PORTFOLIO FIRMS OF PRIVATE EQUITY COMPANIES
Private Equity: a good idea,
but sadly with a bad reputation.
Increasingly, private equity firms are the motors driving profitable corporate growth. Be it through majority or minority holdings they provide their portfolio firms with financial leeway for expansion, innovations, necessary restructuring measures and help make management processes more professional.
However, for the firms involved the switch to becoming the property of private equity corporation is not always easy. Precisely because many private equity firms do not exactly have a good reputation and consequently attract criticism.
- Employees – often urged on by those representing their interests – are fearful of losing their jobs and possessions.
- Executives may be skeptical about the demands made by the new owner, and find it difficult to accept their role under the altered conditions.
- Clients are worried about whether they will still be supplied with the same high quality at fair conditions
- Suppliers wonder whether they will be paid given the obvious lack of capital.
- Financial markets and potential investors are skeptical of the strategy and its implementation.
- And politicians, unions and other representatives of interests frequently exploit the engagement of private equity firms in order to stir things up and attract attention.
Timely change management and constant communications ensure acceptance and enthusiasm amongst both internal and external groups affected and counter vague fears with specific facts and perspectives.
What you fail to do at the beginning is often hard to make up later. Especially in the acquisition phase the firms behind a buy-out must establish clarity in order to quell rumors and cheap propaganda. A brief press release aimed solely at the financial markets is not enough. The involvement of private equity firms requires a continual communications effort and a patient dialog with all stakeholders. Here, again, only a professional attitude will lead to success.
Value creation phase
The logic is always the same. If private equity firms are involved, they expect above-average value appreciation. In other words: there will be changes. Whether it’s a new strategy, investments in new markets or production facilities, a tighter rein on costs or restructuring: Without change management and the conviction of important target groups these projects often fail. The increase in value does not meet expectations.
Most private equity firms are only involved for a limited period. Once the increase in value has been achieved, the stake is sold off again. Portfolio firms and their owners should prepare in advance for such situations and convince potential investors of the intrinsic value of an acquisition. Those that do not continually report about the company, its strategy, its operative progress and perspectives will have to accept a lower price when the equity is sold off.
By accompanying the portfolio firms of private equity funds through all acquisition phases we contribute decisively to value added.