Founder Focus

Why Private Equity Gets a Bad Rap

Does the mention of a private equity investor conjure images of a “Wolf-of-Wall-Street” type spraying pricey champagne while conning people?
Even if that’s not exactly how you picture private equity, you may have heard the common misconceptions that give PE a less than glowing reputation. If you’re a founder who has read stories that gave you that impression, we can understand why you might be hesitant to deal with private equity firms. Here’s our perspective on the matter.
WHY BAD PRESS CAN MAKE PRIVATE EQUITY LOOK BAD
Overall, private equity has an excellent track record of successful outcomes for both founders and investors. Unfortunately, the stories that make it to the press are the sensational ones, which all too often cast private equity in a negative light.
These stories play well in the press because wealthy investors make good “villains.” (Interestingly, strategic buyers were commonly villainized before private equity became more common.)
But it’s important to note that many of the business failures the press could highlight are not necessarily the fault of an investor. For instance, is it the fault of the investor if ecommerce puts a brick-and-mortar retailer out of business? Or if a new invention makes a company’s technology obsolete? We’ll leave you to decide.

Are there good and bad private equity firms?

Even though there are bad deals and doomed industries, we acknowledge that private equity firms can differ greatly in terms of goals and values.

  • Some firms require founders to stay with the company as a minority investor while the firm controls the company.
  • Some firms have financing contingencies, meaning the seller must help finance the deal. This puts additional risk on the company, particularly if the company is small or rough around the edges.
  • Some firms have a reputation for re-trading — the “hosing at the closing” — meaning the firm changes the terms right before the deal is supposed to close. For example, they may say they have concerns about the company not meeting projections so they drop the closing price. When this happens, founders feel backed into a corner because they don’t have other options and have sunk a lot of time into the sale.

These kinds of scenarios have contributed to private equity’s negative reputation. But there are a lot of good private equity firms trying to do their best for everyone.

For example, at Trivest, the way we try to be part of that group is by not changing the purchase price once we sign an LOI. We have a no re-trading policy, part of our “Just Say No” campaign that empowers founders to decline painful or unfair terms. 

We’re also careful about not putting too much debt on the business to give it the best chance of thriving.

How private equity does good

A good firm will share the goals of a founder. We try to do that by growing your business while leaving your legacy intact. We view our founders as partners, and we try to remove common pain points and make the deal fair for both sides.

Our investors do well when our portfolio companies and their employees do well. Our model is to sell our interest in the business a few years down the road. That means it’s in our best interest to keep the organization healthy and the employees satisfied.

Private equity hasn’t just been good for individual businesses but for the economy and environment. Private equity efforts to improve companies is one of the reasons American businesses are strong. For example, PE has been addressing major societal and environmental issues since the 1980s and 90s when many firms conducted environmental studies and performed cleanup when purchasing manufacturing plants. 

Private equity is also playing a positive role in establishing DEI (diversity, equity, and inclusion) and ESG (environmental, social, and governance) policies. These kinds of policies improve society and help founders find PE firms that align with their values.

OUR RELATIONSHIPS MAKE US SUCCESSFUL

Despite all the negative stories, there are firms that break the stigma and operate as meaningful, mutually beneficial partners. At Trivest, we understand we’re not just buying a business; we’re investing in people. It’s easier—and makes sense to us—to build relationships and retain the goodwill of the founder. It’s a better strategy for everyone involved.

Thinking about selling your company? Read “Why Founders Should Sell to Private Equity” to learn more about working with a PE firm.

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