The image of Private Equity investors has never been the best. At the beginning of the millennium, German politician Franz Müntefering introduced the image of the “locust” into the public debate. Since then, various prejudices against this form of financing have persisted. A recent study even highlights Private Equity as a threat to companies. However, an increasing number of entrepreneurs are seeing these investors not as “locusts” but as potential saviors and reliable partners. And they have good reasons for doing so.
Prejudices that stubbornly persist
The Hans-Böckler Foundation warns in its latest study that Private Equity investors weaken companies and increase their risk of insolvency. Anyone who reads through the further results will learn little new. The usual prejudices are mentioned. Among other things, it is stated that Private Equity investors would undermine collective agreements, undermine social standards for employees, and cut jobs when they restructure the company. The funds would make high profits and high manager and consultant salaries, funds that were missing elsewhere in the company and hindered its development.
The equity ratio of companies with Private Equity investors would decrease. The companies would also be burdened with debt because the investors usually finance the takeover not only from their own funds but also through loans. Anyone who believes the study results can distance themselves from Private Equity. However, the results should be viewed critically.
View study results with skepticism
The negative results of the study can be explained by several factors. Firstly, the number of companies examined in the study is relatively small, with fewer than 200, making it non-representative. Additionally, it’s important to consider that the Hans-Böckler-Stiftung has a pro-labor orientation, which may influence their findings. These factors should be taken into account when interpreting the study’s results.
Indeed, when looking for studies that portray private equity financing in a positive light, you can find research that comes to opposite conclusions. The 2021 study “Von wegen Heuschrecke” by inverto, for instance, reaches the opposite conclusion, stating that portfolio companies of private equity firms perform significantly better than comparable competitors without such investment. This highlights the variability of findings in different studies and the need to consider multiple perspectives when evaluating the impact of private equity on businesses. Here, too, it may be criticized that the authors are not objective, and they tend to have a positive view of the financing model. Additionally, the sample size of the examined companies is small.
The fact that Private Equity has its justification and can boost entrepreneurial success becomes evident upon closer examination, without the need for a battle of studies.
Advantages of private equity for growth companies
Of course, as in any industry, there are bad actors. There are Private Equity investors who think in the short term and focus on their own bank accounts rather than increasing the value of the company. However, the majority of investors act differently. They act responsibly.
Because what critics of Private Equity haven’t understood is this: as investors, we have an interest in sustainable and long-term value growth of the company so that we can sell it at a later date with a profit. Instead of focusing on short-term revenue records, we rely on a “Buy and Build” approach.
We want to further develop our portfolio companies. This includes investing in employees because a company cannot significantly scale without them. The notion that Private Equity involves job cuts and lowering of social standards is a stereotype that applies to some but certainly not all investors.
Of course, it is in our interest to save costs. But what is there to say against efficiency? We cut costs where possible, thus strengthening the competitive position of our portfolio company in the market.
Experience advantage leads to win-win situation
Private equity investors are not plunderers, as the “locust” metaphor suggests. For entrepreneurs, they are often the better alternative when seeking growth capital. Private equity investors not only provide capital but also bring expertise to the table.
Our diverse and long-standing experience as founders and investors informs the strategy development for our portfolio companies. Problems and challenges that the existing management faces can often be resolved quickly by us, driving company growth. Fresh capital alone does not guarantee increased success.
Especially in the case of partial sales, Private Equity investors create a win-win situation: while founders may give up a portion of their company, its value often increases in a way they would not have achieved without investor support. In our view, as Private Equity investors, we are partners to entrepreneurs, not locusts. We share the goal of sustainably increasing revenues and profits and achieving healthy growth.