Myths and misconceptions around private equity

Our previous article on this topic, jointly written by Andy Skinner, director at NorthEdge Capital and Peter McLintock, partner at Mills & Reeve, discussed how private equity might be of benefit to businesses and how to attract funding. This article follows on to explore some of the common myths and misconceptions around private equity and considers the benefit of it to mid-market businesses.

Read previous article here.

One of the biggest hurdles seen in relation to mid-market/owner managed and family controlled businesses is the perception that by giving away equity you will lose control of the businesses and the destiny of the business will be taken away. 

However, this is not case. Andy’s key message on this is that the management of the business stays firmly in the hands of management on the basis of a mutually agreed business plan. Private equity firms have no desire and do not have the skills or the bandwidth to manage businesses and it is all about management, management and management!

To support this message, a recent snap poll by accountancy firm, RSM, found that almost three quarters of private equity backed middle market businesses said that their investor has had a positive effect on their firm’s future prospects.

Nearly seven in 10 believed their private equity investor had a positive effect on their firm’s resilience during the global Coronavirus pandemic, as communication between businesses and investors increased for nearly three fifths of the companies (68%).

With 59% of businesses saying that the pandemic has had a negative or very negative effect on trade, the findings highlight that the strength and guidance private equity investment brings has supported growing middle market businesses throughout a difficult year.

Peter adds that overall, it does come down to the dynamism and ambition of the management which, if realistic can be massively accelerated by the capital injection and in terms of pound notes, giving up equity today can lead to your holding being worth much more as a result tomorrow.

The advantages that private equity offers to companies

Private equity is favoured by companies because it allows them access to liquidity as an alternative to conventional financial mechanisms, such as high interest bank loans or listing on public markets.

Private equity financing can help such companies attempt ambitious or unorthodox growth strategies away from the glare of public markets and the strains of extreme leverage, through taking on lots of debt.

In a BVCA study of 450 MBO’s, it was found that the average productivity hike of these business was a dramatic 95%. That can lead to staggering growth. That is nothing to do with clever financial engineering, cost cutting or other jaundiced allegations, such as asset-stripping. That is to do with creating a platform where quality, ambitious management teams can be forge the best business that they are capable of, with our help.

As mentioned, having a supportive shareholder has been shown to reduce the pressure on producing quarter by quarter earnings and dramatically improves the ability of senior management to turn a company around or experiment with new ways to make money.

Mills & Reeve will work with companies long before a private equity firm is even at the door and we will take them through what will appeal to a private equity partner and prepare them for the appraisal and the due diligence process from a sell-side perspective. It's designed to get businesses ready to provide information when they need to and to present themselves in their best possible light.

Our content explained

Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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