Private equity may seem like a sound investment strategy, but myths could keep you from participating. These are some of the top touted myths that are explained and debunked to help you decide whether private equity is right for you.
Private equity firms strip assets.
Private equity firms do a lot of research to determine which companies would offer the best yields for investors. The businesses chosen are mature and are experiencing financial distress. Through a buyout, private equity firms invest money and support a diverse range of value creation strategies that influence growth.
Layoffs can begin once the exit strategy begins, but, over the last five years, only 6% of job losses have resulted from private equity buyouts. The biggest impact is in retail positions, which can see as high as a 12% job loss. Overall, private equity firms work to grow businesses that would otherwise go bankrupt.
Private equity firms constantly look for an exit strategy.
Eventually, a private equity firm will exit the investment to reap the benefits of the growth, but this doesn’t mean it’ll happen at the first possible chance. The average amount of time firms spend involved in an investment is 5.5 years, but this number changes each year and from business to business. Some companies decide to hold investments longer than five years or shorter depending on how they’re performing. Private equity firms will hold investments as long as necessary to create as much profit as they can—which can sometimes be as long as 10 years.
Private equity firms cut costs.
This myth is partially true. Private equity firms do work to reduce costs to maximize profits, but these groups cut unnecessary costs and reinvest the money into other functions such as sales, marketing, research, and other things that support company expansion. Even though cutting costs can be seen negatively, it’s sometimes necessary to allow the entire business to flourish and grow—which later provides profits for all the investors.
Private equity firms only focus on financial fixes.
Private equity firms focus on what can help their investors, but the primary job of the management team is to improve the business. Financial issues can sometimes be linked back to managerial issues and company operations. These firms become interested in mid-market companies for the opportunity to make operational improvements which will improve the chances of high profit.
Private equity and venture capital are the same thing.
Private equity and venture capital may be used interchangeably with some groups, but the two terms are extremely different. Other than the fact that the two investment methods focus on capital growth by investing in businesses, they could not be more different. Private equity focuses on purchasing companies that are mature and have an established financial record to decrease the chance of failure whereas venture capital firms invest in start-up businesses.