In Defense of Private Equity

With almost one trillion dollars of capital available for investment in private companies, Private Equity (PE) funds are finding our industry an attractive space in which to invest. Fear not! This situation will lead to tons of opportunities for employees who play their cards right.

First, a bit on PE funds: they raise capital from private investors for the purpose of investing in private companies. By design, PE investments often involve a greater level of risk to the investors in the fund, but for the same reason they can provide attractive returns—often on the order of 20–25% or more on an annualized basis—once the “exit event” or sale of the businesses in which they invest takes place.

It is this last part (the eventual exit event) that often gives PE-owned companies a black eye in the view of their employees and potential employees who fear that the exit event will mean bad things for them. I disagree. Consider these misconceptions:

 

Misconception No. 1: Working for a PE-owned company equals less job security.
Some years ago, I interviewed a candidate for a senior manager position in a PE-owned business. He was close to perfect. He had experience in a synergistic industry, understood the market and business practices of the company to which he was being recruited, and most important, he shared the core beliefs and values of the recruiting company.

He was offered an above-market salary that reflected a significant increase from what he was earning with his then-current employer.

After considering the offer, he responded that, while the position was almost perfect, his job with his then-current employer—a company long-owned by the members of one family—was much more secure than the one he was being offered. He said he just couldn’t get over his fear that when the equity ownership of our company changed, his position could change too. In spite of my arguments to the contrary, he was not to be convinced. We parted ways on amicable terms.

I was a bit surprised several months later when I heard from him again. It seems that his employer had fallen on hard times, and his position had been eliminated. Unfortunately for him, our position had since been filled by another solid candidate. I will forego explanation of the clearly evident moral of this story.

 

Misconception No. 2: An ownership change means a radical change in how the business is run.
A friend of mine is the CEO of a company that recently went public. In a speech earlier this year to a Milwaukee, Wisc., business group, he noted that since joining his employer nearly 20 years ago, his business had undergone nine changes in ownership! With regard to how these changes affected his team he asked, “What difference does it make who owns the equity?”

Often, one PE fund will be replaced as majority owner by another PE fund. Other times, a group of managers who believe in the company’s model will buy out the PE fund and become majority owners themselves. My friend’s point was that a good business strategy and culture stand on their own, and a change in ownership is often transparent to the people working inside the business.

 

Misconception No. 3: An ownership change limits an employee’s potential for personal growth.
In 1994, just months after I joined a new employer, our company announced that we were going to merge with another. While my coworkers were fretting about whether they would be fired or required to move—and complaining to each other about their circumstances—I expressed excitement about what the future held and offered to do whatever I could to facilitate the ownership transition.
By the end of the year, I had been named vice president of the company (less than eight months after joining the team in a staff position).

The negotiated sale of that company four years later led indirectly to my acceptance of a CEO position. If anything, ownership changes create opportunities for team members who embrace the change, and help the former owner and the new owner meet their goals.

Employees of PE-owned companies also will find plenty of upside. Promotions and compensation are based on results and the individual’s value to the business, not by bloodlines or seniority. Key employees may find the opportunity to own equity in the business, and the managers of the PE fund can become trusted advisors to management by offering their experience, problem-solving skills and creativity.

Working for a PE-owned company offers great opportunities and benefits to employees who want to be judged on performance and who thrive on change and growth.

When a PE fund comes knocking on your employer’s door, or the chance to work for a PE-owned company presents itself, you will do well to consider the advantages.