As an entrepreneur, you can easily be impressed by the talents of private equity. It is a specific profession with specific skills and its own jargon. It is just good not to confuse those talents with entrepreneurial skills and know-how in business management.
Private equity grew out of finance over the past 40 years. Businesses were bought with cheap borrowed money and attractive tax structures, making good returns on equity.
Access to capital
What followed were buy-and-build transactions, in which returns were made because a larger business is worth more than the sum of its parts. All this could come about because of the ever-expanding access to capital.
There are still successful funds based on this old familiar foundation. It is therefore understandable that private equity specialists are good at thinking and talking at the strategic level and they are good with presentations and numbers. However, it is also good to remember that they have usually not been active entrepreneurs and therefore often lack knowledge about business operations.
On their own
Starting in 2008, funds began to increasingly specialize. The people at these funds know the dynamics of the market, are up to date on current events and they know the players within the sector. This makes them a better interlocutor on strategic growth opportunities and allows them to make linkages with other investments.
Instantly recognizable to an entrepreneur, this probably makes you inclined to take a lot from these specialists. Only it remains the case that their background is usually financial and strategic and that they usually have not been active entrepreneurs. When making decisions about strategy and operations, the entrepreneur is still on his or her own.
Sparring partner
Although the above applies to a large proportion of investors, there are currently a handful of large and small investors who combine financial/strategic with business operations. They invest in building sector know-how as well as business operations by their employees. They are a better sparring partner for the entrepreneur, whom they can advise and help to grow the business.
As an entrepreneur, it is good to choose carefully the type of investor you want. In the exploration phase, speak with them about their entrepreneurial experience, actual accumulated know-how and track record. Then, as a partner, you will know what you have on them when it comes down to it.
