Private Equity: The 3 Myths You Should Avoid Like The Plague

The private equity industry has never been shy of headlines although unfortunately, there are many occasions when these are of the negative variety.

Whilst at times these headlines are just, on other occasions they are somewhat unfair. Done correctly, private equity can be hugely beneficial to some businesses; you only have to look at the financial risk management topic in detail to see how positively they are looked upon.

Private equity funding

To highlight some of the myths and misconceptions that can don this form of finance, here are some of the most interesting myths that are often associated with it.

“Companies who have been backed by private equity have more chance of failing”

One of the biggest myths that linger around concerns the state of those companies who have accepted this form of funding. The general consensus is that companies which fall into said category are on their last legs and as such, when it comes to the crunch, they just have much more chance of failing.

In some cases, it could be argued that this is true. Some PE financing companies will turn their attention to firms who are distressed, but the majority don’t opt for this approach. Instead, they will turn towards proven companies who have an aura of predictability about them, and this ultimately means that the rate of failure is actually very low.

“It’s all about the exit strategies”

Something else that people regularly associate with private equity is that their sole focus is all about the exit.

Again, let’s add a caveat – some private equity firms will fall into this category. Some are looking to get the quickest return on their investment and will ultimately flip businesses like there is no tomorrow.

However, this certainly isn’t the norm. Particularly now, a lot of private equity investors are looking to grow, and this means sticking with some companies for the long-term. It’s certainly not a patient form of financing, and these firms do require payback in their sights, but to suggest it’s all about the exit would be a gross exaggeration – in a lot of cases.

Funding for small business

“Small businesses may as well click the back button”

When the term private equity is touted around a lot of people start seeing the big numbers. It’s true, these are the deals that appear in the press, but that’s not to say that smaller firms are immediately discounted.

Don’t be fooled by the notion that private equity companies always want to take businesses public. In an ideal world they might – but this tends to cost the big initial bucks.

Small deals do take place in the private equity world – and these tend to be the bread and butter for a lot of these financing companies. If they can invest in smaller companies and build their expertise up in a niche, it means that they can implement more effective operational changes and ultimately make the big profits when it does come to exit-time.