Three and a half years ago, I was asked to testify at a congressional hearing to explain the role of private equity in helping small businesses to access capital. At that moment, I realized how few people understood our industry. Even people from the investing community did not grasp the role of private equity.
One common misconception is that the “equity” in private equity begins and ends with money. Of course, new financing can help companies expand during a downturn, add staff or manufacturing capacity, and pay down loans, but today’s firms must bring intellectual capital to the table to be successful.
Because the economy remains challenging, it’s increasingly important for companies of all stripes to find new ways to grow revenues and earnings. Finding the resources to drive growth can be difficult for smaller enterprises, which is why many turn to private equity firms when they want to supercharge their expansion.
Private equity firms are uniquely able to add value to these smaller businesses because they combine the nimbleness of an entrepreneur with the deep resources normally available only to Fortune 500 companies. This is one of the key reasons why companies backed by private equity have been shown to grow faster. Here are some specific resources that the most effective private equity firms provide:
- Operating expertise. Talented operating resources can deliver value in countless ways, including implementing lean manufacturing, improving sales and marketing efforts, optimizing pricing, building new facilities, implementing financial controls and integrating add-on acquisitions. Strong private equity firms retain a deep bench of operating experts, most of whom have decades of experience—not in private equity, but in companies and industries much like those they support. This process brings a wealth of experience to entrepreneurs who may not have faced similar situations and opportunities before.
- Training opportunities. Because private equity firms may hold dozens of companies, they can often support and provide learning opportunities that allow company managers to share best practices and to access cutting-edge techniques for growth and management.
- International expansion. Multinational locations and the accompanying boots on the ground allow private equity firms to deliver direct contacts to help companies buy and sell products from and to markets all around the world.
- A massive Rolodex. Private equity firms interact with valuable business resources all the time and remember those resources that are most effective. Frequently, PE firms share information about what resources are most effective through industry “linked in groups” and conferences. This helps smaller companies access dozens of trusted and vetted consultants and senior advisers who provide counsel and services geared for growth. Portfolio companies can hire trusted firms to help with sales and marketing, IT, management, HR and other vital areas.
- Purchasing Power. Harnessing the purchasing power of a large portfolio allows small companies to get favorable pricing on services and commodities like shipping, office supplies and health insurance. Many private equity firms coordinate efforts to control costs and proactively support expense controls, such as sharing best practices for reducing healthcare expenses.
Since my initial visit to Congress, I have been spending a lot of time in Washington and elsewhere talking about these valuable contributions of the private equity industry. I am a passionate advocate of the industry because I’ve seen it work again and again. Private equity and the companies in which we invest thrive by applying all kinds of equity—intellectual and otherwise. Private equity firms must deliver real and lasting value to their portfolio companies in order to provide investors with superior returns. In view of the unique alignment of interests between shareholders and management that private equity provides, these efforts to make companies stronger ultimately serve everyone involved.
Pam Hendrickson is Chief Operating Officer at The Riverside Company, a global private equity firm specializing in leveraged buyouts for companies at the smaller end of the middle market.