Private equity’s role in helping companies grow is often misunderstood

by ExitAdvisor · 23rd September 2016

Andy Lyndon, Director of LDC Birmingham, presents that private equity’s role in helping companies grow is often misunderstood.

He emphasises that when a PE firm takes a stake in the business they are backing the team and rely on the existing team to grow the business.

A common misconception is that once investment has been secured business owners will hand over the reins of the company, but this isn’t the case. We back management teams for their expertise and market knowledge, and work alongside them. Whether we take a minority or majority equity stake, the management team is always best placed to lead the business…

He adds that PE firms provide not just capital but expertise as well.

Entering into a private equity partnership offers more than just a capital injection. The market is home to a wealth of talent with experienced professionals from industry itself, as well accountancy, corporate finance and management consultancy, who can provide valuable strategic guidance and operational support…

With respect competing interests and the view that the PE firm’s goals may be different to the management’s he says,

From our experience, private equity works best when the partnership between investor and management is built on trust, a common vision and strong alignment of interests from day one. Read the article here.

So what businesses are best suited to Private Equity investors?

PEGs make for some of the best buyers of businesses. And business owners love selling to PEGs because they can sell at substantially higher valuations – several multiples of what they’d get with any other buyer. However, there are important distinctions with a sale to a PEG. Continued here.

How do leveraged buy outs (LBOs) work? Valuewalk provides an example for students of finance:

In this tutorial, you’ll learn about the most common LBO modeling-related questions and some tricks and rules of thumb you can use to approximate the IRR (Internal Rate of Return) and solve for assumptions like the purchase price and EBITDA growth in leveraged buyouts.