Misperceptions about Private Equity Companies are Common
What do you think about private equity groups? Are they potential friends or foes? Would you welcome them as potential buyers for your label, converting, or graphics business? Or would you wonder about their trustworthiness and motives?
It probably depends on whether your knowledge of private equity investment groups comes from firsthand experience working with one or from the stories of business owners or employees whose careers have been affected by them.
In either case, keep an open mind. Don’t assume that all private equity groups are all the same. Substantial differences exist in the ethics, integrity, and aspirations of a firm, depending on the types of individuals they employ to source and negotiate deals. Below are a few facts to consider.
Private equity groups have business growth and development mindsets. In the broadest sense of the term, private equity groups pool capital received from outside investors to acquire and develop privately owned businesses and properties that can be sold several years later at a higher price.
The investors and private equity group leaders are financially rewarded for adding value to businesses that were already fundamentally sound but needed infusions of capital to keep up with technology and changing markets and conditions. They are adept at identifying and harnessing technological complexity or economic uncertainty as sources of value.
They are different from venture capitalists. Venture capitalists provide seed money to start-ups. They earn their money when the start-up either goes public (through an Initial Public Offerings) or is sold to new owners (such as private equity groups).
The private equity groups that invest in small to middle-market companies typically earn their money by restructuring the acquired business (or businesses) to make them more valuable to future buyers. They seek good companies to restructure and strengthen.
For example, they may consolidate two mid-sized companies into a larger company to reduce the overall operating costs. Or they may provide the capital needed to invest in new technology that will enable a company to efficiently make a wider range of products or offer a more expansive range of services.
The influence of private equity groups is growing. According to a ProPublica report by Chris Moran and Daniel Petty, private equity firms now manage more than $6 trillion in assets in the United States. As much as one-third of these assets are either still in cash or in assets that can be quickly liquidated when the right longer-term investment opportunities arise.
Private equity groups invest in companies of all types and sizes. In addition to buying label, converting, and graphics companies, private equity groups invest in everything from hospitals and medical practices to kindergartens, dating apps, fisheries, sports teams, and real estate.
They are constantly seeking new targets because sitting on the investors’ cash only prolongs the wait until the investors see returns on their investments.
Private equity owners are less emotionally involved than company founders and family business leaders. Because private equity firm employees only earn money when their investors do, they have a laser focus on achieving successful outcomes. When things go wrong and adjustments in strategy are required, they stay calm and focused and use data to drive their decisions.
In his book about private equity, former Apollo Global Management partner Sachin Khajuria
says that “When investment professionals buy into a company or lend to it as a creditor, they will think and act as if they are owners of the business.” But, “compared to the raw emotion of ownership that an entrepreneur might have, this feeling of ownership is more nuanced in private equity. Investment professionals can detach when analyzing problems, and when selling out.”
Private equity investing may soon be open to smaller, retail investors. Traditionally, private equity have raised most of their money from large institutional investors such as pension funds, sovereign wealth funds, endowments, and very wealthy individuals. These big institutional investors can afford required minimum investments that range from $250,000 to multiple millions of dollars, depending on the private equity group.
But just as fintech (financial technology) has made it easier for smaller investors to buy stocks and bonds and crypto, technology may make private equity investment groups more accessible to retail investors.
Khajuria predicts that the democratization of finance in sectors such as stock trading and crypto is coming to private equity. He predicts that we will see private equity play a bigger role in individuals’ investment portfolios.
This means all investors should develop a better understanding of how private equity works.
“Society needs engagement with private equity, not an adversarial approach.” writes Khajuria. “Perhaps we do need to regulate private equity differently or tax its activities differently” but we all should understand how private equity influences our economy and transforms businesses to help them grow profitably and become more efficient.”
Khajuria points out that private equity investing isn’t like tracking the ups and downs of the stock market. Instead, every stakeholder must wait at least five to 10 years to realize a return on their investments.
Misperceptions about private equity companies are common. Small business owners may be wary of private equity groups or believe that private equity is only for mega-deals or transactions involving technology companies. Some may fear that a private equity buyer will focus solely on cutting expenses to the bone or revamping the company’s established culture.
Yes, the private equity groups that invest billions in public companies may seek to trim excess costs and extravagant practices from bloated corporations. But the private equity groups focused on growing small to mid-sized businesses are more likely to finance operational improvements and retain key talent.
From my own experience, I know that many private equity firms are led by excellent business people who really do care about people and their futures.
But private equity groups have high standards and finely tuned processes for finding and evaluating good companies to buy.Their focus on efficiency and revenue growth can bring a fresh perspective to businesses that have become overly reliant on founders and their families for guiding the business.
Private equity groups keep up with trends in technology and appreciate how technology can help transform businesses that rely too heavily on “the way we have always done it.”
If you are planning to exit your business in the next 3 to 5 years, give me a call for specific guidance on how to grow your business to attract the attention of private equity investors.
I frequently receive inquiries from private equity groups that are seeking specific types of acquisition targets. When I meet these investment pros in person, I often get the sense that many are committed not only to timelines, but also trust and transparency in the process.
But my impression of private equity groups doesn’t really matter. What matters most is the impression print business owners get when you meet them. When a distinct chemistry exists between the seller and the private-equity buyer, then good deals may soon be in the works.
RESOURCES
Next Big Idea Club: Two and Twenty: How the Masters of Private Equity Always Win by Sachin Khajuria
Pro Publica: What Private Equity Firms Are and How They Operate by Chris Morran and Daniel Petty