Private equity partnerships: A positive force for company growth

Private equity (PE) firms invest the money they collect on behalf of a fund’s investors, usually by taking controlling stakes in companies. The firm then works with executives to increase the value of these businesses?–?called portfolio companies –?by steering them through a transition of rapid performance improvement, before selling them. ?

PE funds are generally backed by investments from large institutional investors, such as pension funds, sovereign wealth funds, endowments, and very wealthy individuals. These funds are managed using both investors’ contributions and borrowed money. Because of this, PE investors are generally highly involved in company strategy and governance. By keeping tight control on management and setting clear objectives, these investors can help companies achieve higher market valuations.?

Criticisms of the private equity model?

In some cultures or countries, the PE model is viewed negatively. One of the biggest criticisms toward it is that it focuses on short-term profit at the detriment of long-term value development. Having worked in various PE-owned firms –?witnessing firsthand how the model can bring about positive results?–?I do not agree.?

Regardless, such negative views toward PE typically stem from either poorly executed deals or strong returns in a limited time. And it is true that such deals occur from time to time. However, private equity firms have more than US$ 4.5 trillion in assets under management, across industries and geographies. They invest in companies and people –?and are drivers of ESG agendas.?

Further, for a PE firm to be profitable, it must ultimately sell its portfolio companies. Destroying long-term value negatively affects that goal – and is therefore detrimental to the private equity model. While PE ownership is generally not long term, it can positively impact processes that drive company growth, especially through investments and professional support. This means that, yes, while PE firms are “in it” to make money, they by nature drive value in the process. ?

The benefits of private equity partnerships?

PE partnerships offer a range of benefits to companies seeking to grow and expand. By capitalizing on private equity firms’ expertise, experience, and collective knowledge, companies can leapfrog their growth, expanding much more rapidly by drawing from a deep pool of resources that might otherwise be unobtainable. ?

Ultimately, for a PE deal to be successful, a strong management team must be at the helm of the acquired company. This means that PE firms not only perform due diligence on financial KPIs, they also make sure to back the right team –?and invest in their success. Typically, PE allows for management to have "skin in the game,” meaning that management can invest alongside the PE firm, thus ensuring that interests are aligned.?

PE partnerships also provide company leaders with access to a professional network that can accelerate growth and drive success. Because most PE firms own a broad range of companies, executives can benefit from the experiences of other management teams. This can be particularly valuable when it comes to identifying and implementing best practices, building efficient systems, and navigating complex regulatory environments that lay a foundation for both the present and future.?

A ‘win-win’ move from private equity to strategic ownership?

Although at times a PE investment is sold onwards to another PE fund, a PE-managed company often ends up being sold to a strategic player that can further drive synergies between two companies operating in the same market –?or that are complementary to one another.?

For many companies, this move from PE to strategic ownership is beneficial. Under strategic ownership, a company is acquired by a buyer or group of buyers that have a long-term vision for the business, as well as the expertise to achieve it. ?

Whereas PE ownership predominantly focuses on shorter-term?–?with an average investment time of five years –?it nevertheless paves a road on which strategic ownership can drive to reach long-term stability, value creation, and alignment with broader stakeholder interests. The result is sustainable growth – and is a win-win for all stakeholders.

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