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Private equity myths: infamous five

By Nicol Fraser,  October 01,2016

Private equity doesn't have a great reputation. But common criticisms are unfounded – at least in the mid-market. Nicol Fraser of Dunedin busts some myths about private equity investment.

It’s in the name: private equity. Many people suspect that, if it’s private, there must be something bad about it. So here’s five “myths” about private equity that management teams should know the truth about:

Myth 1: PE firms are asset-strippers

To grow a business we need to invest. If we’re growing the manufacturing capability of an engineering business that’s going to mean bigger factories, more machinery, more people to operate that machinery, so there is a huge investment that goes into a lot of our businesses. If they are growing – and that is clearly why we’re interested – then we invest in them. And let’s not forget that more investment means more jobs. The figures speak for themselves, PE-backed businesses employ more than 800,000 people in the UK.

Myth 2: PE firms overleverage companies

We absolutely use leverage, but we use it conservatively. Across our portfolio average gearing is about two times EBITDA. Some of our businesses have no external leverage. We use a financing structure that is appropriate for the business and the management team. Leverage is not all bad. There are positive aspects. Leverage can improve the returns for everybody. It does improve our returns, but it also improves the management’s returns. Leverage allows management teams to buy into a business at a discounted rate.

Myth 3: PE is risky

Our financing structures are appropriate for growth businesses. If you look at businesses that have been private equity backed and have used leverage, the proportion that end up in formal distress is much, much lower than the wider economy. We care about every single business we invest in. We will only make two or three investments a year, so each one is deeply important to us. Consistency of returns across the portfolio is incredibly important to our investors.

Myth 4: PE firms are untrustworthy

Private equity has further to travel in terms of improving its image and its public reputation. US presidential candidate Mitt Romney could not avoid the fallout from one poor investment despite many that grew and created more jobs.

When it comes to trust, it comes down to people and individuals who create a culture in their firms and the way they deal with people. That is why we spend so much time on management due diligence and getting to know people. This process builds trust in both directions. You can check our references: we’re happy for you to talk to other companies we’ve invested in and dealt with.

Myth 5: PE executives are not aligned

Every single time Dunedin makes an investment, each of the partners will also personally write a cheque. We invest on exactly the same terms as our fund. We put our money where our mouth is.

If you would like to talk about how any of these issues relate to your business then please get in touch – nicol.fraser@dunedin.com

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