It’s a term that is seemingly branded about more and more and that in itself means that there are a lot of misconceptions doing the rounds about private equity.
However, according to the financial risk management experts from JCRA group, private equity isn’t all that it is made out to be. As the title of today’s post might have already suggested, we will now mull over some of the main myths that surround private equity and debunk them once and for all.
Myth #1 – Private equity involves giving up all control of a business
This is something that may have once been true, but nowadays a lot of private equity firms are more than happy to take minority stakes in a business. Of course, not all fall into this category, and if a business happens to be on the small side there’s a chance that the minority stake won’t be suitable for them. However, to suggest that all PE firms are only interested in taking complete control of a business would be a gross understatement nowadays.
Myth #2 – There is always an exit strategy (usually, within 3-5 years)
Another popular myth is that there is a ticking time bomb in relation to the amount of time in which a private equity company is willing to invest in a business for. In other words, once they have reached the three to five year threshold, they are ready to cash-in and move on to their next venture.
Again, this used to be common practice, but what seems to be happening is that private equity investors are happier to hold onto businesses for longer periods of time. This period of time reached six years a few years ago and while this might not be classed as long-term by some quarters, it’s still a significant period of investment for most.
Myth #3 – It’s only big tech firms that are suitable for private equity
Unless your business is the next Facebook, there’s no chance of a private equity deal, right? Let’s not spend much time on this myth; it’s not the case in the slightest. Private equity deals come in all shapes and sizes and while the financial media might only report on the deals involving huge sums of money, one should understand that this form of investment affects pretty much every niche out there, with businesses both large and small.
Myth #4 – The first job is to replace the management team
Another myth that isn’t worth the paper it is written on is that private equity companies are only interested in completely replacing an existing management team. First and foremost, this isn’t true, but let’s look at the reasons why.
The existing management team knows all about the business and the industry it is involved in. Sure, they might be making some questionable decisions, but that existing knowledge is crucial and can help a private equity firm immensely as they get to grips with their new business.