Until a few years ago, when I met with prospective partners, I would joke that before I was a private equity principal I was a lawyer, “but please don’t hold that against me.” That line has stopped getting laughs.
In fact, I’m hearing business owners respond that they would much rather deal with a lawyer than a private equity guy. Ouch!
So, what happened? When and why did private equity get a bad name?
Private equity had noble beginnings. Modern U.S. private equity took root after World War II to help fund new businesses for returning servicemen and foster technological advances to compete against the Soviet Union. The industry grew tremendously. By 1980, approximately $5 billion was invested in private equity. Today, that number is estimated to exceed $500 billion. Many great companies and iconic brands were founded with private equity investment and partnering including: Apple, Genentech, Electronic Arts, Federal Express and Minute Maid. Many private equity individuals and firms have generated very large and highly publicized returns on their investments.
The visible, monetary success of private equity was met with some general concern, skepticism and, perhaps, envy from the business community and seeded the pervasive negativity of today. These attitudes were then heightened by the sometimes-questionable and widely publicized practices of well-known private equity professionals like Michael Milken of Drexel Burnham Lambert, who drove tremendous merger and acquisition activity with junk bonds, T. Boone Pickens generating fortunes with greenmail, and Carl Icahn’s ruthless corporate slashing.
At this point, the term “private equity” was firmly embedded in business and the public’s dialogue, and the connotation was not good.
The public’s concern about private equity was cemented during the golden age of private equity, from 2003 to 2007. These years saw unprecedented levels of investment activity, investor commitments, debt deployment and the formation and growth of thousands of private firms and companies that support their investing. During that period, 13 of the 15 largest buyouts in history occurred, and three of the largest private equity firms went public, creating tremendous wealth for their general partners.
During the golden age, many owners of small- and middle-market companies, and much of the public, started considering private equity investors to be greedy abusers of debt, willing to do whatever is necessary to generate a quick return, even to a company’s detriment. Unfortunately, that perception was not unfounded. Fortunately, there are many great private equity firms that do not operate that way.
Private equity is like many industries (and political parties) where a highly visible portion sets the public’s perception of the whole. There are, in fact, many private equity firms that don’t fit the stereotype, and they can be great partners to business owners and management teams.
Reputable private equity firms focus on creating returns though growth and improvement of the companies they invest in. They develop transaction structures that align their needs with those of the selling parties, as well as the company and its employees. They use appropriate leverage. They develop well thought out incentive plans for company leadership and employees. They support management in developing and executing a strategic plan that will satisfy stakeholder expectations and realize the company’s full potential. They bring resources to bear that the ownership and management wouldn’t otherwise have access to. Finally, they are valuable sounding boards and guides. They add value.
Don’t assume all private equity firms — or lawyers for that matter — are the same. If you are considering a transaction, talk to a few firms, interview them and find a great partner. They definitely exist.
Dan Lubeck is founder and managing director of Solis Capital Partners (www.soliscapital.com), a private equity firm headquartered in Newport Beach, Calif. Solis focuses on disciplined investment in lower-middle market companies. Lubeck was a transactional attorney and has lectured at prominent universities and business schools around the world.