From afar, some regard private equity investment as quite a ruthless form of funding. However, if one were to analyze the industry more closely, it would soon become clear that this isn’t necessarily the case.
Sure, private equity firms are in the business to make huge profits – and countless studies have highlighted this.
In amongst the huge figures are some myths that border on the unbelievable though. It means that the industry is blighted by inaccuracies that in some ways harm its reputation.
Following on from this, we’ve collected some of the best myths we could find on private equity and debunked them in whatever way we can. Here goes.
Myth #1 – Private equity firms will come and rip out a management structure
Remember we spoke about private equity firms supposedly being ruthless? This is pretty much where that myth arises from.
The general consensus is that a private equity firm will come in, remove the entire management structure and appoint their own team in each and every takeover they become involved in.
Take the example of Sun Capital. The co-CEO of this company, Marc J Leder, has stated on countless occasions that the existing management structure is a key reason why his company decides to invest in a firm. They don’t want to rip it out and install a new one. Instead, they want to make subtle changes to the working processes – not the team itself.
The fact that Sun Capital perform a culture study before launching into an acquisition cements the fact that they aren’t interested in replacing entire teams.
Myth #2 – Companies backed by private equity have more chance of failing
In some ways, this is an understandable myth but nevertheless, it’s not true.
It’s understandable because a lot of the time, a company will be taken over by a private equity group if it is struggling. This is because the nature of private equity is creating value out of something that is underperforming, meaning that those companies which are already at the top of their game are rarely approached.
However, the statistics about failures suggest otherwise. For example, one study found that over 66% of businesses who had been taken over by a private equity group experienced a 20% uplift in profits.
Suffice to say, these sorts of figures don’t relate to failure.
Myth #3 – Private equity investors only care about the exit strategy
Again, it’s easy to understand why some people might reach this conclusion and in some ways, a group of investors will always have one eye on the exit.
However, most people believe that this means that the investors don’t have any interest in what happens in-between. It stands to reason that this isn’t the case and even if a private equity firm has set out a goal of selling within five years, they will be constantly attempting to grow during this period to maximize their investment and also, increase the company’s profits to top things up.