How to Address the Misconceptions About Private Equity

Over the last two years, private equity has been the center of plenty of controversy. If you open a newspaper, some of the largest firms have become connoted with greed, lechery, and distrust. For the average reader, the clubbing scandals, carried interest tax finagling, and accusations of job destruction have painted private equity as the bane (Bain?) of a healthy economy.

One of our Members decided to take action to amend these growing misperceptions. In an e-mail we recently received, Hamilton Robinson Capital Partners sought to highlight the benefits of private equity. We caught up with Carrie DiLauro of Hamilton Robinson to learn more about their efforts.

According to DiLauro, general misconceptions about private equity have challenged their ability to source deals. “Many people believe private equity companies come in, buy your firm, take it apart, fire the management team, and then sell it to the highest bidder — all without adding any value to that company. People believe that we only care about profits, buying at a low price and selling at a higher one. This is such a gross misconception of what private equity offers,” causing SMB owners to have “a sense of hesitation or mistrust. Almost always, we find that you have to break through these doubts.”

DiLauro has found that the best way to combat misperceptions about her firm is to make sure businesses are properly educated about private equity. “Prior to the election, there was very little news about private equity. Due to a lack of accurate information out there in the media, people were more susceptible to believing the inaccurate portrayals of private equity.”

Here are a few points to make clear during your next conversation with a business owner:

Your Firm is Not Like Every Other Private Equity Firm

First, DiLauro likes to make sure that SMB owners understand that not all private equity firms are like Bain Capital. She explained, “One of the biggest misconceptions that has developed since the election campaigns began is the idea that all private equity firms are goliaths, like Bain Capital.”

She continued, “The truth is that there are many of us that are the complete opposite of what the public opinion is conjuring up. We are small firms that are looking to help the small businesses in America. Of course everybody is looking to make their investors money, but along the way, there is so much benefit and support provided towards improving the companies we invest in, the economy and small businesses around the country.”

Your Firm Offers More than Financial Tweaks

Due to the uncertainty of private equity’s inner workings, many SMB owners do not understand how private equity firms help businesses. DiLauro explained that, “Many people believe that [private equiteers] are just a bunch of financial guys that manipulate numbers all day.

“In actuality, it is simply hard work — it is improving the management team, it is creating jobs in the factories, increasing output, finding better markets, finding different markets. It is just basic good business principles that are driving a lot of this growth. Maybe that is just the boring story, but it doesn’t come through very often.”

Your Firm is Not Necessarily Changing the Management Team

According to DiLauro, many SMB owners fear that private equity firms will simply take the reins and rule the business without any concern for the existing management team. Like so many of the other stereotypes, this idea is misguided. “In reality we are always looking to improve the quality and business processes of a company. We are absolutely a partner with management 100%. We are not just an overseer at all.”

She added, “When you are talking private equity, it is simply people-to-people engagements. As a private equity firm, you must trust the management of the company. In turn, the management has to trust the private equity firm that they will have the integrity throughout the entire transaction that was put forth at the beginning. At the end of the day, it is trust. Once you gain that trust, you can break down some of the misconceptions of private equity.”

While the primary image of private equity will continue to be dominated by the largest firms, you can take proactive measures by building trust and educating contacts, helping to right many of the misconceptions. On a brighter note, some of the biggest firms are beginning to clean up their image by engaging in more open conversations.

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Note: Since the publication of the article, we have received some great feedback from our readers. In addition to discussing the above points, it might be worthwhile to consider these:

One reader wrote to us, “I also think the general public needs to understand that many of the investors in PE are not just rich people, but include pension funds, university endowments, charitable foundations and insurance companies that rely on the larger returns to avoid underfunded liabilities.”

Another reader stressed the importance of letting prospects know your past track record. If you have a reputation of building up companies, make sure you share it.

Feel free to reach out if you have any other thoughts.

Thanks to purplejavatroll for the image.