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Debunking the Myths of Private Equity

By : Faiz Uddin| 8 June 2020
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As many people are in search of funding at this time, private equity may be the solution for you. Not to be confused with venture capital, private equity is an investment source for companies in the later stage of development that are made in firms not publicly listed on any stock exchange. Some people confuse private equity with venture capital because they both refer to firms that invest in companies and exit through selling their investments in equity financing, such as initial public offerings. However, it’s important for entrepreneurs to know the difference so they don’t waste their time and others’ time by trying to get capital from the wrong kind of investor. Outside of understanding the difference between the two, you must know what you are getting yourself into when taking on investors. You’ve probably heard intimidating things when it comes to private equity, but, Ziad Abdelnour explains, “a lot of it is just exaggeration, perpetuated by entrepreneurs who have made dumb decisions. It’s one of my goals to help you separate fact from fiction, therefore, let me debunk a few common myths on private equity.”

In my conversation with Ziad K Abdelnour, Lebanon-born American investment banker and President & CEO of Blackhawk Partners Inc, a New York-based investment firm, he discusses his view on some common private equity myths and clears a few things up about the industry.

Win-Lose Game

The first common myth about private equity is that the investors win while the entrepreneurs lose. According to this myth, private investors will make off with the value of your company—perhaps buying at a low price and cutting you out of the eventual rewards—that you’d earn from going public or selling to another company. However, private equity investors only make money if the value of your company appreciates and for the most part, you will retain a substantial interest in your company. You won’t find yourself in a win-lose situation unless you make some really poor choices and allow yourself to be taken advantage of. Entrepreneurs are also often afraid that they will lose control of your company because of sharks and other predators looking for a quick kill and smelling desperation. Again, this is a problem that can only stem from you. You can’t be forced to make a deal that you don’t see as fit and as an entrepreneur, you cannot abdicate your responsibility for the sake of expediency.  This is why it’s highly important to take the time to read and understand any contracts before signing off on them.

Valuation Is All That Matters

Valuation is certainly an important consideration because you want to get a fair price when you sell your company. However, it’s not the only thing that matters.  It’s equally important to partner with an investor who shares your goals and who will work with you to achieve them. Yes, who the investor is matters just as much as the money they bring. You want to make sure that you are both on the same page to prevent an unnecessary conflict that could slow down the growth of your business. Plus, you should find investors that add value to the company. Some private equity may not have hands-on operation experience, however, they add an outside perspective backed by the recognition of patterns that may not be obvious to the management team. Not to mention, they have an extensive network that you can take advantage of, so partnering up with investors that are plugged in with the people you want to be in touch with is something to consider as well.

PE Investors Only Care About Exit Strategy

This is a myth because it simply ignores some basic realities about investing. Yes, it’s true when a private equity firm invests in your company, they do expect to exit their investment within the next five to seven years. But this is because the firm has limited partners who expect liquidity at some point therefore, they can’t hold their investment forever.  However, during the time that they are invested in your company, their goal is the same as yours: to increase the value of your company by helping you grow and expand the business. Also just because your private equity investor has to make an exit, doesn’t mean you have to sell your company off. Alternatives might include recapitalizing the company with bank debt, swapping out one investor with a new private equity investor, or raising capital from a strategic partner, often a non-financial sponsor.

Deciding whether or not to take on private equity financing is a complex decision. It’s not something to just jump into without doing your research and considering all of your options. It requires an in-depth analysis of your personal and business goals, the market environment, and the financing options available. Laying out the facts on private equity and putting these misconceptions to rest has given you a little more insight to help you with making the right decision.

In conclusion, Ziad says, ” The bottom line is that it’s a term that’s evidently being spoken about more and more and that in itself means there’s a ton of myths doing the rounds regarding private equity.”

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