As our country and economy try to deal with and recover from the COVID-19 pandemic, private equity will play a key role in helping many middle-market businesses survive and ultimately thrive. This may come as a surprise to some people, whose opinions of private equity have been formed by media portrayals that fail to accurately represent the value that private equity brings to the table. Unfortunately, the public image of private equity is still dominated by a narrative created 31 years ago in “Barbarians at the Gate” – where brazen dealmakers chased mega-deals with huge check books, adding large amounts of debt to the balance sheets of acquired companies in the pursuit of financial engineering.
This narrative of aggressive deal-making and big takeovers misses the vast majority of the value creation and activity of the private equity industry. Over 8,500 companies in the U.S. are backed by private equity, nearly twice the number listed on U.S. stock exchanges. The majority of those private equity-backed companies operate in the middle-market, with annual revenues of $25 million to $1 billion. Those are not the mega-deals that make headlines, but they represent the majority of private equity activity in the real economy. These middle market companies help drive our economy, accounting for a third of U.S. private sector gross GDP and jobs.
A more collaborative style of Private Equity
For families, founders and entrepreneurs who’ve built these middle market companies, partnering with a private equity firm means an infusion of capital to grow a local franchise into a regional franchise. It means being able to make necessary investments to upgrade critical systems, and consolidating fragmented suppliers into more meaningful, long-term relationships that grow with the company. And most importantly, it means access to expertise from executives who have previously led similar efforts and can guide a company towards its new, ambitious future.
This style of private equity is far less worried about trimming corporate excess than focused on scaling a business model beyond its initial proving ground. It is collaborative, rather than adversarial, with existing management. It often works with families, founders and entrepreneurs who have built the business from the ground up and are now looking to create a sustainable legacy both for their own family and the community where their business operates.
COVID-19 is a major test for the industry
In these unprecedented times due to COVID-19, companies of all shapes and sizes must navigate a sea of uncertainty. Firms like ours continue to stand shoulder to shoulder with our partners and are committed to doing what we’ve always done, adding value as part of a mutually beneficial relationship. Unlike many larger companies, middle-market businesses cannot readily tap public capital markets. They can and do turn to private equity firms to provide the necessary resources.
As liquidity crunches arise, private equity firms are able to use their financial expertise and relationships to help shore up a company’s financial situation. As supply chains are interrupted, firms are able to use the private equity firm’s sector experience and networks to find new paths forward. As manufacturing facilities and work environments must be re-configured in order to keep employees safe and abide by social distancing guidelines, firms are able to share and implement best practices across their portfolio of businesses. As communities struggle to cope with the impact of the virus, we support our portfolio companies in the local engagement that forms part of their middle-market DNA.
Impact through portfolio companies, not through headlines
The work is far from over – in the middle market, private equity is about scaling, improving and connecting companies to make them more resilient and successful. As the world is learning how to deal with the pandemic, business models will change and some industries will have to significantly transform. It is in those circumstances where our industry’s combination of patient capital, operational expertise and global networks make a difference. The proof will not be in headlines, but in the thousands of portfolio companies that emerge stronger and better equipped to move forward.
This is not to deny the importance of good deal making – of course a good entry point is important when investing. But I believe that at the end of this crisis, the private equity industry will not be measured by how many more deals we picked up at a good price. We will be judged by how we helped our portfolio companies and their communities succeed in a profoundly changed world.
See article on Forbes.com