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Business Owners

Don’t Believe These 5 Myths About Private Equity


With headlines surrounding the private equity industry touting the velocity and size of deals, big name takeovers, and the goings on of the most prolific fund managers, it’s no wonder the asset class often gets a bad rap among CEOs. Even though it’s been proven that private equity portfolio companies experience higher rates of revenue growth than their non-PE backed counterparts, there remains a healthy dose of skepticism around how firms will manage the mid-market firms they acquire.

Here are five common myths and misconceptions about how private equity firms invest in and manage companies.

Myth #1: Private equity firms are ruthless takeover specialists.

Some mid-market CEOs believe PE firms will automatically take control, fire management, and liquidate assets. In fact, the goals and involvement of PE firms vary. Certainly, they will play a role in company decision-making to ensure that their investment remains profitable. In many cases, this role is a welcome partnership. This is particularly true for underperforming mid-market companies, which stand to benefit from the wealth and experience of PE firms in navigating business challenges.

Myth #2: PE is only interested in big buyouts.

Many think that there’s no money for PE firms to make in buying small or mid-sized companies. This is false. Certainly, some private equity firms are involved in major LBOs and corporate takeovers. But in recent years, many PE investors have gravitated toward smaller deals. Headlines around the VC community may suggest to CEOs that PE is looking to make big bucks by taking companies public, but the vast majority of PE exists happen in secondary buyouts.

Many CEOs also worry about being pushed out once a firm comes in with its own managers and relationships. But most private equity firms recognize that it can be very expensive and tumultuous for a company to undergo a management change. If a CEO wants to leave, that’s one thing. But PE firms love to invest in great CEOs as well as great companies. Even if a CEO ends up stepping down, she often stays on in an advisory capacity.

Myth #3: PE firms are only interested in financial fixes.

Another common misconception is that PE firms are interested only in improving financial outlooks and could care less about improving company operations. For most PE firms, this is fundamentally false. PE firms become interested in mid-market firms largely for the opportunity to make fundamental operational improvements. Sure, the firm wants to add leverage to an investment — but they also want to sure that that investment remains stable in the market for the long term.

PE has responded to the emerging mid-market sector by adopting a buy-and-build approach with their portfolio companies. This involves pushing organic growth strategies as well as seeking out add-on acquisitions over the life of the investment.

Myth #4: PE firms will focus only on finding an exit strategy for your company.

Yes, private equity eventually needs to return capital to their investors. No, that doesn’t mean they’ll sell your company the first minute they have the chance.

As discussed above, PE firms are increasingly investing in operational changes to companies. With this comes a longer term investment; as such, PE holding periods for companies have expanded in the years since the recession.

Can you find more patient capital? Sure — family-owned companies or privately held businesses may be better places to look. But not all PE firms are turnaround shops. Most want to grow their portfolio companies over time to maximize their value.

Myth #5: PE-backed companies have a higher rate of failure

There is some misconception that only companies in despair take PE financing. While a few firms focus solely on investing in distressed assets, this is a very specialized form of PE. Most firms focus on companies with proven and predictable future growth.

As mentioned earlier, private equity-backed companies have in fact been shown to have higher rates of revenue growth than their non-backed counterparts. The latest reported data has private equity backed companies revenue growth at 9.2%, compared with 6.5% of their non-PE backed counterparts.

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