RISKS OF TAKING PRIVATE-EQUITY INVESTMENT
There are numerous risks of taking private-equity into your company. Michael Tait explains these risks.
Working with private-equity investors can offer various benefits, such as access to capital, strategic guidance, and expertise. However, like any business arrangement, there are also potential risks and challenges associated with partnering with private-equity investors.
Here are some common risks to be aware of:
Loss of Control:
Private-equity investors typically acquire a significant ownership stake in the company in exchange for their investment. This can lead to a loss of control for the original founders and management team.
Short-Term Focus:
Private-equity firms often have a finite investment horizon, typically aiming for an exit within a certain timeframe, such as 3 to 7 years. This can lead to short-term decision-making that may not align with the long-term goals of the company.
Strategic Differences:
Private-equity investors may have different strategic priorities or operational philosophies than the existing management team. This misalignment can lead to conflicts and challenges in implementing the desired business strategy.
Financial Leverage:
Private-equity transactions often involve the use of financial leverage (debt). While leverage can enhance returns, it also increases financial risk. If the company fails to meet its financial obligations, it could face financial distress.
High Expectations for Returns:
Private-equity investors typically expect high returns on their investment. If the company fails to meet these expectations, it may lead to strained relationships and potential conflicts between the investors and management.
Exit Uncertainty:
The success of a private-equity investment is often measured by the exit strategy, such as selling the company or going public. Economic conditions, market trends, or unforeseen challenges can affect the ability to execute a successful exit.
Operational Interference:
Some private equity investors may become actively involved in the day-to-day operations of the company. While their expertise can be valuable, excessive interference can lead to friction and disrupt the existing management structure.
High Fees:
Private equity firms typically charge fees for their services, including management fees and performance fees. These fees can be substantial and impact the overall returns of the company.
Reputation Risks:
The reputation of a private equity investor can impact the perception of the company. If the investor is known for aggressive cost-cutting or other controversial practices, it could affect the company’s image.
Market Conditions:
External factors such as economic downturns, changes in industry regulations, or shifts in market conditions can impact the success of a private equity investment.
It’s crucial for companies considering private-equity investment to conduct thorough due diligence, negotiate terms carefully, and ensure that the goals and values of both parties align. Seeking legal and financial advice during the negotiation process is also advisable to mitigate potential risks.
Investopedia – Private Equity Explained With Examples and Ways to Invest