Private equity firms are often targeted by the press as inherently evil and exclusively driven by profits, often to the detriment of everyone else. It’s a common narrative — and an apparently appealing one — but far from accurate.
Historically, many PE firms relied on financial engineering to drive their bottom line, but returns became much harder to come by after the economic crisis of the late 2000s. Today, competition in private equity is fierce, and firms have an array of tools enabling them to drive revenue and cash flow for portfolio companies over the long term. If they don’t, they simply won’t be able to achieve meaningful returns on their investments.
Capital Gains
If you’re a business owner looking to take your business to the next level, you’re doing yourself a disservice by excluding private equity from your list of options. A strategic partnership with the right PE firm comes with plenty of benefits, and it’s been the catalyst for sustainable growth and prosperity for countless companies.
Here’s just a handful of the advantages private equity can offer:
1. Market expertise
Many private equity firms specialize in working with specific types of companies within one or two industries or verticals. For example, Blackford Capital partners with family-owned manufacturing businesses and has proven itself to be one of the best when it comes to deal sourcing. The firm’s success stems from its knowledge of the market and its ability to identify opportunities that company leaders might not be able to see on their own. It places a focus on establishing and meeting key performance indicators specific to those manufacturing companies and on promoting efficient capital management among family-run businesses in that industry.
Like Blackford, specialized firms are able to capitalize on deep institutional knowledge of specific markets and can even help you identify new markets or new product development opportunities.
2. More funding
Private equity firms are typically positioned to offer you more money than any other type of investor. Especially for larger firms, deals tend to be measured in hundreds of millions of dollars. While not every company needs this level of funding, it can make the difference between prosperity and bankruptcy. This was certainly the case for Delaware City Refinery, which was able to reopen in 2011 after a $450 million investment from Blackstone and First Reserve Corporation in 2010.
3. More involvement
A good PE firm will help you assess every aspect of your business to determine where you can cut costs and maximize value — and then help you execute. For example, firms like KKR offer operational assistance to their portfolio companies, in addition to access to a global network of resources. The ability to leverage a PE firm’s vast industry knowledge, operational expertise and investment experience can be transformative for a company of any age.
4. Higher returns
In 2012, Boston Consulting Group conducted a study that found that more than 66 percent of private equity deals boosted a portfolio company’s annual profits by at least 20 percent, and nearly half of those deals led to a growth of 50 percent or more. The pressure on PE firms to create value, combined with the capital and expertise they wield, can be powerful.
Moreover, if you’re thinking about selling to a strategic competitor, consider the fact that selling to a PE firm instead will often times allow you to retain a stake in your business while reaping the benefit of additional capital.
Not all firms are created equal — and not every relationship between a PE firm and its portfolio companies is beneficial — but don’t let prevalent misconceptions prevent you from exploring your options.
The reality is that PE firms, like most businesses, are certainly interested in making money, but they’re not looking for a quick profit at the expense of the companies they invest in. They naturally want those companies to be successful because that’s how they, in turn, succeed. As a result, when a company partners with an experienced private equity firm, everyone wins.