An Introduction to Private Equity

bigstock-Accessing-The-Data-1212151-300x225Private Equity (PE) has a mixed reputation in the business world. Some see it as a malevolent force only interested in short-term profit. Others believe it plays a valuable role in the business community, encouraging a degree of risk, innovation and most certainly growth.

The reality is that whilst PE is focussed on a return on investment, the best way to achieve that investment is by looking to the medium and long-term.

So What Exactly is Private Equity?

A private equity investment will generally be made by a private equity firm, a venture capital firm or an angel investor.

Each of these categories of investor has its own set of goals, preferences and investment strategies. All, however, provide working capital to a target company either to nurture expansion, new product development, or restructure the company’s operations, management, or ownership structure.

PE normally buys a business for a 3-5 year period, but when they sell that business, they need to sell it on a story for growth over the next 3-5 years.

Where PE normally falls down is when it buys ‘lifestyle’ businesses and fails to convert the management and culture of the business to one which would implement what would be considered best practice in many other companies.

Of course, we do see the headlines of Southern Cross etc. that have used financial engineering to generate large amounts of cash from companies.

These examples are greatly outnumbered, however, by the thousands of successful PE companies that deliver sustainable growth each year.

To be successful, PE backed businesses need to operate in just the same way as any well run business:


You need to start with a solid strategy – one that can be implemented effectively.

In another article, I will discuss techniques for developing and implementing a corporate strategy in a pragmatic way, but for now I will just say that the key for any strategy is implementation.

You can have the best strategy in the world, but if you implement it poorly, it can easily be less successful than a mediocre strategy implemented expertly.


Make sure the incentives are targeted at those who can make a difference, particularly any equity incentives. It's no good if the equity an individual has will only amount to a reasonable bonus – you would be better to simply give them the bonus and pool the equity into larger amounts.


Don’t try to control everything at the top, but feel free to empower your people to make decisions quickly and effectively.

This will lead to some mistakes, but it will ensure you retain a level of flexibility and responsiveness to the market. Just make sure the governance process captures any mistakes so you can fail quickly and learn.

The main difference in PE businesses is that you know for certain that one day in the future the business will be sold. This has to have a place in your strategy, and in the way you operate the business at all times.

For example, by understanding to whom you are likely to sell, you will be able to shape the business to make it more attractive to those potential buyers.

This will inform any M&A activities you undertake, any markets you decide to enter, or exit, and even some of the customers you will chase.

In addition, you will need a data room containing all your contracts, a view of your staff and structure, and a three-year financial plan etc. Pull those together in the early phase of the PE ownership and update them throughout the course of the business. Building in processes to keep these up to date is an efficient way to do things.

Finally, management should not be afraid of PE but should treat them as they would any investor.

Management should agree the success criteria for the business with the PE house, but it is management, not the investor, that should drive the business forward.

In short – if managed properly – PE can be a force for good, and a source of additional capital to enable growth by organic or inorganic means.

It does, however, require discipline and strong management to get the best results.

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