Private equity, Channel markets, Channel investors, Midmarket

How Private Equity Buyouts Can Be Good for Business

Author: Nixon Peabody's Maura Martinelli

Few of those I interact with outside of work have much to say on the topic of private equity funds. But it seems for those that do, comments typically come from the perspective of working for a company that a private equity fund has acquired.

For those who’ve experienced this transition, it may not always seem positive. Like many mergers and acquisitions in business, employees may fear systematic changes made by outside decision makers who either don’t understand the history and intricacies of the company, or do understand, but disregard those interests for the sake of increasing its profitability.

Although a private equity buyout is a mutual transaction between consenting parties in which each stands to gain financially, it may cause tension between the portfolio companies and the private equity firms as they endeavor to turn the company around in a relatively short period of time. While it’s no one’s intention to create a stressful environment, this strain can have negative impacts on all parties involved.

Private Equity: Beyond the EBITDA Figures

In these scenarios, it’s important to remember the positive impact of a private equity buyout on a business, and not just with regard to EBITDA.

For example, a recent KPMG and AMEXCAP report, The Impact of Private Equity on businesses in Mexico: 17 success stories, stresses that private equity funds benefit the investee companies by changing them from family or small-sized businesses to sound companies that compete effectively in global markets. They also encourage the development of priority sectors of the economy, support growth and professionalization of companies, support the creation of well paid jobs, and boost the development of social and environmental responsibility programs.

A 2012 Wall Street Journal article, How Private Equity Works, highlights the increase in employment and higher wages by the presence of private equity buyouts, and provides an example of the emergence of Hertz from a private to a public company with an equity valuation of $17 billion in less than a year.  These positive impacts are possible because private equity funds allow investors to funnel more money into the needs of a company which may have been difficult to achieve before the investors were present.

Another report from Ernst & Young, How can private equity transform into positive equity, explains that private equity funds focus on reinvigorating or reinventing companies to drive growth, not just to cut costs.  The report stresses that to continue the positive impact, private equity funds must presently increase the appearance of their portfolio companies, within respective industries, rather than shrink potential growth through the reduction of expenditures.  This “buy and transform phase” as described by Ernst & Young, will allow private equity funds to not only receive higher returns, but avoid the negative perceptions private equity buyouts may have.

Speed to Progress

Private equity firms have the potential to quickly enhance companies overall, improving the situation for everyone involved. As long as private equity firms continue to turn companies around in a short period of time, we don’t expect buyout activity to slow down any time soon so it’s important to focus on the positive impacts of these transactions.

Maura Martinelli is an associate in Nixon Peabody’s Private Equity and Investment Funds practice group. Read more Nixon Peabody blogs here.

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