The challenges clients face working with a private equity backed business.

As you may be aware Quiss Technology is a privately owned managed service business operating out of our HQ in Tamworth. Quiss Chairman, Andy Michael,┬á and largets shareholder has worked within the business since he started it 35 years ago – all our shareholders are still working within the business.

We have seen over the last 15 years a succession of competitors being purchased or invested in by private equity firms, some successfully, many others not so. So we thought we would put together a few blogs looking at this from a clients point of view and what it means for them to be working with such organisations. As always we have tried to be fair, so we have listed not only the challenges but some of the benefits as well.

What is Private Equity

Private equity firms are investment firms that raise capital from institutional investors, such as pension funds, endowments, and insurance companies, to invest in private companies. Private equity firms typically have a 10-year investment horizon and seek to generate high returns for their investors by buying companies, improving their operations, and then selling them for a profit.

Challenges

There are a number of challenges that clients face when working with a private equity backed business. These challenges include:

  • Lack of transparency:┬áPrivate equity firms are not required to disclose information about their investments to the public, which can make it difficult for clients to assess the risks and potential rewards of working with a private equity backed business.
  • Short-term focus:┬áPrivate equity firms have a limited investment horizon, which means that they are under pressure to generate profits quickly. This can lead to short-term decision-making that may not be in the best interests of the long-term health of the business.
  • Changes in management:┬áPrivate equity firms often replace existing management teams with their own team of executives. This can lead to disruption and uncertainty for employees and customers.
  • Increased debt:┬áPrivate equity firms typically finance their investments with debt, which can increase the financial risk of the business.
  • Loss of control:┬áWhen a private equity firm invests in a business, it typically acquires a controlling stake in the company. This means that the private equity firm has the power to make decisions about the business, even if those decisions are not in the best interests of the other stakeholders, such as employees, customers, and suppliers.
Benefits

Despite these challenges, there are also a number of benefits to working with a private equity backed business. These benefits include:

  • Access to capital:┬áPrivate equity firms have access to large amounts of capital, which can be used to finance growth, acquisitions, or other strategic initiatives.
  • Expertise:┬áPrivate equity firms have teams of experienced investment professionals who can provide guidance and support to management teams.
  • Network:┬áPrivate equity firms have extensive networks of contacts in the business world, which can be used to help businesses grow and succeed.

Ultimately, the decision of whether or not to work with a private equity backed business is a complex one. There are a number of factors to consider, including the specific challenges and benefits that are relevant to the business. If a business is considering working with a private equity firm, it is important to carefully evaluate the risks and rewards before making a decision.

Additional considerations

Here are some additional things to consider when working with a private equity backed business:

  • Make sure you understand the private equity firm’s investment strategy and goals.
  • Get to know the private equity firm’s investment team.
  • Be clear about your expectations for the relationship.
  • Document the terms of the relationship in a written agreement.
  • Monitor the relationship closely and be prepared to terminate the relationship if necessary.

Hopefully the above has provided some food for thought for when you are making decisions around what type of business you want to engage with.

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