Private equity does not have a good reputation among CEOs. This is mainly because of how this asset class is nowadays presented in the media. Marc Leder highlights that the truth is not of interest for journalists since what sells is the shock factor. This is why you often see articles about prolific fund managers but the focus is put on negatives instead of positives. Nowadays, numerous myths about private equity appeared. Those that are particularly common and that need to be ignored are highlighted below.
Myth: Private Equity Firms Are Takeover Specialists
Many mid-market CEOs will tell you that the private equity firms always take control, liquidate assets and fire the management team. This is simply not the truth. In fact, the exact opposite is preferred. The PE firm will play a clear role in the decision-making process but the goal is making the investment profitable. Working with a private equity firm is much more like a partnership than a takeover. Most mid-market companies would benefit a lot from the experience and wealth of the PE firms, especially when challenges appear.
Myth: Private Equity Firms Only Want Big Buyouts
Private equity firms include highly experienced investors that fully understand the importance of portfolio diversity. While so many private equity firms out there are focused on corporate takeovers and major investments, smaller deals are always considered. Most PE deals these days actually focus on secondary buyouts, smaller companies that minimize risks of large investments.
We should also add that the belief a PE firm will come in with its very own relationships and managers is false. Management change is tumultuous and expensive. This is why the private equity firm always prefers to work with the current management team to build a long-term growth strategy.
Myth: Private Equity Firms Just Care About Profits
This misconception states that PE companies neglect company operations and improvements in favor of just financial outlooks. PE firms normally become interested in the mid-market firm because of the opportunity to make serious operational improvements. Leverage is always desired for investments but the focus is put on the long term. The investors are fully aware of the fact that only by improving company operations this can become a reality.
Myth: Private Equity Firms Just Want Exit Strategies
The myth is that the PE firm wants to sell the company as soon as possible. In reality, any such company needs to return good capital to investors. Operational changes are always considered and holding periods are so much longer than what many expect. In fact, most PE firms will only make an investment on a period of 5, 10 or even 20 years.
Myth: Companies Fail After Private Equity Investments
This myth practically appeared because of the thought that just companies in a really bad shape choose private equity investments. There are PE firms that do focus on distressed assets but this is actually quite rare in the industry. Most of the firms will focus on the companies that have a predictable and proven future growth.