Private equity investors have never had the best image. At the beginning of the new millennium, Franz Müntefering, a German politician from the social democratic SPD party, introduced the image of the locust into the public debate. Since then, various prejudices against this form of financing have persisted. A new study that identified private equity as a threat to companies was recently published. But more and more entrepreneurs do not see the investors as the locust, but as a new hope and reliable partner. Rightly.
Prejudices remain anchored
In its latest study, the Hans Böckler Foundation warns: Private equity investors weaken companies and increase their risk of bankruptcy. If you read through the other results of the study, you will learn little that is new. The common prejudices are presented. Among other things, the study reveals: private equity investors would lever collective agreements, undermine social standards for employees and cut jobs when reorganizing the company. The funds would generate high profits and high manager and consultant salaries, money that was then lacking elsewhere in the company and hampered its development.
The equity ratio of companies who engaged with private equity investors would decrease. The companies would also be burdened with liabilities because the investors mostly financed the takeover not only from their own funds, but also with loans. Anyone who believes the results of the study can only refrain from private equity. But the results should be viewed critically.
View study results with skepticism
How can these negative results of the study be explained? With less than 200 examined companies, the number is relatively small and not representative – and it is no secret that the Hans Böckler Foundation is close to employees. These factors should be kept in mind when interpreting the results.
Anyone looking for studies that cast private equity financing in a positive light will find them too. The study by inverto, “Von wegen Heuschrecke”, published in 2021, comes to the opposite conclusion that portfolio companies of private equity funds perform significantly better than comparable competitors without such an investment. At this point, one might criticize: the authors are not objective either, they tend to have a positive position towards this financing model. Plus, as before, the sample of companies examined is small.
On closer inspection, it becomes clear that private equity is a justified form of financing and can inspire entrepreneurial success without the need of studies proving this.
Benefits of private equity for growth companies
Needless to say, one can find the black sheep in every industry. There are private equity investors who think in a short-term way and tend to prioritize their own bank account balance instead of increasing the value of the company. But the majority of investors act differently, responsible.
Because what the critics of private equity did not understand: As investors, we have an interest in a sustainable and long-term increase in the value of the company in order to sell it at a later date for a profit. Instead of looking at short-term sales records, we use a “buy and build” approach.
We want to develop our portfolio companies. This also means that we invest in employees. Because without employees, a company cannot be scaled significantly. The idea that private equity goes hand in hand with downsizing and cutting social standards is a prejudice that applies to some but not to all investors.
It is of course in our interest to save costs. But what can be said against efficiency? We save wherever possible and thus strengthen the competitive position of our portfolio company on the market.
Experience-based advantage leads to a win-win situation
In contrast to the locust myth, private equity investors are not scavengers. For entrepreneurs, private equity investors are often even a better alternative if they are looking for growth capital. Because private equity investors not only bring in capital, but know-how.
The strategy development of our portfolio companies benefit from our diverse and longstanding founders and investment experience. Problems and challenges that the previous management faced can often be quickly resolved by us, thus increasing company growth. It is not only new capital that does increase their success.
A win-win situation is created by private equity investors, especially in terms of partial sales: the founders forego company shares, but their value usually increases in a way which they would not have achieved without the investor’s support. In our understanding, as private equity investors, we are partners of entrepreneurs, not locusts. We share the goal of sustainably increasing sales and profits and achieving healthy growth.
