Private equity: The regular myths debunked

It’s painted in all sorts of lights, but few disagree that private equity is one of the most lucrative industries around. Succeed here – and the riches can be beyond your imagination.

Of course, this sort of reputation also leads to countless misconceptions. Every month we see masses of information published on private equity and unfortunately, a lot of it is inaccurate.

While we don’t have a dissertation-like word count to mull through all of the misinformation we have stumbled upon over recent times, we are going to discuss some of the most common myths that this industry throws at us.

Myth #1 – It’s all about the exit strategy

As you’ll see with a lot of the myths that we analyze, a lot may have “once” been true. In other words, they have become outdated, which is why they are now myths.

This first one about exit strategies most definitely fits this description. Nowadays, private equity firms don’t have one eye on the exit, many are about the long-term approach. Sure, most still sell within a set period of time (usually five to seven years), but it’s not a case of getting out and making a quick buck like it once was.

Myth #2 – Private equity firms just want to appoint their own team

This is one of the primary reasons why private equity has a bad name amongst some sources. A lot of people believe that they like to just step in, strip a team out, and implement their own people. Once upon a time this may have been the case but suffice to say, times have changed.

In fact, you only have to analyze the philosophy of Marc Leder from Sun Capital to see this. He has publically said that one of his primary questions when scrutinizing a company is to see if there is an existing management team he can take advantage of. In other words, if this doesn’t exist it’s a major turn-off, for the simple reason that there’s nobody who can aid him with the existing workings of the company.

Myth #3 – It’s all about the big money acquisitions

This final myth couldn’t be any further away from the truth. The reason a lot of people think along these lines is because all of the news headlines center on the big acquisitions – the ones worth tens of millions of dollars (or more).

What people don’t realize is that there’s a whole other private equity industry. There’s one that hones in on small to medium sized companies, and this is just as vibrant. Sure, it might not have the huge profits attached that some deals have, but it’s a business in its own right and some investors perform very well with this approach.

It could be said that this links in to the previous myth as well. As PE firms were so renowned to appointing their own team and “forgetting” about the existing structure, a lot of smaller businesses opposed the practice. Now this has changed somewhat, this part of the industry has opened up.

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