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Monday, March 1, 2021

CEO Insider

8 Myths of Private Equity

If you mention private equity to the average person, their first thought will likely be negative. They’ll think of an industry that destroys companies in search of the almighty profit, irrespective of who gets in the way.

In reality, private equity is an important instrument. At a certain point as a founder, you will have taken your company as far as you can on your own. To continue growing, you’ll need private equity.

In order for you to make use of this valuable instrument, you must first dispel the common myths about private equity companies. Here are eight of the most prevalent.

Myth #1: They’re Only Driven by Greed

Private equity companies are often seen as vultures devoid of human compassion, driven only by greed. The perfect example is Edward Lewis, played by Richard Gere in Pretty Woman, who makes a living breaking up companies.

Most people do not focus on the end of the movie, in which Julia Roberts’s character, Vivian, shows Edward there is another way, that growing and building something with the company could be far more fulfilling. This miraculous change of heart is perceived as the exception, not the rule, but it’s more common than you think.

Myth #2: They Break Up Companies

Probably the biggest myth is that private equity firms break up companies. In reality, they spend a lot more time acquiring and merging companies than breaking them up.

In the rare times where a company does need to split, it is more likely than not a division that is no longer core to the mission of the company and is sold off to continue to have a life elsewhere. One example of this is Microsoft selling off Expedia in 1999. The travel site enjoyed a $10 billion revenue in 2017.

Myth #3: They Do Not Care About the People

The only real currency that private equity deals in is human capital. They need the right people in the right roles doing the right job to create growth and wealth.

Private equity cannot afford to indiscriminately fire people; there would be no one left to run the company. They like to keep the expertise that has built up over the years with the company.

Yes, they will bring in additional talent to advise on any knowledge gaps, but this is a huge benefit, as they have a network of experts that most company owners simply do not have access to.

Myth #4: They Only Want to Make Money for Their Partners

Private equity firms are interested in making money for their partners, but the myth implies that it is only the direct partners in the private equity firm that are making the money.

The firm’s primary goals is to generate returns and wealth for their limited partners, the ones who wrote the check for the fund (often pensions, mutual funds, etc.).

The best way to create those returns? Growing your company and making it even more profitable. In other words, these partners want you to succeed and will help you get there.

Myth #5: An Arrogant Youngster Will Be My New Boss

A private equity firm has a number of people associated with it who will support the partnership going forward, ranging from the most senior partners to young associates. These young associates are not there to tell you how to run your business, but to support you in communicating with the senior partners, making the right decisions, and executing your plans.

Associates are like trusted members of your team, not your new boss. Anything they give you is a suggestion or hint, at best, not a directive. Directives will come directly from partners—and don’t worry, they will not hide behind associates.

Myth #6: I Will Lose All Control

With private equity, will you lose all control? No. Will you lose some control? Yes. Of course you will, and if you think otherwise, then private equity may not be for you. But the control you lose pales in comparison to the opportunity and experience you will gain.

Private equity will never come in and tell you how to service your customers; that is your trade, your knowledge, and expertise. Where a private equity firm will provide value is in your strategic thinking. They will encourage you to think bigger or wider, and then give assistance in execution.

Myth #7: The Highest Bidder is Best

Many founders have a fundamental misunderstanding of how to choose a private equity firm. They default to the highest bidder, when in reality, it’s far better to treat private equity as a partnership.

When you approach private equity through a lens of partnership, then everyone strides forward and continues to grow. Bringing private equity into your company should be about accepting assistance to get you somewhere that you may have struggled to reach alone. That is about more than money. It’s about the right fit.

Myth #8: All Private Equity is the Same

Ultimately, all the myths about private equity come down to one main misconception: that all private equity is alike.

There are bad actors in all industries and life. Private equity is no different. Not everyone is good. But neither is everyone bad.

At its best, private equity creates a whole ecosystem of beneficiaries, helping your company grow and generating returns for investors. But it’s up to you to do the work and due diligence to make sure you’re choosing the right private equity firm.

This article was adapted from the book, Courage to Lose Sight of Shore: How to Partner with Private Equity to Grow Your Business with Confidence (Lioncrest Publishing; September 25, 2020), written by Kelley W. Powell.

Kelley W. Powell
Kelley W. Powell is CEO and partner of MacLaurin Group, a company providing technology operating partner services to portfolios of private equity companies. Supporting companies in growth and M&A activities, Kelley brings a unique experience from founder-led organization to multiple private equity-led cycles. Kelley is an avid mentor, angel investor, and chairwoman for the da Vinci Center for Innovation Angels Advisory Board at VCU. She’s also a board member of the Richmond chapter of the Association for Corporate Growth, and in 2020 was appointed by Governor Northam to serve as a member of the Virginia Council on Women. Kelley W. Powell is an opinion columnist for the CEOWORLD magazine. Follow her on Twitter or connect on LinkedIn.
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