company in the portfolio.
A Whole New Light
Private equity firms have good intentions and are passionate about growing successful companies that make the world a better place. They are an asset to companies, founders, and the business landscape. The firms offer specialized expertise and knowledge, insights, and vision. As a result, they speed growth and maximize investment value. Now, they are also recognizing the importance of doing more social good with the power and influence they wield.